Source: http://ca.findacase.com/research/wfrmDocViewer.aspx/xq/fac.20050909_0000204.NCA.htm/qx
Timestamp: 2017-10-18 05:51:23
Document Index: 674441364

Matched Legal Cases: ['§ 1001', '§ 4', '§ 404', '§ 1104', '§ 405', '§ 1105']

ORDER (1) GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTIONS TO DISMISS PLAINTIFFS' CONSOLIDATED AMENDED COMPLAINT AND (2) DENYING PLAINTIFFS' MOTION FOR LEAVE TO FILE A SECOND CONSOLIDATED AMENDED COMPLAINT [Re Docket Nos. 84, 100, 116, 118, 120, 122, 123, 124, 291, 320]
Christine Chang and James Huffman ("plaintiffs"), former participants in McKesson Corporation's Profit-Sharing Investment Plan ("the Plan"), bring a class action lawsuit against multiple defendants for their alleged breaches of fiduciary duties under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001, et seq. On January 12, 1999 McKesson Corporation merged with HBOC to form McKesson HBOC. Later that year, McKesson HBOC announced that HBOC had engaged in accounting irregularities. As a result, McKesson HBOC's stock price plummeted and the Plan lost substantial value. On April 30, 1999, McKesson HBOC made its annual contribution to McKesson HBOC 's Employee Stock Ownership Plan ("ESOP"). McKesson HBOC made this contribution in the form of stock. That contribution is the only contribution at issue in this litigation.
In March 2003 several defendants moved to dismiss plaintiffs' consolidated amended complaint ("CAC"), including: (1) McKesson HBOC, Inc. and HBO & Company; (2) Charles W. McCall, a former officer and director of HBOC and Chairman of the Board of Directors of the post-merger company for several months; (3) Mark A. Pulido, a former member of both McKesson Corporation's Board of Directors before the merger and the post-merger company for several months, (4) the McKesson Corporation Outside Directors;*fn1 and (5) the HBOC Outside Directors.*fn2 Plaintiffs opposed the motions. On May 10, 2005 the court granted preliminary approval of a settlement between plaintiffs and (1) HBOC and (2) its former officers and directors. The court thus stayed plaintiffs' claims against the HBOC subclass. On May 25, 2005 plaintiffs filed a motion for leave to file a second amended consolidated complaint ("SCAC"). The defendants other than the HBOC subclass oppose the motion. The court has reviewed the papers and considered the arguments of counsel.*fn3 For the reasons discussed below, the court grants defendants' motions to dismiss the CAC except for plaintiffs' allegations that McKesson HBOC breached its duty of prudence by contributing stock to the Plan on April 30, 1999. The court denies defendants' motions with respect to that claim. The court also denies plaintiffs' motion for leave to amend.
On December 31, 2002 plaintiffs filed the CAC.*fn4 Plaintiffs assert claims against McKesson HBOC, Inc, the members of McKesson Corporation's Board of Directors before the January 12, 1999 merger, and the members of McKesson HBOC's Board of Directors after the January 12, 1999 merger.
CAC ¶¶ 17, 22. The CAC also named the Plan as a nominal defendant. Id. at ¶ 24.
Participants may make "basic contributions of between 2% and 6% . . . and supplemental contributions of between 6% and 10%" of their salary to the Plan. Id. at ¶ 69. The Plan also includes an ESOP component under which McKesson Corporation "'matche[s]' up to the first 6% of each participant's salary-deferral contributions" and makes supplemental contributions based on an employee's age and length of service. Id. at ¶¶ 71-72. Although the Plan allows McKesson Corporation to choose between initially contributing cash or company stock, it requires fiduciaries to convert cash contributions into company stock "as soon as practicable." McKesson Plan at §§ 4.3(a) & (c). Plaintiffs allege that "virtually 100%" of the Plan's assets "other than each participant's salary-deferral contributions was held and invested in . . . [c]ompany [s]tock" and that company stock "comprised approximately 75% of the overall value of the . . . Plan assets." CAC ¶¶ 75-76. The Plan does not allow participants to direct sales of company contributions until they reach the age of fifty-five, or when their age plus years of service exceed sixty-five years. Id. at ¶ 77. Thus, participants "could not safely diversify" their holdings. Id.
In mid-1998, McKesson Corporation and HBOC began to discuss the prospect of merging. HBOC had hired Arthur Andersen ("Andersen") to audit its 1996 and 1997 financial statements and to review its first and second quarter 1998 financial statements. Id. at ¶ 88. McKesson Corporation retained Deloitte & Touche LLP ("Deloitte") to perform accounting due diligence of HBOC. Id. at ¶ 87. Deloitte reviewed Andersen's audit work papers. Id. at ¶ 88. Deloitte also spoke with HBOC accounting personnel and reviewed additional financial schedules. Id. at ¶ 89. On July 12, 1998, Deloitte reported four accounting problems: (1) in 1996 and 1997, HBOC had recognized revenue from customer transactions before the customer had actually committed to purchase, violating generally accepted accounting principles ("GAAP"); (2) HBOC had overstated revenue by failing to defer revenue from maintenance service contracts in violation of GAAP; (3) HBOC had established excess reserves related to acquisitions, and had improperly used these reserves in 1997 and the first and second quarters of 1998; and (4) HBOC had understated the reserve for potentially uncollectible customer accounts receivable by approximately $10 million to $25 million. Id. at ¶¶ 90-100. Deloitte presented these findings to the McKesson Corporation Board-including Pulido, Richard Hawkins, McKesson Corporation's Chief Financial Officer, and Heidi Yodowitz, McKesson Corporation's Controller-in a meeting on July 13, 1998. Id. at ¶ 101. In addition, Deloitte stated that it was highly likely that the United States Securities and Exchange Commission ("SEC") would require HBOC to restate its financials. Id. On July 15, 1998 McKesson Corporation announced that it would not merge with HBOC. Id. at ¶ 102.
However, on October 13, 1998 McKesson Corporation and HBOC again discussed merging. Id. at ¶ 108. McKesson Corporation and HBOC agreed to a share exchange ratio of 0.37 McKesson Corporation shares for each share of HBOC. This was an 11% premium over the closing price of HBOC stock on October 16, 1998, but was more favorable to McKesson Corporation than previously-agreed-upon exchange ratios. Id. at ¶¶ 108-109. Deloitte updated its accounting due diligence, finding the same four accounting problems as in its earlier report. Id. at ¶ 113. Deloitte expressed these concerns to McKesson Corporation's Board. Id. at ¶ 114. McKesson Corporation's Board of Directors thus "knew . . . that HBOC's financial statements were suspect and there was a substantial risk that the SEC would require" HBOC to restate them. Id. at ¶ 116. Despite the fact that McKesson Corporation received a "Fairness Opinion" from Bear Stearns, McKesson Corporation's Board members knew that it was "incomplete" because they had "instructed Bear Stearns to ignore the information uncovered by Deloitte." Id. at ¶¶ 118-121. McKesson Corporation's Board and Directors also knew that "[t]he proposed merger . . . raised many substantial and very legitimate risk factors": that (1) 75% of all mergers fail to achieve expected results, (2) McKesson Corporation and HBOC were very different, and (3) both companies "had [recently] acquired numerous other businesses." Id. at ¶ 122. Finally, Pulido, McCall and Bergonzi "had a financial interest in seeing to it that the merger was completed, in the form of stock options and restricted stock that would vest." Id. Nevertheless, the shareholders of both companies approved the merger on January 12, 1999. Id. at ¶¶ 125-126. HBOC became a wholly-owned subsidiary of McKesson and the two companies became known as McKesson HBOC. Id. at ¶ 12.
On July 14, 1999 McKesson HBOC announced that it had completed its investigation and was restating revenues by $245.8 million for the March 31, 1999 fiscal year, $48.8 million for the March 31, 1998 fiscal year, and $33.2 million for the March 31, 1997 fiscal year. Id. at ¶ 136. McKesson HBOC also noted that it would revise its net income downward by $152.2 million for the March 31, 1999 fiscal year, $25.8 million for the March 31, 1998 fiscal year, and $13.5 million for the March 31, 1997 fiscal year. Id. In addition, McKesson HBOC noted that it would recognize only some of these reversed revenues in the future. Id. at ¶ 137. The average closing price of McKesson HBOC stock for the months of May, June, July, and August 1999, was $33.14, $31.31, $30.22, and $30.46, respectively. Id. at ¶ 244. Between October 1999 and June 2000, McKesson HBOC stock traded for roughly $20 per share. Id.
Fourth, the court acknowledged that, if pled in more detail, plaintiffs could state a claim for McKesson HBOC's failure to make contributions in the form of cash, as opposed to stock. Id. Finally, the court dismissed plaintiffs' co-fiduciary liability claims because they failed to explain (1) what duties defendants breached, (2) which defendants knew about these breaches, (3) how each defendant did not make reasonable efforts to remedy the breaches, (4) what acts defendants took to conceal information, and (5) what damages or harm resulted. Id. at *17.
Plaintiffs' seventh cause of action claims that individual McKesson Corporation Board members breached their fiduciary duties of prudence, loyalty, and diversification under ERISA § 404, 29 U.S.C. § 1104 ("section 404") during the period before the January 12, 1999 merger. CAC ¶¶ 196-220. Plaintiffs' eighth cause of action alleges that individual McKesson HBOC Board members breached their section 404 duties between January 12, 1999 through April 20, 1999, after the merger but before McKesson HBOC publicized HBOC's accounting irregularities. Id. at ¶¶ 221-235. Plaintiffs' ninth cause of action asserts that the individual McKesson HBOC Board members breached their section 404 duties after the announcement on April 28, 1999. Id. at ¶¶ 236-251. Plaintiffs' tenth cause of action claims that McKesson HBOC (1) breached its duties under section 404 by making contributions in stock rather than cash and (2) is liable for the individual Board members' wrongdoing "under the law of agency, including the principles of vicarious liability and respondeat superior." Id. at ¶¶ 252-258.*fn5 Plaintiffs' twelfth cause of action alleges that defendants are subject to co-fiduciary liability under ERISA § 405(a), 29 U.S.C. §§ 1105(a)(2)-(3) ("section 405"). Id. at ¶¶ 272-277. Plaintiffs' thirteen cause of action claims that McCall is liable under section 404 and under equitable principles. Id. at ¶¶ 278-281.
3. The Proposed SCAC
On May 25, 2005 plaintiffs requested leave to file the SCAC.*fn6 The SCAC adds citations and quotes from articles to support the proposition that "75% of mergers fail to achieve expected results." SCAC ¶ 122(a). The SCAC also alleges that McKesson HBOC, McCall, Pulido, Bergonzi, and Hawkins engaged in a variety of post-merger wrongdoing, including improperly recognizing revenue from thirty-seven contracts in the first quarter after the merger. Id. at ¶ 140A. One contract in particular, with Data General Corporation, led to McKesson HBOC's improper recognition of $20 million in revenues. Id. McCall and Hawkins were "directly involved" in the Data General transaction. Id. at ¶ 140B, 140D(d). Bergonzi "knew of and participated in" this fraud. Id. at ¶ 140D(a). Pulido also knew about the fraud and yet failed to make the 1999 plan contribution in cash. Id. at ¶ 140C. Moreover, "[d]efendants neither considered nor evaluated the prudence of the investment policy of the . . . Plan regarding its holdings in McKesson [HBOC] stock, or whether to continue contributing cash or . . . [s]tock to the Plan . . . at any time during this timeframe . . . ." Id. at ¶ 140E (emphasis omitted). Finally, McKesson HBOC's decision to contribute stock in 1999 occurred on April 26, 1999-after the company knew that it was going to have to restate its earnings-and was therefore imprudent.*fn7
Dismissal under Federal Rule of Civil Procedure Rule 12(b)(6) is proper only when a complaint exhibits either a "lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1988). The court must accept the facts alleged in the complaint as true. Id. "A complaint should not be dismissed 'unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Gilligan v. Jamco Dev.Corp., 108 F.3d 246, 248 (9th Cir. 1997) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)).*fn8
Federal Rule of Civil Procedure 15(a) instructs courts to give leave to amend "when justice so requires." Courts weigh four factors when deciding whether the grant leave to amend: "undue delay, bad faith or dilatory motive, futility of amendment, and prejudice to the opposing party." Serpa v. SBC Telecomms., Inc., 318 F. Supp. 2d 865, 870 (N.D. Cal. 2004). "The party opposing amendment bears the burden" of proving that leave is inappropriate. DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 187 (9th Cir. 1987). Futility ...