Court Opinion

ID: 4161107
Source: CourtListenerOpinion
Date Created: 2017-04-18 19:05:20.696384+00
Date Added: 2024-06-11T14:22:50.310186
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

PARK EMPLOYEES’ AND                      )
RETIREMENT BOARD EMPLOYEES’              )
ANNUITY AND BENEFIT FUND OF              )
CHICAGO, derivatively and on behalf of   )
Bioscrip, Inc.,                          )
                                         )
                  Plaintiff,             )
                                         )
     v.                                  ) C.A. No. 11000-VCG
                                         )
RICHARD M. SMITH, MYRON Z.               )
HOLUBIAK, CHARLOTTE W.                   )
COLLINS, SAMUEL P. FRIEDER,              )
DAVID R. HUBERS, RICHARD L.              )
ROBBINS, STUART A. SAMUELS,              )
GORDON H. WOODWARD,                      )
KIMBERLEE C. SEAH, HAI V. TRAN,          )
PATRICIA BOGUSZ, KOHLBERG &              )
CO., L.L.C., KOHLBERG                    )
MANAGEMENT V, L.L.C.,                    )
KOHLBERG INVESTORS V, L.P.,              )
KOHLBERG PARTNERS, V, L.P.,              )
KOHLBERG TE INVESTORS V, L.P.,           )
KOCO INVESTORS V, L.P., and              )
JEFFERIES LLC,                           )
                                         )
                  Defendants,            )
                                         )
     and                                 )
                                         )
BIOSCRIP, INC.,                          )
                                         )
                  Nominal Defendant.     )

                        MEMORANDUM OPINION

                      Date Submitted: January 19, 2017
                       Date Decided: April 18, 2017
Pamela S. Tikellis, A. Zachary Naylor, and Vera G. Belger, of CHIMICLES &
TIKELLIS LLP, Wilmington, Delaware; OF COUNSEL: Catherine Pratsinakis, of
CHIMICLES & TIKELLIS LLP, Haverford, PA; Carol V. Gilden, of COHEN
MILSTEIN SELLERS & TOLL PLLC, Chicago, Illinois; Richard A. Speirs and
Kenneth Rehns, of COHEN MILSTEIN SELLERS & TOLL PLLC, New York, New
York, Attorneys for Plaintiff Park Employees’ and Retirement Board Employees’
Annuity and Benefit Fund of Chicago.

Stephen P. Lamb and Matthew D. Stachel, of PAUL, WEISS, RIFKIND,
WHARTON & GARRISON LLP, Wilmington, Delaware; OF COUNSEL: Leslie
Gordon Fagen, Daniel J. Kramer, and Robert N. Kravitz, of PAUL, WEISS,
RIFKIND, WHARTON & GARRISON LLP, New York, New York, Attorneys for
Defendants Kohlberg & Co., L.L.C., Kohlberg Management V, L.L.C., Kohlberg
Investors V, L.P., Kohlberg Partners V, L.P., Kohlberg TE Investors V, L.P., and
KOCO Investors V, L.P.

David C. McBride, Martin S. Lessner, Tammy L. Mercer, and Nicholas J. Rohrer,
of YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware;
OF COUNSEL: Jonathan Rosenberg and William J. Sushon, of O’MELVENY &
MYERS LLP, New York, New York, Attorneys for Defendant Jefferies LLC.

Gregory P. Williams, Brock E. Czeschin, and Sarah A. Clark, of RICHARDS,
LAYTON & FINGER, P.A., Wilmington, Delaware; OF COUNSEL: Jay
Lefkowitz, P.C., Joseph Serino, Jr., P.C., and Shireen A. Barday, of KIRKLAND &
ELLIS LLP, New York, New York, Attorneys for Nominal Defendant BioScrip, Inc.
and Defendants Richard M. Smith, Myron Z. Holubiak, Charlotte W. Collins, Samuel
P. Frieder, David R. Hubers, Richard L. Robbins, Stuart A. Samuels, Gordon H.
Woodward, Kimberlee C. Seah, Hai V. Tran, and Patricia Bogusz.

GLASSCOCK, Vice Chancellor
      I am in the unusual position here of issuing a second decision granting a

motion to dismiss in a single matter. Court of Chancery Rule 15(aaa) is designed to

prevent such a situation. Here, under the good-cause rationale of Rule 15(aaa), I

granted the Defendants’ first motions to dismiss, but allowed the Plaintiff to amend

its complaint.

      The case involves the alleged receipt of illegal kickbacks by the Nominal

Defendant, BioScrip, Inc., in connection with sales of a drug, Exjade. The complaint

alleges that the then-Board of Directors and other BioScrip fiduciaries failed to

properly oversee the company, allowing this illegal activity to exist, leading to

damages to BioScrip. The Plaintiff, a BioScrip stockholder, seeks to hold these

fiduciaries liable to the company, via this derivative litigation.

      The first incarnation of the Plaintiff’s Complaint (the “Original Complaint”)

sought to excuse demand and justify this derivative proceeding on the not-unusual

allegation that the directors could not exercise their business judgment with respect

to a demand, because of a substantial likelihood that they themselves would be found

liable in the matter. Because, under the unusual facts here, I found that it was clear

at the time the Original Complaint was filed that the composition of the Board would

have changed before such a demand could be considered, I found that the operative

board for demand analysis was not composed of the directors named in the Original

Complaint. Instead, the operative Board consisted largely of new directors, seated

                                           1
on May 11, 2015 (the “May 11 Board”). The Original Complaint did not address

the ability of the May 11 Board to consider a demand. Therefore, I dismissed, but

with leave to refile if the Plaintiff considered the May 11 Board also incapable of

addressing a demand to litigate. The Plaintiff did so, and the Defendants filed new

Motions to Dismiss, addressed in this Memorandum Opinion.

       A complaint may proceed derivatively on behalf of a corporation without

demand first being made upon the board of directors, but only upon a showing that

such demand should be excused as futile. The Plaintiff here has failed to plead facts

that, if true, raise a reasonable doubt that the May 11 Board is capable of applying

its business judgment to a demand that such litigation on behalf of BioScrip proceed;

accordingly, demand is not excused, and the Motions to Dismiss are granted. My

reasoning follows.

                                  I. BACKGROUND1

       This matter may proceed derivatively only if the Plaintiff can demonstrate that

a demand on the Board of Directors is excused. The suit was filed when Board

membership was in a state of flux, raising the question of whether the outgoing or

incoming directors were the fiduciaries against whom demand futility must be

measured. I issued a Memorandum Opinion in this matter on May 31, 2016

1
 For purposes of evaluating the Defendants’ Motions to Dismiss, the facts are drawn from the
well-pled allegations of Plaintiff’s Verified Amended Stockholder Derivative Complaint (the
“Amended Complaint” or “Am. Compl.”), and all documents incorporated by reference therein.
                                             2
addressing that question (“Park Emps’ I”).2 I found that, contrary to the Plaintiff’s

argument, the proper Board against which to make demand was the Board of

Directors as constituted on May 11, 2015.3 Due to the unique facts of the matter and

because the Original Complaint as pled—focusing on the composition of the Board

on May 7, 2015—was insufficient to support a finding of demand futility, I also

found it appropriate to allow the Plaintiff an opportunity to move to amend its

complaint, under the good cause exception to Court of Chancery Rule 15(aaa).4 The

Plaintiff did so, amending its complaint and alleging that demand would be futile as

to the May 11 Board. The Defendants have moved to dismiss the Amended

Complaint under Rule 23.1 and Rule 12(b)(6). The following factual recitation is

sufficient to evaluate Defendants’ motions pursuant to Rule 23.1 as they relate to the

May 11 Board.5 Interested parties are referred to the more detailed statement of facts

in Park Emps’ I.

       A. The Parties

       The Plaintiff is a stockholder of BioScrip, Inc. and has been a stockholder at

all relevant times.6 The Plaintiff purports to bring this action derivatively on behalf

2
  Park Emps.' & Ret. Bd. Emps.' Annuity & Benefit Fund of Chicago v. Smith, 2016 WL 3223395
(Del. Ch. May 31, 2016).
3
  Id. at *3.
4
  Id. at *2–3.
5
  Given my decision below, I need not address Defendants’ motions under Rule 12(b)(6).
6
  Motion for Leave to File an Amended Complaint, Ex. A (the “Amended Complaint or “Am.
Compl.”) ¶ 22. See also Order (Sept. 20, 2016) (Dkt. No. 98) (granting Motion for Leave to File
an Amended Complaint).
                                              3
of BioScrip, Inc. Nominal Defendant BioScrip, Inc. (“BioScrip”) is a Delaware

corporation that provides infusion services, home health services, and pharmacy

benefit management (“PBM”) services nationwide.7

       Defendant Smith has been the President and CEO of BioScrip since 2011 and

previously worked as the COO starting in 2009.8 Smith has also served on the Board

since 2009.9 Defendant Holubiak served as a director from 2005 until June 1, 2016.10

Starting in 2005, Holubiak served on the Audit Committee, the Management

Development and Compensation Committee (the “Compensation Committee”), and

the Corporate Strategy Committee.11 Beginning in 2013, Holubiak also served on

the Governance, Compliance and Nominating Committee (the “Governance

Committee”).12

       Defendants David R. Hubers, Charlotte W. Collins, Stuart A. Samuels,

Samuel P. Frieder, and Gordon H. Woodward all left the BioScrip Board on May

11, 2015, but were directors at all times relevant to any liability (collectively with

Smith and Holubiak, the “Director Defendants”).13 Defendants Patricia Bogusz, Hai

V. Tran, and Kimberlee C. Seah were BioScrip officers at all relevant times (the

7
  Am. Compl. ¶¶ 1, 23.
8
  Id. at ¶ 24.
9
  Id.
10
   Id. at ¶ 25.
11
   Id.
12
   Id.
13
   See id. at ¶¶ 26–30.
                                          4
“Officer Defendants” and collectively with the Director Defendants, the “Individual

Defendants”).14

       Defendants Kohlberg & Co., L.L.C., Kohlberg Management V, L.L.C.,

Kohlberg Investors V, L.P., Kohlberg Partners V, L.P., Kohlberg TE Investors V,

L.P. and KOCO Investors V., L.P. (collectively, “Kohlberg”) consist of various

Delaware LLCs and partnerships.15 Before the stock offerings at issue in this matter,

Kohlberg beneficially owned approximately 26.2% of BioScrip’s outstanding

shares. Kohlberg also held the right to appoint two directors to the BioScrip Board

and accordingly designated two of its senior executive officers—Frieder and

Woodward—to the Board.16

       Defendant Jefferies LLC (“Jefferies”) is a global investment banking firm and

a Delaware LLC.17 BioScrip hired Jefferies to advise it in connection with a shelf-

registration “leading up to the April 2013 Offering in which [BioScrip] and Kohlberg

sold [BioScrip securities and] the August 2013 Offering in which Kohlberg (by and

through its Board designees, Frieder and Woodward) sold” BioScrip securities.18

Jefferies also was to advise BioScrip in connection with BioScrip’s possible sale of

its PBM business segment and possibly the entire company.19 Additionally, Jefferies

14
   Id. at ¶¶ 31–33.
15
   Id. at ¶ 34.
16
   Id.
17
   Id. at ¶ 35.
18
   See id.
19
   Id.
                                         5
“served as underwriter for the April 2013 Offering.”20

        B. Relevant Non-parties

        Christopher S. Shackelton is the co-founder and managing partner of

Coliseum Capital Management, LLC (“Coliseum”).21              On March 9, 2015, in

connection with a securities purchase agreement with Coliseum, Shackelton was

appointed to the BioScrip Board and currently serves as a member of the Board’s

Audit and Compensation Committees.22 Shackelton “also has a significant business

relationship with BioScrip.”23 Since November 16, 2012, Shackelton has been a

member of the board of directors of LHC Group, Inc. (“LHC”), of which

Coliseum—the LLC that Shackelton founded—owns 23%.24 LHC purchased two

BioScrip operating subsidiaries in April 2014 that together brought in approximately

$72.6 million in revenues in the year prior to their sale.25 Additionally, Jefferies “is

a longtime advisor to LHC” and served as an underwriter on LHC’s initial public

offering as well as its second stock offering.26 LHC also “presented at Jefferies’

2016 Annual Healthcare Conference.”27

20
   Id.
21
   Id. at ¶ 36.
22
   Id.
23
   Id.
24
   Id.
25
   Id.
26
   Id.
27
   Id.
                                           6
       R. Carter Pate has served on the Board since May 11, 2015.28                       Upon

Holubiak’s resignation on June 1, 2016, Pate took over as Chairman of the Board.29

Pate is also Chairman of the Audit Committee and a member of the Compensation

Committee.30 Pate was the “Global and U.S. Managing Partner of the Healthcare

Practice at PriceWaterhouse Coopers (‘PWC’)” from 2007 until 2010.31 It was

during this time that, “while under Pate’s management, PWC audited Novartis’

financial statements and internal controls.”32

       Michael Goldstein has served as a member of the Board since May 11, 2015.33

Goldstein currently chairs the Governance Committee and is a member of the Audit

Committee.34 Goldstein “has been an advisor to Jefferies & Company Inc. (an

affiliate of Jefferies Group LLC) since 2011.”35 An April 16, 2012 press release

named Goldstein to the first “six distinguished members” of the “Global Senior

Advisory Board” of Jefferies Group Inc.—the predecessor to Jefferies Group LLC.36

This advisory board was established by Richard B. Handler, who is the Chairman

and CEO of Jefferies Group LLC, which is the parent of Jefferies. An additional

28
   Id. at ¶ 41.
29
   Id.
30
   Id.
31
   Id.
32
   Id. “PWC audited Novartis financial statements and its internal controls from at least 2001 to
2013.” Id.
33
   Id. at ¶ 43.
34
   Id. at ¶¶ 25, 43.
35
   Id. at ¶ 43.
36
   Id.
                                               7
press release issued in September 2012 “continued to tout Goldstein as a member of

the ‘distinguished group’” of the Global Senior Advisory Board.37

       Tricia Nguyen has been a director of the Board since 2014 and currently

serves on the Governance Committee.38 David W. Golding has served as a director

on the Board since May 11, 2015.39 Golding currently chairs the Compensation

Committee and serves on the Governance Committee.40 Golding was originally

nominated to the Board in February 2015 “as a result of an Investor Agreement with

Cloud Gate Capital, LLC and DSC Advisors LLC, which at the time owned

approximately 7% of [BioScrip’s] common stock.”41

       C. Facts Leading to this Litigation

       This matter centers around three areas of alleged misconduct: “(1) a kickback

scheme related to the Company's sale of a drug called Exjade (the ‘Exjade Kickback

Scheme’); (2) the Individual Defendants' fraudulent concealment of the quick and

significant erosion of BioScrip's pharmacy benefit management services segment;

and (3) insider trading in connection with two stock offerings in 2013.” 42 The

intricacies of these areas of alleged misconduct are explored in further detail in Park

37
   Id.
38
   Id. at ¶ 37.
39
   Id. at ¶ 42.
40
   Id.
41
   Id.
42
   Park Emps.’ I, 2016 WL 3223395, at *3.
                                             8
Emps’ I.43 A brief review of the Exjade Kickback Scheme is warranted, however.

      In November 2005, Novartis Pharmaceuticals Corporation (“Novartis”) chose

“BioScrip and two others pharmacies to be exclusively responsible for processing

and filling almost all Exjade prescriptions.”44 BioScrip received a rebate from

Novartis of $13 per Exjade shipment.45        This rebate was not illegal.46 In 2007,

BioScrip’s Exjade sales decreased due to increased recognition of the drug’s

negative side effects.47    Novartis then used “threats and substantial financial

kickbacks to incentivize BioScrip’s management” to recommend Exjade refills.48

By late 2007, BioScrip’s refill rates were among the highest of its peers and in early

2008, Novartis raised BioScrip’s per shipment rebate from $13 to $20, allegedly

constituting an illegal kickback.49 By the end of 2008, Novartis would again increase

this rebate to $30.50 BioScrip eventually sold the division involved in this scheme

in approximately May 2012 but retained any liabilities arising from the division.51

      D. Procedural History

      In response to my holding in Park Emps I, the Plaintiff filed its Motion for

43
   Park Emps.’ I, 2016 WL 3223395.
44
   Am. Compl. ¶ 71.
45
   Id. at ¶ 74.
46
   Id.
47
   See id. at ¶ 75.
48
   Id. at ¶ 77.
49
   Id. at ¶ 80.
50
   Id.
51
   Id. at ¶ 85.
                                          9
Leave to File an Amended Stockholder Derivative Complaint on June 30, 2016 (the

“Motion to Amend”) and attached the Amended Complaint to this Motion. The

Amended Complaint pleads the same counts as the Original Complaint, but adds

alternative allegations that demand would be futile as to the May 11 Board instead

of solely the May 7 Board.

       Count I asserts a derivative Caremark claim against the Director Defendants,

Bogusz and Seah for breach of their fiduciary duties of care and loyalty for failing

to oversee BioScrip’s operations and compliance.52 Count II asserts a derivative

claim against the Individual Defendants for breaching their fiduciary duties of care

and loyalty in connection with alleged federal securities disclosure violations.53

Count III asserts a derivative claim against the Director Defendants and Kohlberg

for breaching their fiduciary duties of care and loyalty for causing BioScrip to

engage in unlawful stock offerings in 2013.54 Count IV asserts a derivative Brophy

claim for insider selling against Kohlberg, Frieder, Woodward, Bogusz, Holubiak,

and Hubers.55 Counts V and VI assert derivative claims against Jefferies and

Kohlberg, respectively, for aiding and abetting the breach of fiduciary duty and

52
   See id. at ¶¶ 255–267.
53
   See id. at ¶¶ 268–272.
54
   See id. at ¶¶ 273–282.
55
   See id. at ¶¶ 283–287.
                                        10
insider selling claims in the other counts of the Complaint.56 The Plaintiff seeks,

among other things, an award of damages to BioScrip for injuries it sustained

because of the alleged breaches of fiduciary duties and an order requiring the

disgorgement of “ill-gotten gains” from the alleged insider sales transactions.57

       The Defendants, in opposition to the Motion to Amend, argued that, pursuant

to Rules 15(aaa) and 23.1, amendment of the Original Complaint would be futile,

because demand on the May 11 Board was not excused. I held a teleconference on

the Motion to Amend on September 13, 2016, after which I granted the Motion.

However, that decision was without prejudice to the Defendants’ arguments under

Rule 23.1. I told the parties I would hear any arguments pursuant to Rule 12(b)(6)

at the same time as I would hear arguments under Rule 23.1, presuming motions to

dismiss. The Defendants so moved, and I heard argument under Rules 23.1 and

12(b)(6) on January 19, 2017. My Memorandum Opinion follows.

                                       II. ANALYSIS

       The Defendants have moved to dismiss Plaintiff’s Amended Complaint

pursuant to Court of Chancery Rule 23.1, for failure to make a demand.58 That rule

acknowledges that directors, not stockholders, control the property of the

56
   See id. at ¶¶ 288–301. Count VI clarifies that it does not include a claim against Kohlberg for
aiding and abetting the claims in Count IV against Defendants Bogusz, Hubers and Holubiak. Id.
at ¶ 301.
57
   See id. at Prayer for Relief.
58
   As well as under Rule 12(b)(6) for failure to state a claim.
                                               11
corporation, including choses-in-action. Rule 23.1 requires that a derivative plaintiff

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

the plaintiff desires from the directors or comparable authority and the reasons for

the plaintiff's failure to obtain the action or for not making the effort.”59 Where, as

here, a “plaintiff forgoes demand and seeks to proceed with derivative litigation

nonetheless, the action will be dismissed unless the plaintiff can demonstrate that

demand is futile.”60

       This Court assesses demand futility using the standard articulated by the

Delaware Supreme Court in Rales v. Blasband.61 Under Rales, the plaintiff must

allege particularized facts that create a reasonable doubt that “the board of directors

could have properly exercised its independent and disinterested business judgment

in responding to a demand,” had one been made.62 An earlier case of the Court,

Aronson v. Lewis,63 addresses the same problem in the specific context of a subset

of such cases: where an action of the current Board is the matter at issue.64 Under

Aronson, the plaintiff must allege particularized facts that create a reasonable doubt

that “the directors are disinterested and independent” or the “challenged transaction

59
   Ct. Ch. R. 23.1 (emphasis added).
60
   In re Duke Energy Corp. Derivative Litig., 2016 WL 4543788, at *11 (Del. Ch. Aug. 31, 2016).
61
   634 A.2d 927 (Del. 1993).
62
   Id. at 934.
63
   473 A.2d 805 (Del. 1984).
64
   See Rales, 634 A.2d at 933–34 (explaining that Aronson does not apply in the absence of a
derivative suit challenging an actual business decision by the board of directors that would be
considering the demand).
                                              12
was otherwise the product of a valid exercise of business judgment.”65 The analyses

in both Rales and Aronson drive at the same point; they seek to assess whether the

individual directors of the board are capable of exercising their business judgment

on behalf of the corporation.66

       The Plaintiff here presents arguments under both the Aronson and the Rales

tests. As an initial matter, the Plaintiff argues under Aronson that demand is futile

with respect to the May 11 Board because, in light of the Board taking an affirmative

action by moving to dismiss under Rule 12(b)(6), the Board has prejudged the claims

in a way that is not in BioScrip’s interest.67 The Plaintiff also argues under Rales

that a majority of the May 11 Board “lacks independence or is otherwise interested

with respect to each of the six Counts” in the Complaint.68 I address each contention

in turn.

       A. Moving to dismiss under Rule 12(b)(6) does not excuse demand.

       The Plaintiff makes the novel argument that the Board has effectively

demonstrated demand futility here, in that the Board has “taken an affirmative legal

position hostile to BioScrip’s interests” and “fail[ed] to act on an informed basis and

65
    Aronson, 473 A.2d at 814.
66
    See Park Emps.’ I, 2016 WL 3223395, at *8 n.73. See also Guttman v. Huang, 823 A.2d 492,
500–502 (Del. Ch. 2003) (explaining that “the differences between the Rales and the Aronson tests
. . . are only subtly different, because the policy justification for each test points the court toward
a similar analysis”).
67
    See Pl’s Reply Br. in Support of its Motion for Leave to Amend (“Pl’s Reply Br.”) 10. The
Plaintiff adds that demand is also excused for the same reasons under Rales. See id. at 11 n.7.
68
    Id. at 16.
                                                 13
in good faith” in its authorization of motion practice in this matter.69 Specifically,

the Plaintiff contends that the Board prejudged the merits of the underlying claims

by seeking to dismiss them under Rule 12(b)(6) with prejudice. 70 The Plaintiff

contrasts this case with the more typical derivative case where the directors

considering demand would themselves be defendants. In such a case, according to

the Plaintiff, “substantive defense of conduct is expected.”71 However, the BioScrip

Board changed composition from May 7 to May 11, and only two directors on the

Board face any liability. Therefore, the Plaintiff argues that the Board had an

opportunity to investigate the claims on the merits but “chose not to do so,” and

instead moved to dismiss the Amended Complaint under 12(b)(6) within six weeks

of receiving it.72 The Board, the Plaintiff asserts, could not have chosen this course

of conduct consistent with exercising its business judgment.73

        Although I appreciate the creativity of Plaintiff’s argument here, I cannot

agree. The Plaintiff essentially presents a circular argument that demand is excused

because it is clear that the Board would reject demand. However, to my mind, this

is short of a demonstration that the Board would wrongfully reject demand. The

Plaintiff has not alleged facts showing any breach of the Board’s fiduciary duties in

69
   See id. at 12.
70
   Id. at 14.
71
   Id.
72
   Id.
73
   Id. at 13.
                                         14
this regard. Rather, the Plaintiff settles for a res ipsa loquitur-style argument that

the Board’s decision to move to dismiss under 12(b)(6) immediately equates to a

failure to exercise its business judgment. This, however, approaches tautology. As

this Court has noted, “[t]he failure to sue . . . is not enough to demonstrate an

‘interestedness’ sufficient to sterilize the discretion of the remaining members of the

board,” and “it is the Board’s inaction in most every case which is the raison d’etre

for Rule 23.1.”74

       Accordingly, I find that the Plaintiff has not pled particularized facts sufficient

to create a reasonable doubt that demand would be futile as to the May 11 Board

based on those directors authorizing a motion to dismiss under Rule 12(b)(6).

       B. The Plaintiff fails to demonstrate that a majority of the Board lacks
       independence or is otherwise interested with respect to any of the six counts.

       As mentioned, pursuant to the Rales test, a plaintiff must allege particularized

facts that create a reasonable doubt that “the board of directors could have properly

exercised its independent and disinterested business judgment in responding to a

demand.”75 “A director cannot consider a litigation demand under Rales if the

director is interested in the alleged wrongdoing, not independent, or would face a

substantial likelihood of liability if suit were filed.”76 When assessing demand

74
   Richardson v. Graves, 1983 WL 21109, at *3 (Del. Ch. June 17, 1983).
75
   Rales, 634 A.2d at 934.
76
   In re China Agritech, Inc. S'holder Derivative Litig., 2013 WL 2181514, at *16 (Del. Ch. May
21, 2013) (internal quotations omitted).
                                              15
futility, the Court must accept all particularized allegations as true as well as any

reasonable inferences that logically follow therefrom.77 In doing so, I must keep in

mind that “Delaware law presumes the independence of corporate directors.”78

Nonetheless, “it is important that the trial court consider all particularized facts pled

by the plaintiffs about the relationships between the director and the interested party

in their totality and not in isolation from each other,” and give such relationships due

weight in assessing demand futility.79 Additionally, when examining a director’s

purported conflict of interest, “there must be some basis to conclude it is material

enough to that director that it could overcome their rational business judgment.”80

Materiality means that an alleged benefit, or an alleged detriment, is “significant

enough in the context of the director’s economic circumstances, as to have made it

improbable that the director could perform her fiduciary duties to the . . .

shareholders without being influenced by her overriding personal interest.”81

       The May 11 Board consists of seven directors: Smith, Holubiak, Shackelton,

Pate, Goldstein, Nguyen, and Golding.82                   The Plaintiff challenges the

disinterestedness of five of the seven directors on the Board: Smith, Holubiak, Pate,

77
   See Brehm v. Eisner, 746 A.2d 244, 255 (Del. 2000).
78
   DiRienzo v. Lichtenstein, 2013 WL 5503034, at *12 (Del. Ch. Sept. 30, 2013) (citing Aronson,
473 A.2d at 815).
79
   Del. Cty. Empls. Ret. Fund v. Sanchez, 124 A.3d 1017, 1019 (Del. 2015).
80
   DiRienzo, 2013 WL 5503034, at *12.
81
   Khanna v. McMinn, 2006 WL 1388744, at *20 (Del. Ch. May 9, 2006) (internal quotations
omitted).
82
   See Compl. ¶¶ 24–25, 36, 39–43.
                                              16
Goldstein, and Shackelton. I assume, without deciding, that Smith and Holubiak are

sufficiently interested to be unable to bring their business judgment to bear.

Consequently, for two of Pate, Goldstein, and Shackelton, the Plaintiff must plead

particularized facts sufficient to create a reasonable doubt as to their ability to

exercise their business judgment in responding to a demand. In this endeavor, the

Plaintiff has failed, as explained below.

                  1. Pate

          The Plaintiff does not contend that Pate has a direct interest in the proposed

derivative litigation, or faces liability therefrom. The Plaintiff’s rationale is much

more attenuated; it alleges that Pate was the “Global and U.S. Managing Partner of

the Healthcare Practice” at PWC from 2007 to 2010, during which time PWC

audited Novartis’ financial statements.83 As a reminder, non-party Novartis is the

pharmaceutical company that allegedly pressured BioScrip to increase its refill rates

of Exjade through the use of illegal kickback rebates, among other things. 84 Even

accepting all reasonable inferences from these alleged facts and considering them in

their totality, the Plaintiff has failed to raise a reasonable doubt as to Pate’s ability

to exercise his business judgment here.

83
     See id. at ¶ 41.
84
     See id. at ¶¶ 70–85.
                                            17
       For all six counts, the Plaintiff argues that demand is excused as to Pate

because of his “conflict involving the Exjade Kickback Scheme.”85 This alleged

conflict stems from “Pate’s involvement with PWC at the time when PWC had

managerial responsibility for auditing Novartis’ financial statements and internal

controls, and Pate’s oversight of PWC’s auditing of Novartis.”86 According to the

Plaintiff, any litigation over the Exjade Kickback Scheme or finding of a breach of

fiduciary duties by the Defendants would reflect negatively on Novartis, and

secondarily “would embarrass Pate professionally and negatively affect his

professional reputation.”87 Moreover, the Plaintiff contends that Pate would be

forced to consider questions about his own competence—or that of others at PWC—

as well as the Exjade Kickback Scheme’s illegality and Novartis’ role in it.88

       PWC is not a defendant here. The Plaintiff’s allegation here is that a global

managing partner of an international accounting firm’s healthcare practice would

find a negative judgment against his firm’s former client damaging to his personal

reputation; so much so that he could not bring his business judgment to bear. I

remain unconvinced. The Plaintiff has failed to alleged particularized facts assisting

me with this inference. Other than Pate’s position as the global and U.S. managing

85
   See Pl’s Reply Br. 21, 27, 29, 32, 35.
86
   Id. at 21.
87
   Id.
88
   See id.
                                            18
partner of PWC’s healthcare practice, the Plaintiff points to no further facts to show

that Pate was involved in PWC’s audit of Novartis, let alone that he, or PWC, was,

or should have been, aware that Novartis was offering alleged illegal incentives to

BioScrip. Accordingly, I find that the Plaintiff has failed to create a reasonable doubt

as to Pate’s ability to bring his business judgment to bear on this matter.

                2. Shackelton and Goldstein

         The Plaintiff’s arguments that Shackelton and Goldstein could not exercise

their business judgment in the case of a demand are reminiscent of its assertions

regarding Pate, rejected above. Again, the Plaintiff does not contend that these

directors face liability in the proposed derivative action. The Plaintiff relies instead

on these directors’ relationship with Jefferies, which is a Defendant here. Jefferies

served as a financial advisor to BioScrip. The Plaintiff, in Count V, brings an aiding

and abetting claim against Jefferies, arguing that Jefferies assisted in the wrongful

conduct connected to the Individual Defendants’ breach of their fiduciary duties.89

The Plaintiff’s allegations against Goldstein and Shackelton do not concern these

two directors’ connections to the directors and officers who allegedly, with the

advice of Jefferies, breached their fiduciary duties. Rather, the Plaintiff’s allegations

focus on the connections of Goldstein and Shackelton to Jefferies, the alleged aider

and abettor, itself. Alleged connections to an aider and abettor could, I presume,

89
     See Compl. ¶¶ 288–294.
                                           19
support demand futility where those facts imply an inability by the connected

director to act independently; here, however, I find that the Plaintiff has not met its

burden to show demand futility arising out of the relationship between Jefferies and

these directors.

       The Plaintiff argues that both Shackelton and Goldstein are beholden to

Jefferies due to their alleged “substantial relationships” with Jefferies.90       For

Shackelton, the Plaintiff alleges that he is the co-founder and managing partner of

non-party Coliseum, and that Shackelton was appointed to the BioScrip Board in

connection with a securities purchase agreement with Coliseum.91 Coliseum, in turn,

holds a substantial minority interest in another corporation, LHC, and Shackelton

sits on the LHC board of directors.92 Shackelton’s “substantial relationship” with

Jefferies allegedly arises from Jefferies acting as a “longtime advisor to LHC” and

serving as an underwriter for LHC’s IPO and second stock offering; not to mention,

the Plaintiff adds, LHC “presenting” at Jefferies’ 2016 Annual Healthcare

Conference.93

       With respect to the ties between Jefferies and Goldstein, the Plaintiff

concentrates on its allegations that Goldstein is one of “six distinguished members”

90
   Pl’s Reply Br. 22–23.
91
   Id. at 22 n.15 (citing Compl. ¶ 36).
92
   Id.
93
   Id.
                                          20
of a “Global Senior Advisory Board,” advising Jefferies’ parent company, Jefferies

Group LLC. The Plaintiff points out that he was nominated to this advisory board

by the joint Chairman and CEO of Jefferies Group LLC, and that a press release

“tout[ed] Goldstein as a member of [this] ‘distinguished group.’” 94 The Plaintiff

also argues that, since 2011, Goldstein has been an advisor to Jefferies & Company

Inc., which is an affiliate of Jefferies Group LLC.95 The Amended Complaint fails

to add details regarding the nature, materiality or associated remuneration (if any) of

these “advisory” positions.

       In light of these alleged facts, according to the Plaintiff, Shackelton and

Goldstein have “an incentive to shield Jefferies from liability both for financial and

reputational reasons” and are thus unable to consider a demand for Counts I through

V.96 The Plaintiff reasons more fully as follows: The facts alleged in Count I—the

Caremark Claim—are the “genesis of the claims against Jefferies” and support all

other counts; that is, they support Count II’s alleged federal securities disclosure

violations, Count III’s alleged unlawful stock offerings, Count IV’s alleged Brophy

claims for insider selling, and the alleged aiding and abetting of all of these claims

by Jefferies in Count V.97 Therefore, the Plaintiff argues, since “[a]llegations should

94
   Id. at 22 n.16.
95
   See id.; Compl. ¶ 43.
96
   Id. at 22.
97
   Id. at 23.
                                          21
be analyzed collectively when determining demand futility,” both Shackelton and

Goldstein, allegedly beholden to Jefferies, “cannot possibly impartially consider the

conduct alleged in Count I when this conduct is the foundation of the claims made

in Counts II, III, IV and V, all of which implicate Jefferies.”98

       In other words, the Plaintiff is attempting to rebut the presumption that

Shackelton and Goldstein are directors capable of exercising their business

judgment, on the ground that both directors would have to consider litigation against

corporate fiduciaries on behalf of BioScrip. Their judgment is impermissibly tainted

in this exercise, because a third party, to whom they are allegedly beholden, could

then potentially face liability as an aider and abettor of the underlying claims in such

litigation. I assume here that an indirect interest in an aider-and-abettor could, in

proper circumstances, disable the exercise of fiduciary duties.99 I find that the

Plaintiff has not pled particularized facts sufficient to raise a reasonable doubt as to

98
   See id. at 23 (citing In re Ezcorp Inc. Consulting Agreement Derivative Litig, 2016 WL 301245
(Del. Ch. Jan. 25, 2016)).
99
   The Plaintiff cites to only two cases for the proposition that a director cannot impartially consider
a demand to pursue breach of fiduciary duty when that breach is one of the elements of an aiding
and abetting claim. See id. at 29, 35. Neither case, however, directly addresses such a proposition;
each merely demonstrates the common-sense notion that primary liability, such as a breach of
fiduciary duty, is necessary for the existence of secondary liability for aiding and abetting. See In
re KKR Fin. Holdings LLC S'holder Litig., 101 A.3d 980, 1003 (Del. Ch. 2014) (“An aiding and
abetting claim may be summarily dismissed based upon the failure of the breach of fiduciary duty
claims against the director defendants.”) (internal quotations omitted); In re Alloy, Inc., 2011 WL
4863716, at *14 (Del. Ch. Oct. 13, 2011) (“As a matter of law and logic, there cannot be secondary
liability for aiding and abetting an alleged harm in the absence of primary liability.”).
                                                  22
the ability of either Shackelton or Goldstein to bring his business judgment to bear,

however.

      The Plaintiff attempts to establish that Shackelton is beholden to Jefferies by

virtue of his indirect minority interest in, and directorship of, a company—LHC—

unrelated to this litigation, because that company in turn used Jefferies as its

underwriter and received advice from Jefferies for a long period of time. Such an

allegation is simply too attenuated to imply that Shackelton is materially personally

beholden to Jefferies in some non-economic way. The Plaintiff also fails to allege

any fact from which I could draw a reasonable inference that the Jefferies-LHC-

Shackelton relationship is economically material to Shackelton. Moreover, with

respect to LHC’s connection to Jefferies (to the extent pertinent to establishing

Shackelton’s connection to Jefferies), it seems to me that, if anything, Jefferies

would be beholden to LHC, not the other way around, as Jefferies is the entity

presumably receiving money from LHC in exchange for its business services. Thus,

I find that the Plaintiff has failed to plead particularized facts sufficient to create a

reasonable doubt as to Shackelton’s ability to exercise his business judgment in

considering a demand upon the Board.

      The Plaintiff’s allegations here also fail as to Goldstein. The Plaintiff attempts

to paint Goldstein’s membership on the “advisory board” as one of a distinguished

professional accomplishment, but fails to allege any facts as to why service on such

                                           23
a board would be material to Goldstein. This Court has held that merely serving on

an advisory board does not create a disabling interest even when the plaintiff alleged

such service was prestigious and lucrative.100 Here, the Plaintiff simply alleges that

Goldstein serves on a Jefferies’ advisory board that Jefferies has referred to as

“distinguished” and argues that the prestige of this alone establishes the materiality

of such a position to Goldstein.101 The Plaintiff, however, points to no facts to

elucidate the work of the advisory board or that Goldstein receives compensation for

his service, let alone that any such compensation might be material to Goldstein.

       The Plaintiff also fails to allege facts from which I could reasonably infer

Goldstein possesses any personal relationships with Jefferies that would render him

an interested party. The Plaintiff does allege that the joint Chairman and CEO of the

parent company of Jefferies nominated Goldstein to the advisory board. However,

“to render a director unable to consider demand, a relationship must be of a bias-

producing nature.”102 Furthermore, “[t]he naked assertion of a previous business

100
    See Khanna, 2006 WL 1388744, at *20 (“The Amended Complaint does not inform the Court
what membership on the [advisory board] actually entails. . . . The allegations provided by the
Plaintiffs clearly fail to meet the above-articulated [materiality] standard: they set forth no
particularized allegations of compensation actually received by Lynch in return for his [a]dvisory
[b]oard service or as to whether such compensation would be material to a director in Lynch's
position.”). See also id. at *2 n.9 (“The Amended Complaint fails to develop sufficiently . . . the
nature of [the board of advisors]. It may be that appointment to [the board of advisors] carried
significant remunerative benefits, but the Plaintiffs' conclusory pleadings in this respect fail to set
forth the detail necessary to satisfy Court of Chancery Rule 23.1.”).
101
    See Oral Arg. Tr. 38:13–39:2 (Jan. 19, 2017).
102
    Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1050 (Del.
2004).
                                                 24
relationship is not enough to overcome the presumption of a director's

independence.”103 The Plaintiff alleges no further facts with regards to the joint

Chairman and CEO of the parent company of Jefferies. Accordingly, and in light of

the shortcomings of its allegations regarding the advisory board already discussed, I

am unable to infer that Goldstein’s appointment renders him beholden to his

appointer—the joint Chairman and CEO—and transitively beholden to his

appointer’s employer’s subsidiary—Jefferies. I also note that the press releases

touting Goldstein as a member of the “distinguished group” of the advisory board

tends, if anything, to indicate that Jefferies is capitalizing on and beholden to the

reputation of Goldstein, rather than the other way around. I therefore find that the

Plaintiff has failed to plead particularized facts sufficient to create a reasonable doubt

as to Goldstein’s ability to exercise his business judgment.

          Our Supreme Court’s recent case-law has stressed that when evaluating

director independence, personal relationships matter.104 This truth is not a license to

base findings of demand futility on attenuated relationships naked of supporting

allegations implying divided loyalties sufficient to taint the exercise of fiduciary

duties, however. The Plaintiff’s contentions regarding the relationships between

Jefferies and Goldstein and Shackelton are of this latter variety.

103
      Orman v. Cullman, 794 A.2d 5, 27 (Del. Ch. 2002).
104
      See generally Sandys v. Pincus, 152 A.3d 124 (Del. 2016); Sanchez, 124 A.3d 1017.
                                                25
                                    III. CONCLUSION

       For the foregoing reasons, I find that the Plaintiff has failed to plead demand

futility under Rule 23.1. Accordingly, the Amended Complaint is dismissed.105 An

appropriate form of order is attached.

105
   The dismissal of the underlying insider selling and fiduciary duty claims logically compels the
dismissal of the aiding and abetting claims against Jefferies and Kohlberg in Counts V and VI as
well.
                                               26
  IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

PARK EMPLOYEES’ AND                      )
RETIREMENT BOARD EMPLOYEES’              )
ANNUITY AND BENEFIT FUND OF              )
CHICAGO, derivatively and on behalf of   )
Bioscrip, Inc.,                          )
                                         )
                  Plaintiff,             )
                                         )
     v.                                  ) C.A. No. 11000-VCG
                                         )
RICHARD M. SMITH, MYRON Z.               )
HOLUBIAK, CHARLOTTE W.                   )
COLLINS, SAMUEL P. FRIEDER,              )
DAVID R. HUBERS, RICHARD L.              )
ROBBINS, STUART A. SAMUELS,              )
GORDON H. WOODWARD,                      )
KIMBERLEE C. SEAH, HAI V. TRAN,          )
PATRICIA BOGUSZ, KOHLBERG &              )
CO., L.L.C., KOHLBERG                    )
MANAGEMENT V, L.L.C.,                    )
KOHLBERG INVESTORS V, L.P.,              )
KOHLBERG PARTNERS, V, L.P.,              )
KOHLBERG TE INVESTORS V, L.P.,           )
KOCO INVESTORS V, L.P., and              )
JEFFERIES LLC,                           )
                                         )
                  Defendants,            )
                                         )
     and                                 )
                                         )
BIOSCRIP, INC.,                          )
                                         )
                  Nominal Defendant.     )

                                 ORDER

    AND NOW, this 18th day of April, 2017,

                                    27
      The Court having considered Defendants’ Motions to Dismiss pursuant to

Rule 23.1 for failure to plead demand futility, and for the reasons set forth in the

Memorandum Opinion dated April 18, 2017, IT IS HEREBY ORDERED that

Defendants’ Motions to Dismiss are GRANTED.

SO ORDERED:

                                             /s/ Sam Glasscock III

                                             Vice Chancellor

                                        28