SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-1852-15T1

PAUL BERGER, Derivatively on

Behalf of MERCK & CO., INC.,

Plaintiff-Appellant,

v.

KENNETH C. FRAZIER, LESLIE A.

BRUN, THOMS R. CECH, THOMAS H. 

GLOCER, WILLIAM B. HARRISON, JR.,

C. ROBERT KIDDER, ROCHELLE B. 

LAZARUS, CARLOS E. REPRESAS,

PATRICIA F. RUSSO, CRAIG B.

THOMPSON, WENDELL P. WEEKS, PETER

C. WENDELL, ROBERT M. DAVIS, and

PETER N. KELLOGG,

Defendants-Respondents,

and 

MERCK & CO., INC.,

Nominal Defendant-Nominal

Respondent.

______________________________________

Argued October 18, 2017 – Decided 

Before Judges Fuentes, Koblitz, and Suter.

On appeal from Superior Court of New Jersey, 

Law Division, Union County, Docket No. L-1379-

15.

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

This opinion shall not "constitute precedent or be binding upon any court." 

Although it is posted on the internet, this opinion is binding only on the 

parties in the case and its use in other cases is limited. R. 1:36-3.

July 13, 2018
2 A-1852-15T1

John F. Keating, Jr. (The Brualdi Law Firm, 

PC) argued the cause for appellant (Steven P. 

Lombardi, attorney; Richard B. Brualdi, Steven 

P. Lombardi, and John F. Keating, Jr., on the 

brief).

Mark A. Kirsch (Gibson, Dunn & Crutcher, LLP) 

of the New York bar, admitted pro hac vice, 

argued the cause for respondents (McCarter & 

English, LLP, and Mark A. Kirsch, attorneys; 

Mark A. Kirsch, Laura K. O'Boyle and Peter M. 

Wade (Gibson, Dunn & Crutcher, LLP) of the New 

York bar, admitted pro hac vice, Samuel G. 

Liversidge (Gibson, Dunn & Crutcher, LLP) of 

the California bar, admitted pro hac vice, and 

Mary Gabriel, on the brief). 

PER CURIAM

Plaintiff Paul Berger appeals from a December 4, 2015 order 

that dismissed his shareholder derivative lawsuit filed against 

the individual members of Merck & Company's (Merck's) Board of 

Directors (Board) and three members of Merck's management 

(collectively, defendants).1 The complaint alleged that 

 

1 Defendants include: Kenneth C. Frazier, Merck's President and 

Chief Executive officer since 2011; Robert M. Davis, Merck's 

Executive Vice President and Chief Financial Officer (CFO) since 

2014; Peter N. Kellogg, Merck's Executive Vice President and Chief 

Financial Officer from 2007 to April 2014; Leslie A. Brun, a member 

of the Board since 2008; Thoms R. Cech, a member of the Board 

since 2009; Thomas H. Glocer, a member of the Board since 2007; 

William B. Harrison, Jr., a member of the Board since 1999; C. 

Robert Kidder, a member of the Board since 2005; Rochelle B. 

Lazarus, a member of the Board since 2004; Carlos E. Represas, a 

member of the Board since 2009; Patricia F. Russo, a member of the 

Board since 1995; Craig B. Thompson, a member of the Board since 

2008; Wendell P. Weeks, a member of the Board since 2004; and 

Peter C. Wendell, a member of the Board since 2003.
3 A-1852-15T1

defendants caused Merck to fail to disclose its tax liability on 

indefinitely reinvested overseas earnings, otherwise known as the 

Repatriation Tax (Tax), when it filed its 2013 Form 10-K with the 

Securities and Exchange Commission (SEC). We affirm dismissal of 

the complaint under Rule 4:6-2(e), for failure to state a claim 

upon which relief can be granted. 

I. 

Merck is a Fortune 500 company headquartered in New Jersey. 

Its common stock is traded on the New York Stock Exchange. It is 

a "global health care company." In 2013, its revenue was 

approximately $43.9 billon; it had $57.1 billion of earnings from 

its subsidiaries outside the United States. Plaintiff is a 

stockholder of Merck. 

The Financial Accounting Standards Board (FASB)2 has 

developed various accounting standards. Standard 740-30-50-2 

requires disclosure by companies of "[t]he amount of the 

unrecognized deferred tax liability for temporary differences 

related to investments in foreign subsidiaries and foreign 

corporate joint ventures that are essentially permanent in 

 

2 FASB "establishes financial accounting and reporting standards 

for public and private companies and not-for-profit organizations 

that follow Generally Accepted Accounting Principles." About Us, 

FASB, https://www.fasb.org/jsp/FASB/Page/LandingPage&cid=1175805 

317407.
4 A-1852-15T1

duration if determination of that liability is practicable or a 

statement that determination is not practicable."

Merck's Form 10-K for year end 2013, filed on February 27, 

2014, provided that, 

[a]t December 31, 2013, foreign earnings of 

$57.1 billion have been retained indefinitely 

by subsidiary companies for reinvestment; 

therefore, no provision has been made for 

income taxes that would be payable upon the 

distribution of such earnings and it would not 

be practicable to determine the amount of the 

related unrecognized deferred income tax 

liability.

[Emphasis added.]

Plaintiff contends in his complaint that calculation of the Tax 

is routine, requiring only that "current tax laws and rates" be 

applied to "historical permanently reinvested earnings." He 

asserts that Merck's Form 10-K was misleading without the Tax 

information. 

On October 28, 2014, plaintiff demanded that the Board file 

a lawsuit against Merck's current and past directors for their 

failure to comply with Standard 740-30-50-2 when reporting the 

Tax. Plaintiff asserted that this failure breached their fiduciary 

duties to shareholders. 

The Board hired the law firm of Forman & Shapiro, LLP (F&S) 

to conduct an investigation of plaintiff's claims and to report 

its findings to the Board. F&S retained an accounting expert, 
5 A-1852-15T1

interviewed partners at PricewaterhouseCoopers, who were the 

accountants for Merck, and spoke with certain current and former 

Merck employees. It reviewed records from Merck's Audit Committee 

and communications between the Board and the SEC.

F&S reported its findings at the February 2, 2015 Board 

meeting, advising that calculation of the deferred tax liability 

was "not practicable" and that it was "reasonable" for Merck not 

to provide this Tax in its Form 10-K. On February 25, 2015, the 

Board declined to file the lawsuit requested by plaintiff, finding 

it was "not in the company's best interests."

Plaintiff filed this shareholder derivative lawsuit on April 

7, 2015. The complaint alleged defendants breached their fiduciary 

duty to Merck by causing Merck to fail to disclose the Tax in its 

Form 10-K filed on February 27, 2014 (for the year ending December 

31, 2013) with the SEC. It included a single count against 

defendants for breach of their duties of "due care, loyalty, good 

faith, and other obligations to Merck." The relief sought included 

a declaration of the breach, an affirmative injunction requiring 

defendants to comply with the accounting standard to disclose the 

Tax, monetary damages and attorney's fees.

The complaint alleged that other large multinational 

companies, such as Apple, Microsoft and Citigroup, made disclosure 

of the Tax. "On information and belief," the complaint averred 
6 A-1852-15T1

that Merck periodically made an estimate of the Tax. Plaintiff 

also said that for three prior years, Merck calculated and reported 

a "reconciliation between the effective tax rate and the U.S. 

statutory [tax] rate, which included . . . foreign earnings and 

unremitted foreign earnings." The complaint alleged that 

potential changes to the tax laws could tax "accumulated 

unrepatriated foreign earnings of controlled foreign companies," 

creating a financial impact for Merck. 

Plaintiff complained that Merck's Board did not "investigate 

or consider the consequences" of violating this FASB standard even 

though a July 5, 2014 New York Times article had discussed the 

same issue and specifically referenced Merck. Another 

shareholder, the Beatrice Corwin Living Irrevocable Trust, 

requested access to books and records about the same issue. 

According to plaintiff, the Board's minimal response showed it did 

not investigate or consider the issue.

In July 2015, defendants filed a motion to dismiss the 

verified complaint under Rule 4:6-2(e), for failure to state a 

claim. Defendants argued that plaintiff provided no factual 

support for its allegation that Merck could make the Tax

calculation "practicably." Defendants averred that the complaint 

did not allege any acts or omissions by the individual directors 

that breached their fiduciary duties to the company. Plaintiff 
7 A-1852-15T1

did not identify any purported harm to the company. Defendants 

also argued that the directors' decision not to institute suit was 

protected by the modified business judgment rule.

Judge Thomas J. Walsh dismissed plaintiff's complaint under 

Rule 4:6-2(e) for failure to state a claim for breach of fiduciary 

duty on December 4, 2015, in an oral opinion. Plaintiff's 

complaint did not allege that defendants breached any "law, 

regulation or other similar authority" by reporting that Merck's 

deferred tax liability was not practicable to calculate. Plaintiff 

did not articulate any facts to support his claims. Plaintiff did 

not say how defendants breached any fiduciary duty or that Merck's 

practices were "not customary in the industry." Merck's 

certificate of incorporation "parallel[ed]" N.J.S.A. 14:2-7(3) and 

limited the liability of a director or officer. The court found 

the complaint made "no allegation that the Board knew of a duty 

to act in regard to disclosure and consciously failed to do so; 

nor [did] plaintiff's [c]omplaint assert any allegations regarding 

the Board's oversight of Merck's accounting practices." There was 

no obligation by the Board to react to the New York Times newspaper 

article. The trial court did not address defendants' modified 

business judgment rule defense or their contention that plaintiff 

did not suffer damages. 
8 A-1852-15T1

On appeal, plaintiff claims the trial court erred because it 

was practicable for the company to calculate and disclose the Tax. 

Plaintiff argues that Rule 4:6-2(e) was not properly applied. Had 

it been, the court would have accepted as true all the allegations 

he made, including that the Tax could be calculated. Plaintiff 

alleged the Board members breached their duty to "keep informed, 

to read and understand Merck's financial statements, including its 

tax disclosures," by not considering the tax implications of the 

Tax. 

Also, the complaint should not have been dismissed based on 

the exculpatory provision in Merck's certificate of incorporation. 

This was extrinsic to the complaint. It should not have been 

enforced at the pleading stage, before discovery. It was improper 

to deny injunctive relief because the exculpatory clause did not 

address it. 

Plaintiff claims that the modified business judgment rule 

cannot be used as an alternate basis to affirm the trial court 

because the trial court did not consider it. Finally, plaintiff 

argues that Robert Davis, Merck's current chief financial officer 

(CFO), is a necessary party to this litigation to enforce 

injunctive relief. 

We conclude that plaintiff's arguments lack merit and we 

affirm the dismissal of this litigation. 
9 A-1852-15T1

II.

We review de novo the challenged order that dismissed 

plaintiffs' complaint for failure to state a cause of action, 

applying the same legal standard as the trial court. Frederick 

v. Smith, 416 N.J. Super. 594, 597 (App. Div. 2010). A motion for 

failure to state a claim must be denied if, giving plaintiffs the 

benefit of all their factual allegations and all favorable 

inferences, a cause of action has been alleged in the complaint. 

Printing Mart-Morristown v. Sharp Elecs. Corp., 116 N.J. 739, 746 

(1989). Conclusory allegations do not provide an adequate basis 

to deny a motion to dismiss under Rule 4:6-2. Id. at 768. 

We agree with the trial court that the complaint was properly 

dismissed under Rule 4:6-2(e). There is no dispute that FASB 

standard 740-30-50-2 allows a company to report that it is not 

practicable to estimate the Tax. Financial Accounting Standard 

(FAS) 109 explains that a determination or calculation may be 

impracticable where "the cost to develop that information is 

excessive[.]" FAS No. 107, incorporated into a different section 

of the ASC, indicates that "practicable" means, "that an estimate 

. . . can be made without incurring excessive costs."3 

 

3 See Statement of Financial Accounting Standards No. 107, 

Accounting for Income Taxes, 7 (Dec. 1991), 

http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid12182201

23701&acceptedDisclaimer=true. 
10 A-1852-15T1

Practicability, therefore, is a "dynamic concept," meaning what 

is practicable for one entity might not be for another and what 

is not practicable in one year might be practicable in another. 

We reject plaintiff's contention that we are required to 

accept as true his allegation that Merck can "practicably" estimate 

the Tax. That is a conclusion that he has not supported factually. 

Under Rule 4:6-2(e), we are required to accept as true facts that 

are alleged, but not conclusory allegations. Scheidt v. DRS 

Techs., Inc., 424 N.J. Super 188, 193 (App. Div. 2012). 

"[P]leadings reciting mere conclusions without facts and reliance 

on subsequent discovery do not justify a lawsuit." Glass v. 

Suburban Restoration Co., 317 N.J. Super. 574, 582 (App. Div. 

1998); see Lederman v. Prudential Life Ins. Co. of Am., 385 N.J. 

Super. 324, 349 (App. Div. 2006).

Plaintiff makes three arguments to support this conclusion, 

none of which are persuasive. Plaintiff contends on "information 

and belief" that Merck actually estimated the Tax. He provided 

no evidence or facts to support this. This claim is meaningless

because it was based on information and belief, not on personal 

knowledge even though the complaint was verified. See Monmouth 

Cty. Social Serv. v. P.A.Q., 317 N.J. Super. 187, 193-94 (App. 

Div. 1998) (providing that a complaint that is made without 
11 A-1852-15T1

personal knowledge, it is a nullity and insufficient to invoke the 

court's jurisdiction); see also R. 1:4-7.

Next plaintiff says that Merck was required to make a 

reconciliation between the effective tax rate and the U.S. 

statutory tax rate and did so in 2011, 2012, and 2013. Defendants 

acknowledge that they were required to make a reconciliation 

between the effective tax rate and U.S. statutory tax rate, but 

that the calculation simply applied a 35% tax rate to foreign 

earnings. What is important here is that plaintiff did not explain 

how this reconciliation shows that Merck can practicably estimate 

the Tax at issue. This then is another bare conclusion, not 

supported by facts. 

Plaintiff contends that other multinational companies, such 

as Apple and Microsoft, disclose the amount of the Tax. However, 

that does not mean that Merck can do the same or that its corporate 

structure is similar. These are entirely different corporations 

with separate overseas business holdings. Equating one company's 

capabilities with another is speculative. Therefore, we agree 

with the trial court that the complaint was properly dismissed 

under Rule 4:6-2(e) because it relied on a newspaper article and 

conclusory statements without any supporting facts. Without 

factual support, we cannot "accept as true" plaintiff's conclusion 

that Merck can calculate the Tax "practicably." 
12 A-1852-15T1

The breach of fiduciary duty claim also was properly dismissed 

by the trial court. The complaint alleged a single count for 

breach of fiduciary duty by Merck's directors and officers. 

Plaintiff argued that Merck's shareholders "have a right to expect 

that directors will exercise reasonable supervision and control 

over the policies and practices of a corporation," citing Francis 

v. United Jersey Bank, 87 N.J. 15, 36 (1981). He claims that 

defendants had a "duty to look" which included "reading and 

understanding financial statements, and making reasonable attempts 

at detection and prevention of . . . illegal conduct." Id. at 31, 

39. 

Whether or not Francis sets forth the applicable standard, 

the complaint did not allege facts sufficient to meet the standard. 

The complaint did not cite a law or regulation violated by Merck's 

2013 Form 10-K. It did not identify any inadequacies with Merck's 

internal controls or its financial reporting process. It did not 

say what accounting standards were violated. There was no 

obligation by the Board to act based on a newspaper article that 

mentioned the company. There were no factual allegations made 

against individual Board members. 

We discern no error by the trial court in dismissing the 

complaint in the alternative based on the exculpation clause in 
13 A-1852-15T1

Merck's certificate of incorporation for directors and officers. 

It provided that 

all current and former directors and officers 

of the Corporation shall not be personally

liable to the Corporation or its stockholders

for damages for breach of duty owed to the 

Corporation or its stockholders, except that 

the provisions . . . shall not relieve a 

director or officer from liability for any 

breach of duty based upon an act or omission 

(a) in breach of such person's duty of loyalty 

to the Corporation or its stockholders, (b) 

not in good faith or involving a knowing 

violation of law or (c) resulting in receipt 

by such person of an improper personal 

benefit. 

The certificate of incorporation was referenced by plaintiff 

in his complaint. The trial court could rely on it in deciding 

the Rule 4:6-2(e) motion. See Myska v. N.J. Mfrs. Ins. Co., 440 

N.J. Super. 458, 482 (App. Div. 2015) (quoting E. Dickerson & Son, 

Inc. v. Ernst & Young, LLP, 361 N.J. Super. 362, 365 n.1 (App. 

Div. 2003) ("a court may consider documents specifically 

referenced in the complaint 'without converting the motion into 

one for summary judgment.'"). Plaintiff's complaint did not allege 

facts showing the individual defendants breached their duty of 

loyalty, acted in bad faith, knew about any violation of law or 

benefited from the Form 10-K filing. 

We also reject plaintiff's argument that Robert Davis was a 

necessary party to the litigation. He was not CFO when the 2013 
14 A-1852-15T1

Form 10-K was filed in February 2014. He is not needed for 

injunctive relief, given our decision here. 

In light of our opinion, we have no need to address any of 

plaintiff's arguments about the modified business judgment rule. 

Affirmed.