Court Opinion

ID: 60554
Source: CourtListenerOpinion
Date Created: 2010-04-26 04:01:20+00
Date Added: 2024-06-11T12:18:32.411226
License: Public Domain

[DO NOT PUBLISH]

                  IN THE UNITED STATES COURT OF APPEALS
                                                               FILED
                            FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS
                             ________________________  ELEVENTH CIRCUIT
                                                           March 13, 2008
                                                        THOMAS K. KAHN
                                   No. 07-11653
                                                              CLERK
                            ________________________
                         D.C. Docket No. 06-00467-CV-TWT-1

DORIS STAEHR
Derivatively on behalf of Coca-Cola Enterprises, Inc.,

                                                                         Plaintiff-Appellant,

                                            versus

JOHN R. ALM, LOWRY F. KLINE,
PATRICK J. MANNELLY, RICK L. ENGUM,
E. LISTON BISHOP, III, et al.,

                                                                     Defendants-Appellees.

                              ________________________

                      Appeal from the United States District Court
                         for the Northern District of Georgia
                            ________________________

                                     (March 13, 2008)

Before ANDERSON and BLACK, Circuit Judges, and HODGES,* District Judge.

PER CURIAM:

       *
         Honorable Wm. Terrell Hodges, United States District Judge for the Middle District of
Florida, sitting by designation.
       Doris Staehr (Appellant), derivatively on behalf of Coca-Cola Enterprises, Inc.

(CCE) appeals the district court’s dismissal of her Verified Consolidated Shareholder

Derivative Complaint for failure to adequately plead demand futility.2 We affirm the

district court’s dismissal.

                                   Background and Facts

       Appellant is an owner of common stock in CCE. She filed a derivative lawsuit

on behalf of CCE against certain CCE officers and directors alleging violations of

Delaware state law, including breach of fiduciary duty, abuse of control, gross

mismanagement, waste of corporate assets and unjust enrichment.3                    Specifically,

Appellant claimed that CCE, through its Board of Directors, engaged in “channel

stuffing” to manage its reported revenue earnings. According to the Amended

Complaint, “[c]hannel [s]tuffing is a deceptive business practice used by a company

       2
         Appellant also appeals the district court’s decision not to permit her the opportunity to
amend the Amended Complaint. However, Appellant did not file a motion seeking leave to
amend. Instead, Appellant included a footnote in her response to Appellees’ motion to dismiss,
asking an opportunity to amend if the district court granted Appellees’ motion. The footnote did
not state the substance of the proposed amendment or explain why justice would so require. As
such, Appellant failed to properly seek leave to amend, and this Court will not address that issue.
See Fed. R. Civ. P. 15(a); see also Wagner v. Daewoo Heavy Indus. Am. Corp., 314 F.3d 541
(11th Cir. 2002).
       3
        At the time the action was filed, CCE’s Board of Directors consisted of: Appellees
Lowry F. Kline, J. Trevor Eyton, Irial Finan, Gary P. Fayard, L. Phillip Humann, Paula G. Rosput
Reynolds, Calvin Darden, Marvin J. Herb, James E. Copeland, Jr., J. Alexander M. Douglas, Jr.,
Summerfield K. Johnston, III. Directors Fernando Aguirre and Donna A. James were not named
as Defendants.

                                                 2
to inflate its sales and earnings figures by deliberately sending retailers along its

distribution channel more products than they are able to sell to the public.” [R26:18].

      Appellant alleged that Coca-Cola Company (Coke) induced CCE to exploit its

customer base using these tactics, causing CCE to sell product at lower prices than

it would have charged thereby increasing its own total sales volume for the benefit

of Coke. Appellant claimed that the individual Appellees were beholden to Coke

which allegedly controlled and dominated the CCE Board of Directors to maximize

Coke’s financial position to the detriment of CCE. As a result of the “channel

stuffing,” the individual Appellees allegedly caused CCE to restate earnings,

disseminate false and misleading public statements, including earnings conference

calls, earnings press releases and filings with the Securities and Exchange

Commission. Further, according to the Amended Complaint, certain of these

individual Appellees traded shares of CCE stock with insider knowledge of these

misstatements, thus selling their shares at artificially inflated prices.

      Appellant filed the lawsuit against the individual Appellees and the nominal

CCE without making a demand on the Board of Directors requesting remediation of

these alleged corporate practices. Appellees filed a motion to dismiss on the basis

that Appellant failed to plead particularized facts that demonstrated demand was

excused by futility. Appellees also argued that, even if demand was excused, the

                                            3
Amended Complaint should be dismissed because it failed to state a claim for breach

of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets,

unjust enrichment, and was barred by the statute of limitations, laches and

acquiescence. The district court granted the motion to dismiss on the ground that

Appellant failed to properly plead demand futility. This appeal followed.

                                Standard of Review

      We review the district court’s dismissal of a shareholder derivative lawsuit for

abuse of discretion. See Stepak v. Addison, 20 F.3d 398, 402 (11th Cir.1994); See

also, Peller v. Southern Co., 911 F.2d 1532 (11th Cir. 1990). Appellant tacitly

concedes that the application of an abuse of discretion standard is appropriate, but

urges the Court to repudiate precedent and adopt the de novo review standard for this

appeal. This invitation is unavailing, however, because the established standard can

only be altered by the Court en banc. In any event, this is not an appropriate case to

reconsider the applicable standard, because Appellant loses under either mode of

review.

                                     Discussion

      This action is governed by the substantive law of Delaware. “A cardinal

precept of the General Corporation Law of the State of Delaware is that directors

rather than shareholders, manage the business affairs of the corporation.” Stepak, 20
4
F.3d at 402 (quoting Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984). Shareholder

derivative suits intrude upon this managerial authority. Under Delaware law,

therefore, an aggrieved shareholder must demand that the board take the desired

action prior to bringing such a suit. Id. This necessity for demand is reflected in

Federal Rule of Civil Procedure 23.1,4 which requires more stringent pleading

requirements than the mere notice pleading commanded in Fed. R. Civ. P. 8 and Fed.

R. Civ. P. 12(b)(6). Stepak, 20 F.3d at 402. Fed. R. Civ. P. 23.1 provides in part:

       The [derivative] complaint shall also 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, if necessary, from the shareholders
       or members, and the reasons for the plaintiff’s failure to obtain the action
       or for not making the effort.

       If a plaintiff can show the demand would be futile, the demand is excused. A

finding of demand futility is authorized only where particularized factual allegations

of the derivative stockholder complaint create reasonable doubt that, as of the time

the complaint was filed, a majority of the board could have properly exercised its

independent and disinterested business judgment in responding to a demand. Rales

v. Blasband, 634 A.2d 927, 934 (Del. 1993). Interest is demonstrated where a

director, “will receive a personal financial benefit from a transaction that is not

       4
        Delaware Chancery Rule 23.1 and Federal Rule of Civil Procedure 23.1 contain similar
requirements.

                                              5
equally shared by the stockholders,” or, “where a corporate decision will have a

materially detrimental impact on a director, but not on the corporation and the

stockholders.” Id. at 936.

      Thus, in this case, to excuse a demand according to Delaware law, the

Appellant was required to establish in the Amended Complaint the bias of seven

Directors – a majority of the Board – to show that the Board itself was disqualified

to consider the issue. See Blasband, 634 A.2d at 934. The District Court held that the

Amended Complaint failed to establish that any of the thirteen CCE Directors was

interested or not independent. [R42:267-83].

      Appellant does not dispute the District Court’s finding regarding the disinterest

of six of the Directors. She only challenges the district court’s individual finding of

independence as to Directors Douglas, Fayard, Finan, Humann, Darden, Johnston III

and Kline. [Brief of Appellant at 22-24, 27-31]. It follows that if the district court

was correct in its finding of disinterest with respect to any one of these seven

remaining Directors, the futility of a demand has not been established. Because we

find that Appellant failed to plead particularized facts to demonstrate that two of the

                                          6
seven remaining Directors – Defendants Darden and Johnston III - were interested,5

the district court did not abuse its discretion in dismissing the Complaint.

       Appellant argues that Defendants Darden and Johnston III were interested by

virtue of their membership on the boards of other corporations, Target, Kroger

Company and/or Krystal Company.6 Appellant contends that the other corporations

are major retailers of Coke’s products and have close business relationships with CCE

and Coke. Appellant argues that demand was futile with respect to Directors Darden

and Johnston III, because the Directors could not support an action on behalf of CCE

without harming the relationship between Target, Kroger Company, Krystal Company

and Coke. The membership on Target, Krystal Company and/or Kroger Company’s

boards allegedly made Defendants Darden and Johnston III beholden to Coke, and

demonstrated that Coke influenced or had the capacity to influence the Directors’

discretion or independence.

       Under Delaware law, an allegation of a collateral business relationship,

standing alone, is insufficient to raise a reasonable doubt about a director’s

       5
         This should not be taken to mean that any of the other challenged Directors were shown
to be interested. We simply find it unnecessary to consider them.
       6
        Although the record is unclear as to whether Director Johnston III was a board member
of Krystal Company, Kroger Company or both corporations, regardless of which company or
companies he served as a director for, our decision remains the same.

                                               7
independence. Beam v. Stewart, 845 A.2d 1040, 1050 (Del. 2004); see also Orman

v. Cullman, 794 A.2d 5, 27 (Del. Ch. 2002) (finding that the law is well settled in

Delaware that a naked assertion of a previous business relationship is not enough to

overcome the presumption of a director’s independence.) Although Defendants

Darden and Johnston III may have held memberships on Target, Krystal and/or

Kroger’s boards, Appellant failed to allege any particularized facts showing that there

was any actual bias because of their positions. The bald allegation that Defendants

Darden and Johnston III were directors of outside companies, without more, does not

demonstrate that the Directors were interested, even if the companies had close

relationships with Coke. Accordingly, Appellant’s argument does not support her

demand futility claim.

      Appellant also asserts that Defendant Darden and Johnston III lacked

independence because of their alleged insider trading activity, potential liability for

failure of oversight, potential loss of insurance coverage if the action was pursued by

the Board, and Defendant Darden’s compensation. In considering these assertions,

the District Court correctly found that: (1) Appellant’s conclusory allegation

regarding the insider trading activity lacked sufficient specificity to demonstrate

interestedness; (2) the Amended Complaint was devoid of particularized facts that

Defendants Darden and Johnston III faced a substantial likelihood of personal

                                          8
liability for their alleged failure of oversight; (3) Appellant’s mere identification of

an insurance exclusion was not enough to show the Directors were interested; and (4)

Appellant failed to allege anything in regard to the claimed extravagance of

Defendant Darden’s compensation. In short, the District Court did not abuse its

discretion in finding that these allegations did not demonstrate interestedness for

demand futility purposes.

                                     Conclusion

      For the foregoing reasons, Appellant failed to plead particularized facts with

respect to at least two of the remaining seven Directors to create a reasonable doubt

that a majority of the Board could have properly exercised independence and

disinterestedness. Accordingly, the district court’s dismissal is AFFIRMED.

                                           9