Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_06-cv-03290/USCOURTS-cand-3_06-cv-03290-6/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:78m(a) Securities Exchange Act

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

In re LINEAR TECHNOLOGY

CORPORATION DERIVATIVE

LITIGATION

This Document Relates To:

ALL ACTIONS

 /

No. C-06-3290 MMC

ORDER GRANTING LINEAR

TECHNOLOGY CORPORATION’S

MOTION TO DISMISS CONSOLIDATED

SHAREHOLDER DERIVATIVE

COMPLAINT; DENYING AS MOOT

INDIVIDUAL DEFENDANTS’ MOTION TO

DISMISS; DISMISSING COMPLAINT

WITH LEAVE TO AMEND; VACATING

HEARING

Before the Court are two motions, both filed October 4, 2006, to dismiss the

Consolidated Shareholder Derivative Complaint filed by lead plaintiffs David Eisenberg and

Laberta Lyle: (1) defendant Linear Technology Corporation’s (“Linear”) motion to dismiss,

pursuant to Rules 12(b)(6) and 23.1 of the Federal Rules of Civil Procedure; and

(2) defendants Paul Coghlan (“Coghlan”), Clive B. Davies (“Davies”), Robert C. Dobkin

(“Dobkin”), David S. Lee (“Lee”), Lothar Maier (“Maier”), Leo T. McCarthy (“McCarthy”),

Richard M. Moley (“Moley”), Robert H. Swanson, Jr. (“Swanson”), and Thomas S. Volpe’s

(“Volpe”) (collectively, “Individual Defendants”) motion to dismiss, pursuant to Rules 9(b)

and 12(b)(6) and the Private Securities Litigation Reform Act of 1995 (“PSLRA”). Plaintiffs

have filed opposition to each motion; Linear and the Individual Defendants have filed

replies. Having considered the papers filed in support of and in opposition to the motions,

Case 3:06-cv-03290-MMC Document 52 Filed 12/07/06 Page 1 of 7
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1

Plaintiffs refer to Lee, McCarthy, Moley and Volpe collectively as the “Committee

Defendants.” (See Compl. ¶ 19.) 

2

Plaintiffs refer to Swanson, Maier, Coghlan, Davies and Dobkin collectively as the

“Officer Defendants.” (See Compl. ¶ 14.)

3

Plaintiffs allege that Swanson, Maier, Lee, McCarthy, Moley and Volpe were the

directors at the time plaintiffs instituted the instant action. (See Compl. ¶ 50.)

2

the Court deems the matter appropriate for resolution without oral argument, see Civil L.R.

7-1(b), VACATES the December 15, 2006 hearing, and rules as follows.

BACKGROUND

Plaintiffs, who assert they are shareholders of Linear, allege the “Committee

Defendants”1 purported to grant stock options to the “Officer Defendants”2 on seven dates

during the period 1995 through 2002, (see Compl. ¶ 27), but that, in reality, “at the behest

of the Officer Defendants, the Committee Defendants improperly backdated the stock

option grants to make it appear as though the grants were made on dates when the market

price of Linear stock was lower than the market price on the actual grant dates,” (see

Compl. ¶ 32). According to plaintiffs, the alleged backdating “resulted in option grants with

lower exercise prices, which improperly increased the value of the options to the Officer

Defendants and improperly reduced the amounts the Officer Defendants had to pay

[Linear] upon exercise of the options.” (See id.) Plaintiffs also allege the Individual

Defendants “falsely reported the dates of stock option grants to the Officer Defendants” in

proxy statements filed with the Securities and Exchanges Commission, (see Compl. ¶ 36),

and “produced and disseminated to Linear shareholders and the market false financial

statements that improperly recorded and accounted for the backdated option grants,” (see

Compl. ¶ 33.d.). Based on such allegations, plaintiffs, seeking to proceed derivatively on

behalf of Linear, allege the Individual Defendants breached their respective fiduciary duties

to Linear, (see Compl. ¶ 54), and violated federal securities laws, (see Compl. ¶ 60), and

the Officer Defendants have become unjustly enriched, (see Compl. ¶ 64).

Plaintiffs allege that before instituting the instant action, they did not make a demand

for relief from the six directors of Linear. (See Compl. ¶ 49.)3

 According to plaintiffs, such

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3

demand would have been “futile” because the Board is “incapable of making an

independent and disinterested decision to institute and vigorously prosecute this action,”

(see Compl. ¶ 49), and because “the misconduct complained of [by plaintiffs] was not, and

could not have been, an exercise of good faith business judgment,” (see Compl. ¶ 51).

DISCUSSION

A. Linear’s Motion to Dismiss

Linear moves to dismiss the Complaint on the ground plaintiffs have failed to plead,

with the particularity required by Rule 23.1, facts to excuse plaintiffs’ failure to make a presuit demand on the Board. 

Federal Rule of Civil Procedure 23.1 provides that when a shareholder files a

derivative action seeking to “enforce the right of a corporation,” the shareholder must

“allege with particularity the efforts, if any, made by the plaintiff to obtain the action the

plaintiff desires from the directors . . . and the reasons for the plaintiff’s failure to obtain the

action or for not making the effort.” See Fed. R. Civ. P. 23.1 (emphasis added). Stated

otherwise, the shareholder “must first demand action from the corporation’s directors or

plead with particularity the reasons why such demand would have been futile.” See In re

Silicon Graphics Inc. Securities Litig., 183 F. 3d 970, 989 (9th Cir. 1999).

The “law of the state of incorporation” sets the standard for determining whether a

shareholder’s failure to make a pre-suit demand should be excused. See id. at 990. Here,

the parties agree Linear is incorporated in Delaware. “To show futility under Delaware law,

a plaintiff must allege particularized facts creating a reasonable doubt that (1) the directors

are disinterested and independent, or (2) the challenged transaction was otherwise the

product of a valid exercise of business judgment.” Id. (citing Aronson v. Lewis, 473 A. 2d

805, 814 (Del. 1984).)

1. Directors Not Disinterested and Independent

“Under the first prong of the Aronson test, the court reviews the factual allegations of

the complaint to determine whether they create a reasonable doubt as to the

disinterestedness and independence of the directors at the time the complaint was filed.” 

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4

Blasband v. Rales, 971 F. 2d 1034, 1051 (3d Cir. 1992). “A director’s interest may be

shown by demonstrating a potential personal benefit or detriment to the director as a result

of the decision.” Beam v. Stewart, 845 A. 2d 1040, 1049 (Del. 2004). A director is not

“independent” if the director does not base a decision “on the corporate merits of the

subject before the board,” but, rather, on “extraneous considerations or influences.” See

Aronson, 473 A. 2d at 816. Where, as here, there are six directors, the plaintiff must plead

particularized facts to raise a reasonable doubt that three of those directors are

disinterested and independent. See Beam, 845 A. 2d at 1046.

In its motion, Linear appears to concede, at least for purposes of the instant motion,

that plaintiffs have sufficiently alleged two of the six directors, specifically, Swanson and

Maier, are “interested” in the stock options, in light of plaintiffs’ allegation that Swanson and

Maier received the stock options at issue herein. (See Linear’s Mot. at 6:25 - 7:4.) Linear

argues, however, that plaintiffs have failed to allege particularized facts showing that any of

the other four directors is interested in the subject transactions or otherwise failed to act

independently. In opposition, plaintiff argues that all four remaining directors, specifically,

the four Committee Defendants, are “interested” because they “face a substantial likelihood

of liability” for their having approved the stock options. (See Pls.’ Opp. at 8:2-4.)

An allegation that a director will be subject to “personal liability” for having approved

the challenged transaction is “insufficient to excuse demand” in the absence of

“particularized facts” indicating the director breached his fiduciary duties. See Aronson,

473 A. 2d at 817. General allegations that a director breached fiduciary duties are

“insufficient to demonstrate that the [director] engaged in conduct that resulted in a

substantial risk of personal liability.” See Silicon Graphics, 183 F. 3d at 990.

Here, plaintiffs allege the four Committee Defendants “backdated the stock option

grants” at issue herein, (see Compl. ¶ 31), made “false financial statements in certain

“Form 10-K” documents, (see Compl. ¶ 34), and “falsely reported the dates of stock option

grants” in certain “proxy statement” documents, (see Compl. ¶ 36). As to the latter,

plaintiffs provide no particularized allegations in support of their general allegation that the

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5

Committee Defendants made false statements or reports. With respect to the allegation of

“backdating,” the only factual allegation offered by plaintiffs is that on seven occasions over

a period of seven years, stock options were dated “just after a sharp drop” in Linear’s stock

and “just before a substantial rise,” (see Compl. ¶ 31), which, plaintiffs allege, constitutes a

“striking pattern that could not have been the result of chance,” (see id.). Because plaintiffs

provide no facts as to how often and at what times the Committee Defendants have

granted stock options in the past, no “pattern,” let alone a “striking” one, is apparent.

Moreover, plaintiffs have failed to allege facts as to how the asserted backdating

affected the price the Officer Defendants ultimately paid for the stock, and, as a

consequence, have failed to demonstrate, let alone with particularity, that the Committee

Directors’ approval of the options harmed Linear. See Aronson, 473 A. 2d at 817 (holding

plaintiff’s allegation directors were subject to personal liability because they approved a

“wasteful agreement” insufficient to excuse plaintiff from making pre-suit demand, in light of

plaintiff’s having failed to “allege particularized facts indicating that the agreement is a

waste of corporate assets”).

 Accordingly, plaintiffs have failed to plead, with the particularity required by Rule

23.1, that a reasonable doubt exists as to whether any of the four Committee Directors is

disinterested or independent. See Silicon Graphics, 183 F. 3d at 990 (holding allegation

that directors “engaged in a fraudulent scheme to inflate the value of [corporation’s] stock

and facilitate profitable insider trading” and “benefitted from the inflated value of

[corporation’s] stock” not sufficiently particularized to excuse plaintiff from making pre-suit

demand on directors); see also Blasband, 971 F. 2d at 1049 (holding “plaintiff may not

bootstrap allegations of futility merely by pleading that the directors participated in the

challenged transaction”).

2. Transactions Not Product of Valid Exercise of Business Judgment Rule

As discussed above, under Delaware law, where a plaintiff is unable to show the

directors are interested and lack independence, such plaintiff nevertheless will be excused

from making a pre-suit demand by showing the challenged transaction is “otherwise” not

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4

In the event plaintiffs amend their Complaint, plaintiffs are cautioned that their

federal securities claims must be pleaded in conformity with the PSLRA, which requires

plaintiffs to, inter alia, allege “with particularity all facts” on which their claims are based,

see 15 U.S.C. § 78u-4(b)(1), including disclosure of plaintiffs’ sources, see In re Silicon

Graphics, Inc. Sec. Litig., 970 F. Supp. 746, 763-64 (N.D. Cal. 1997) (holding plaintiff must

allege “confidential informants, employees, competitors, government employees, members

of the media, and others who have provided information leading to the filing of the case”),

aff’d, 183 F. 3d 970 (9th Cir. 1999).

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the product of a valid exercise of business judgment. Silicon Graphics, 183 F. 3d at 990.

“Under the business judgment rule, directors are presumed to make sound business

decisions, and to inform themselves properly prior to making those decisions.” Id.

Plaintiffs argue that because they have sufficiently alleged the Committee Directors

backdated stock options and, thereafter, made false statements in certain documents,

plaintiffs have raised a reasonable doubt as to whether the Committee Directors are

protected by the business judgment rule. As discussed above, however, plaintiffs have not

pleaded particularized facts concerning such activity. See id. (holding where plaintiff failed

to plead “with particularity” that directors approved issuance of false statements or insider

trading, plaintiff failed to raise reasonable doubt as to whether such conduct was protected

by business judgment rule).

Accordingly, plaintiffs have failed to plead, with the particularity required by Rule

23.1, that a reasonable doubt exists as to whether the conduct at issue is protected by the

business judgment rule.

B. Individual Defendants’ Motion to Dismiss

The Individual Defendants argue that the Complaint should be dismissed because

plaintiffs have not pleaded their federal securities claims in conformity with the PSLRA, that

plaintiffs have not pleaded their state law claims in conformity with Rule (9)(b), and that, in

any event, all claims are barred by the applicable statutes of limitations.

In light of the dismissal of the Complaint for failure to allege with the requisite

particularity grounds on which to excuse plaintiffs’ failure to make a pre-suit demand, the

Court does not reach the arguments made by the Individual Defendants.4

Accordingly, the Individual Defendants’ motion to dismiss will be denied as moot.

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CONCLUSION

For the reasons set forth above:

1. Linear’s motion to dismiss is hereby GRANTED, and the Complaint is hereby

DISMISSED, with leave to amend, no later than January 5, 2007, in conformity with this

Order.

2. The Individual Defendants’ motion to dismiss is hereby DENIED as moot.

IT IS SO ORDERED.

Dated: December 7, 2006 

MAXINE M. CHESNEY

United States District Judge

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