In the 

United States Court of Appeals 

For the Seventh Circuit ____________________

No. 18‐1863

ROBERT LOWINGER, et al.,

Plaintiffs‐Appellants,

v.

DOUGLAS R. OBERHELMAN, et al.,

Defendants‐Appellees.

____________________

Appeal from the United States District Court for the

Central District of Illinois.

No. 1:15‐cv‐01109‐SLD‐JEH — Sara L. Darrow, Chief Judge.

____________________

ARGUED NOVEMBER 1, 2018 — DECIDED MAY 9, 2019

____________________

Before WOOD, Chief Judge, and MANION and ROVNER, Cir‐

cuit Judges.

WOOD, Chief Judge. In the fall of 2011 Caterpillar Inc. began

making serious inquiries about the possible acquisition of a

Chinese mining company, ERA Mining Machinery Ltd., and

its wholly‐owned subsidiary, Zhengzhou Siwei Mechanical &

Electrical Equipment Manufacturing Co., Ltd. (We refer to the

two companies as “Siwei” for simplicity.) Caterpillar com‐

pleted that acquisition in June 2012. Only after the closing did
2 No. 18‐1863

Caterpillar gain access to Siwei’s physical inventory. What it

found was unsettling. An inspection of the inventory revealed

that Siwei had overstated its profits and improperly recog‐

nized revenue. As a result, Caterpillar took a $580 million

goodwill impairment charge just months after the acquisition

was completed. Plaintiffs Robert Lowinger and Issek Fuchs,

both Caterpillar shareholders, now bring this shareholder de‐

rivative suit alleging that several former Caterpillar officers

breached their fiduciary duties by failing to conduct an ade‐

quate investigation of the Siwei acquisition. (We call them the

Lowinger Plaintiffs.) That failure, they contend, caused Cater‐

pillar’s loss. The Lowinger Plaintiffs made a demand that the

Caterpillar Board bring this litigation; the Board refused; and

in this lawsuit, they argue that the Board’s refusal was im‐

proper.  

The district court granted the Officers’ motion to dismiss

the complaint for failure adequately to allege that the Board

wrongfully refused to pursue the Lowinger Plaintiffs’ claim,

FED. R. CIV. P. 23.1(b)(3); it then denied plaintiffs’ motion for

leave to amend. We affirm.

I

A

In 2010 Caterpillar, a construction and mining equipment

manufacturer, was hoping to gain a greater foothold in the

Chinese market. According to the Lowinger Plaintiffs—

whose well pleaded allegations we must accept as true at this

stage—in August of that year defendant Douglas Ober‐

helman, Caterpillar’s then‐CEO, told investors that Caterpil‐

lar was “stepping up big time” in the Chinese market and that

“[W]e’re going to win. We will win in China.” Following this
No. 18‐1863 3

proclamation, defendants Edward Rapp, Caterpillar’s CFO,

and Steven Wunning, Caterpillar’s Group President, began to

advocate for Caterpillar to purchase Siwei, a Chinese mining

company that manufactures hydraulic mining roof supports.

(We refer to the defendants collectively as the Officers unless

the context requires otherwise.)

Caterpillar began its investigation of the Siwei acquisition

in October 2011. To perform the necessary financial analysis,

Caterpillar hired the accounting firm Ernst & Young (“E&Y”).

E&Y’s inquiry was limited, however, because Siwei’s auditors

refused to allow E&Y to review their audit work papers. In‐

stead E&Y was forced to rely on oral statements from those

auditors, along with Siwei’s publicly reported financial state‐

ments. Despite the limited scope of its review, E&Y’s report

raised several financialred flags: Siwei’s declining gross profit

margins; long‐aged accounts receivable; and working capital

and cash flow problems. In its report, E&Y recommended that

Caterpillar undertake additional investigation, but Caterpil‐

lar never did so. In addition to the issues identified by E&Y,

an examination performed by a recently acquired Caterpillar

subsidiary, Bucyrus International, Inc., suggested reasons for

concern. Bucyrus’s research, of which Caterpillar was aware,

suggested that Siwei might be plagued by a host of potential

fraud and anti‐corruption problems. At least in part for those

reasons, Bucyrus had scuttled its own attempted purchase of

Siwei.

As the acquisition process continued, other headaches

emerged. Caterpillar discovered that Siwei needed an imme‐

diate $50 million loan; that Siwei’s customers were not paying

their bills on time; and that Siwei had engaged in several
4 No. 18‐1863

suspicious transactions with closely related parties, including

its parent company’s directors and its former CEO.

Notwithstanding these alerts, Caterpillar entered into an

acquisition agreement with Siwei in November 2011. Bad

news was not far behind. In March 2012, before the acquisi‐

tion was completed, Siwei informed Caterpillar that instead

of the $16 million profit it was expected to report in 2011, it

would record a $2 million loss. In its 2011 Annual Report, Si‐

wei disclosed not only this loss, but numerous other troubles.  

For example, its accounts receivable had grown from 320 to

371 days outstanding, its “allowances for bad and doubtful

debts” had increased over 450%, and its debt had ballooned.

Siwei explained many of these issues as results of its aggres‐

sive attempts to gain market share at the expense of other met‐

rics. Despite everything, on June 6, 2012, Caterpillar com‐

pleted its tender offer to acquire Siwei for approximately $690

million.

With the acquisition complete, Caterpillar gained access to

Siwei’s physical inventory. Only then did Caterpillar realize

that discrepancies existed between Siwei’s physical inventory

and the inventories it recorded in its accounting records. The

resulting investigation uncovered inappropriate accounting

practices that led to overstated profit and early or unsup‐

ported revenue recognition. As a result, Caterpillar deter‐

mined that it would have to recognize a $580 million loss in

the form of a goodwill impairment charge. It announced this

step publicly in January 2013. At the same time, Caterpillar’s

Board approved the departure of Luis de Leon, Caterpillar’s

mining product vice president, at least in part because of his

role in the Siwei acquisition.  
No. 18‐1863 5

After recording the $580 million goodwill impairment

charge, Caterpillar retained the law firm Sidley Austin LLP to

investigate the Siwei acquisition. In July 2013, Sidley pro‐

vided a report to Caterpillar’s board and audit committee de‐

tailing its findings. The Board then imposed financial penal‐

ties on some Caterpillar executives, including Oberhelman.

Neither the amount nor the existence of these penalties, how‐

ever, was ever disclosed in Caterpillar’s public filings.

Shortly after this, several major corporate news outlets, in‐

cluding Forbes, Reuters, and the Financial Times,ran articles de‐

tailing the story of the acquisition and chiding Caterpillar and

its board for what those outlets viewed as insufficient investi‐

gation and oversight. Several months after these stories ran,

Caterpillar settled with Siwei’s former directors and control‐

ling shareholders, releasing them from claims in exchange for

a settlement that benefitted Caterpillar by $135 million for its

2013 second quarter results.

B

Litigation soon followed. First, a group of shareholders

brought a derivative action based on a theory that the Board

was conflicted and so it was futile to ask the Board to sue Cat‐

erpillar’s officers and directors (the “Demand Futility Ac‐

tion”). On June 25, 2014, while the Demand Futility Action

was pending, the Lowinger Plaintiffs made a demand on the

Board. They called on the Board to begin litigation against the

Officers, or any other responsible party, with respect to the

losses Caterpillar suffered because of the acquisition. The

Board declined to respond formally to this demand, because

if the Demand Futility Action was successful, shareholders

would not need first to make a demand on the Board to bring

litigation. It reasoned that any time or resources spent
6 No. 18‐1863

responding to the Lowinger Plaintiffs’ demand would in that

case have been wasted. Also during this period, the Board de‐

clined to enter into any tolling agreements to suspend appli‐

cable statutes of limitation, as its counsel believed the De‐

mand Futility Action tolled the relevant limitations periods.

The Board sought to stay this case while the Demand Fu‐

tility Action remained pending, but the district court denied

that request on March 28, 2016. At that point, the Board re‐

tained the law firm Jones Day to investigate the allegations in

the Lowinger Plaintiffs’ demand. On November 1, 2016, Cat‐

erpillar provided the Lowinger Plaintiffs with a redacted ver‐

sion of Jones Day’s report. That report, based on interviews

with 17 current and former Caterpillar employees and a con‐

sultation with a Jones Day partner with expertise in Chinese

acquisitions, detailed Jones Day’s investigation into the Siwei

acquisition. The report also contained analyses of the compet‐

ing benefits and risks of bringing litigation, including the

chance of success of a lawsuit against any Caterpillar officers

or external advisors involved in the Siwei acquisition.  

Jones Day ultimately concluded that the likelihood of suc‐

cess in litigation was slim, and that any potential success was

likely to be undercut by Caterpillar’s duty to indemnify its

former officers in most scenarios, as well as by business con‐

siderations (such as the hit to corporate morale that litigation

might cause). Based on Jones Day’s report and recommenda‐

tion, the Board refused the Lowinger Plaintiffs’ demand.   The

Lowinger Plaintiffs filed their complaint against the Officers

in March 2015.

Rather than amending their complaint to reflect that re‐

fusal, the Lowinger Plaintiffs continued to argue that the

Board’s initial delay in responding to their demand was
No. 18‐1863 7

sufficient by itself to allow them to pursue this litigation. The

district court granted the Officers’ motion to dismiss that

complaint, holding that the Board’s decision to delay was pro‐

tected by the business judgmentrule, but it gave the Lowinger

Plaintiffs leave to amend. They did so, this time alleging that

the Board’s refusal to accede to their demand was wrongful

because Jones Day was not an independent investigator and

its report had numerous fatal flaws. The Officers again moved

to dismiss. This time the district court granted their motion

and dismissed the action with prejudice. This timely appeal

followed.

II

Under Federal Rule of Civil Procedure 23.1(b)(3), a share‐

holder plaintiff must “state with particularity” his efforts to

obtain his desired action from the company’s directors, and

“the reasons for not obtaining the action or not making the

effort.” Id. at 23.1(b)(3)(A), (B). We review de novo the district

court’s determination whether a plaintiff has met this stand‐

ard. Westmoreland Cnty. Emp. Ret. Sys. v. Parkinson, 727 F.3d

719, 724 (7th Cir. 2013). Though federal law determines

whether a plaintiff has stated the facts with sufficient detail,

state law determines whether a plaintiff’s stated reasons are

sufficient as a matter of substantive law. See id. at 722. We

must look first to Illinois’s choice‐of‐law rules, both sides

agree; those rules direct us to the law of Delaware, Caterpil‐

lar’s state of incorporation. See CDX Liquidating Trust v. Ven‐

rock Assocs., 640 F.3d 209, 212 (7th Cir. 2011).

Under Delaware law, where a plaintiff makes a litigation

demand on the board, she effectively concedes that the board

is independent and able to respond. The board’s decision to

refuse that demand is thus protected by the business
8 No. 18‐1863

judgment rule. See Spiegel v. Buntrock, 571 A.2d 767, 775–76

(Del. 1990). “The business judgment rule is a presumption

that in making a business decision ... the directors of a corpo‐

ration acted on an informed basis, in good faith and in the

honest belief that the action taken was in the best interests of

the company.” Id. at 774.

The combination of a heightened pleading standard and

Delaware’s business judgment rule puts plaintiffs in this kind

of case between the proverbial rock and a hard place. See Bre‐

salier v. Good, 246 F. Supp. 3d 1044, 1052 (D. Del. 2017) (“The

combination of Rule 23.1 and Delaware law places on plain‐

tiffs whose demand has been refused [a] ‘heavy’ burden ....”)

(quoting Ironworkers Dist. Council of Philadelphia & Vicinity Ret.

& Pension Plan v. Andreotti, C.A. No. 9714–VCG, 2015 WL

2270673, at *24 (Del. Ch. May 8, 2015)). We should note in this

connection that, unlike many jurisdictions, Delaware permits

the citation of unpublished decisions of the Delaware courts

as precedent. See New Castle Cnty. v. Goodman, 461 A.2d 1012,

1013 (Del. 1983) (“[L]itigants before this Court may cite Or‐

ders as precedent ....”); see also Issa v. Delaware State Univ.,

268 F. Supp. 3d 624, 631 n.1 (D. Del. 2017) (noting that Good‐

man remains good law despite a change in the Delaware Su‐

preme Court’s rule allowing citations to non‐precedential de‐

cisions).

The only way that a shareholder plaintiff  can walk this

tightrope and overcome the business judgment rule’s pre‐

sumption is to allege particularized facts that create a reason‐

able doubt about “the good faith and reasonableness of [the

board’s] investigation.” Spiegel, 571 A.2d at 777. In other

words, a shareholder plaintiff must create reasonable doubt

that the board upheld its duties of care and loyalty by making
No. 18‐1863 9

an informed decision and acting in good faith. See Andreotti,

2015 WL 2270673, at*24. We thus turn to the question whether

the Lowinger Plaintiffs have overcome that presumption

here.

A

The question we face is a narrow one. It is not whether the

Siwei acquisition was good or bad for Caterpillar. Nor are we

concerned with whether Caterpillar’s board made the right

decision by not bringing litigation against its former officers.

Instead, our review is confined to whether the Board’s deci‐

sion not to litigate is protected by the wide bounds of the busi‐

ness judgment rule, or if the Lowinger Plaintiffs have man‐

aged to allege with particularity facts suggesting that the

Board’s decision was irrational or the result of a grossly neg‐

ligent process. The plaintiffs can meet their burden by plead‐

ing facts that show that the Board’s decision “cannot be at‐

tributed to a rational business purpose” or that the Board

reached its “decision by a grossly negligent process that in‐

cludes the failure to consider all material facts reasonably

available.” Brehm v. Eisner, 746 A.2d 244, 264 n.66 (Del. 2000).  

The Lowinger Plaintiffs’ most serious allegation is that

Jones Day could not independently evaluate Caterpillar’s

claims because that firm also represented E&Y and Citigroup,

two of the possible defendants in any litigation about the Si‐

wei acquisition. Moreover, plaintiffs note, Jones Day also re‐

lied on Sidley’s investigation of the Siwei acquisition, but

Sidley was conflicted because it represented the corporate of‐

ficers in both this case and the Demand Futility Action.

It is true that conflicts can undermine the business judg‐

ment rule. In Stepak v. Addison, 20 F.3d 398 (11th Cir. 1994), for
10 No. 18‐1863

example, the Eleventh Circuit found an impermissible conflict

when a firm “actually represented the alleged wrongdoers in

proceedings related to the very subject matter that the law

firm is now asked to neutrally investigate.” Id. at 405. The Il‐

linois Rules of Professional Conduct similarly forbid concur‐

rent representation when a lawyer’s representation will be

“directly adverse to another client” or where the relationship

to a current or past client “will materially interfere with the

lawyer’s independent professional judgment.” Ill. R. Prof’l

Conduct R. 1.7 & cmt. 8 (2010); see also id. R. 1.9 (discussing

duties owed to former clients).  

But these plaintiffs have not alleged with particularity any

potentially disqualifying conflicts. Their only reference to

Jones Day’s representation of E&Y and Citigroup is that Jones

Day “regularly represents and works together with both of

those entities.” This is not enough to give us the information

that we would need to decide whether Jones Day was actually

conflicted. The mere fact that a law firm represented a client

on some other matter does not automatically disqualify the

firm whenever that client may be involved as an opposing

party in future litigation. See, e.g., Watkins v. Trans Union, LLC,

869 F.3d 514, 519–23 (7th Cir. 2017) (holding that the Indiana

Rules of Professional Conduct did not disqualify a lawyer

from working adversely to a former client). Without more de‐

tailed allegations, we are missing critical facts: did Jones

Day’s representations of E&Y and Citigroup occur in “the

same or a substantially related matter,” as required by Illinois

Rule of Professional Conduct 1.9; how did that representation

“materially limit[]” Jones Day’s advice for Caterpillar, Rule

1.7; was the representation of E&Y and Citigroup ongoing or

wholly in the past? Compare id. R. 1.7 (“Conflict of Interest:

Current Clients”) with id. R. 1.9 (“Duties to Former Clients”).
No. 18‐1863 11

Indeed, because Jones Day, E&Y, and Citigroup are all inter‐

national firms, it would be important to know on what conti‐

nents this work occurred; that information, too, is missing.

The Lowinger Plaintiffs simply have not provided enough in‐

formation about Jones Day’s representation of Citigroup and

E&Y to reveal with particularity any conflict that creates a rea‐

sonable doubt about the Board’s business judgment.

Their allegation that Jones Day relied on Sidley’s investi‐

gative report is similarly flawed. The Lowinger Plaintiffs state

only that “Jones Day’s investigation lacked independence and

was compromised because it relied, in large part, on infor‐

mation provided by Sidley....” But they provide no details

suggesting how Jones Day relied on Sidley. More im‐

portantly, they allege nothing that would suggest that Jones

Day did not independently investigate and analyze every‐

thing discussed in its report.  

We are aware that the Lowinger Plaintiffs cite to pages 42

and 43 of Jones Day’s investigatory report as an example of

Jones Day’s “reliance” on Sidley. But the report’s only men‐

tion of Sidley on those pages states that Sidley investigated

claims against Siwei’s principals prior to Caterpillar’s settle‐

ment with those principals. As a result, Jones Day believed

that Caterpillar appeared to have considered the risks and

benefits of litigation against those principals. It is a stretch to

characterize that as “reliance” on Sidley. The report continues

that regardless of Sidley’s investigation, “any potential litiga‐

tion against these parties would be barred under the terms of

the settlement.” This conclusion has nothing to do with

Sidley. It can be interpreted only as the result of Jones Day’s

own legal analysis of the settlement. That is not enough to al‐

lege Jones Day’s conflict with the detail required by Rule 23.1.
12 No. 18‐1863

B

The Lowinger Plaintiffs’ other arguments fall into two

buckets: the Board’s allegedly improper lack of response to

their demand, and perceived inadequacies in Jones Day’s in‐

vestigation. The Board’s decision to delay responding to their

demand while the Demand Futility Action was pending does

not create a reasonable doubt with respect to the Board’s busi‐

ness judgment. If anything, that was a prudent business deci‐

sion. If the Demand Futility Action had been successful, then

the Board would be disqualified from responding to a de‐

mand, and so any resources spent responding to the

Lowinger Plaintiffs’ demand would have been wasted.  

The Lowinger Plaintiffs counter that the Board risked

making certain claims time‐barred by delaying a response.

They contend that the Board could have mitigated this risk by

entering into tolling agreements, but that it refused to do so.

That failure to mitigate, Lowinger Plaintiffs contend, raises a

reasonable doubt about their business judgment. But as the

Lowinger Plaintiffs’ complaint illustrates, they made this ar‐

gument about the statute of limitations to Sidley, the Board’s

counsel, and it disagreed. The only reasonable inference to

draw from this exchange is that the Board relied on its coun‐

sel’s legal advice when deciding to delay a response without

tolling agreements. That advice was not so erroneous that re‐

lying on it was grossly negligent. Indeed, the district court be‐

lieved that Sidley’s advice on the statute of limitations was

correct.

The Board’s refusal to release the unredacted appendix to

Jones Day’s report and the documents underlying that report

also fails to create doubt about the Board’s judgment. Unlike

the defendants in the cases cited by the Lowinger Plaintiffs,
No. 18‐1863 13

Caterpillar has not “effectively insulated its investigation

from any scrutiny.” City of Orlando Police Pension Fund v. Page,

970 F. Supp. 2d 1022, 1030 (N.D. Cal. 2013); see also Thorpe v.

CERBCO, Inc., 611 A.2d 5, 11 (Del. Ch. 1991) (finding a reason‐

able doubt as to a board’s good faith where it refused to act

on a demand,refused to release the special committee’s report

prepared for the board, and the special committee members

on the board resigned after tendering their report). The Board

gave the plaintiffs the entirety of the report provided to the

Board except for four pages of redacted appendices that it

claimed were subject to attorney‐client privilege. This is a far

cry from City of Orlando, where the board provided plaintiff’s

counsel with nothing more than a copy of the report, and then

only for the limited purpose of preparing for settlement nego‐

tiations. 970 F. Supp. 2d at 1030–31.

If the Lowinger Plaintiffs believed these documents were

vital to their claims, they should have made a books and rec‐

ords demand under 8 Delaware Code § 220 once their first

complaint was dismissed with leave to amend. See Andersen

v. Mattel, Inc., C.A. No. 11816–VCMR, 2017 WL 218913, at *4

(Del. Ch. Jan. 19, 2017) (rejecting a shareholder’s argument

that a board kept its materials secret when that shareholder

had chosen not to make a section 220 demand). Their argu‐

ment that they could not make a section 220 demand once

they filed their initial complaint is inconsistent with the Dela‐

ware Supreme Court’s decision in King v. VeriFone Holdings,

Inc., 12 A.3d 1140 (Del. 2011). King held that a section 220 ac‐

tion was available when a shareholder’s derivative action was

dismissed without prejudice for failure to plead particular‐

ized facts and the shareholder was given leave to amend. Id.

at 1150. While King dealt with the failure to plead facts sug‐

gesting demand futility, we see no reason that it would not
14 No. 18‐1863

apply equally to the demand‐refusal context. In both scenar‐

ios, shareholder‐plaintiffs are seeking similar facts that would

allow them to meet Rule 23.1(b)’s “particularity” pleading

standard. See id. at 1147–48 (approving of a section 220 de‐

mand made after a shareholder’s first complaint “failed to

plead particularized facts”).  

No Delaware case, statute, or rule expressly forecloses the

plaintiffs’ section 220 demand. For that reason, the district

court was correct not to excuse their failure to attempt such a

demand. Absent a failed section 220 action, the Board’s deci‐

sion not to release further investigation documents does not

create a reasonable doubt as to its judgment.

The Lowinger Plaintiffs finally attempt to create doubt

about the Board’s judgment by attacking various parts of

Jones Day’s legal and factual analysis, and the choices it made

about whom and whom not to interview. But these arguments

all amount to “cavils about the types of documents reviewed,

or the choice of persons to be interviewed” that “will not sup‐

port a finding of gross negligence.” Zucker v. Hassell, C.A. No.

11625–VCG, 2016 WL 7011351, at *9 (Del. Ch. Nov. 30, 2016).

These plaintiffs might come to a different conclusion about

the strategic importance of the acquisition, the risk that litiga‐

tion might cause disruption and excessive cost for Caterpillar,

or the need to interview Siwei’s former CEO. But those types

of business and investigative choices are exactly what the

business judgment rule protects. See Andreotti, 2015 WL

2270673, at *25. More to the point, nothing about Jones Day’s

process, or its legal or factual analysis, was so egregiously de‐

ficient that the Board was grossly negligent to rely on it. And

it is egregiousness that Delaware requires to rebut the busi‐

ness judgment rule’s protections. See Belendiuk v. Carrion,
No. 18‐1863 15

Civil Action No. 9026–ML, 2014 WL 3589500, at *7 (Del. Ch.

July 22, 2014) (discussing the few cases that “illustrate the

specificity of the allegations and the egregiousness of the con‐

duct that this Court has found rises to the level of wrongful

refusal”); see also Zucker, 2016 WL 7011351, at *10 & n.117.

III

The Lowinger Plaintiffs contend that even if their com‐

plaint was properly dismissed, the district court should have

allowed them yet another opportunity to amend. Because

“district courts have broad discretion to deny leave to amend

where there is undue delay ... [or] undue prejudice to the de‐

fendants,” the abuse of discretion standard applies.  Arreola v.

Godinez, 546 F.3d 788, 796 (7th Cir. 2008). We see no such

abuse here.

The Lowinger Plaintiffs have not stated what they would

add or change in an amended complaint. They posit that they

could pursue a section 220 books and records action if they

must plead with greater particularity. But as we already have

discussed, they should have taken that step when the district

court allowed them leave to amend after dismissing their first

complaint. See King, 12 A.3d at 1150. Their request for discov‐

ery in this case also falls flat. The district court stayed discov‐

ery pending adjudication of the Officers’ first motion to dis‐

miss. But once the district court granted that motion and gave

the plaintiffs leave to amend, they never attempted to re‐open

discovery to support their amended complaint. We can only

assume that the Lowinger Plaintiffs’ decisions not to attempt

a section 220 action or to move to re‐open discovery were stra‐

tegic, and so their attempts to take those steps now are una‐

vailing.
16 No. 18‐1863

Finally, as the district court noted, at the time it dismissed

this case, the litigation had been pending for three years. This

appeal has taken it into its fourth year. The district court did

not abuse its discretion in finding that the Officers would be

unduly prejudiced by allowing continued litigation under the

circumstances.  

***

We AFFIRM the judgment of the district court.