Court Opinion

ID: 4878945
Source: CourtListenerOpinion
Date Created: 2021-08-26 15:05:32.740037+00
Date Added: 2024-06-11T08:12:37.336166
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IN RE ZIMMER BIOMET HOLDINGS,              ) CONSOLIDATED
INC. DERIVATIVE LITIGATION                 ) C.A. No. 2019-0455-LWW

                          MEMORANDUM OPINION
                          Date Submitted: June 15, 2021
                          Date Decided: August 25, 2021

P. Bradford deLeeuw, DELEEUW LAW LLC, Wilmington, Delaware; Richard A.
Speirs and Christopher Lometti, COHEN MILSTEIN SELLERS & TOLL PLLC,
New York, New York; Robert C. Schubert, Willem F. Jonckheer, SCHUBERT
JONCKHEER & KOLBE LLP, San Francisco, California; Kip B. Shuman,
SHUMAN, GLEEN & STECKER, San Francisco, California; Rusty E. Glenn,
SHUMAN, GLEEN & STECKER, Denver, Colorado; Brett D. Stecker, SHUMAN,
GLEEN & STECKER, Ardmore, Pennsylvania; Counsel for Plaintiffs
Jody C. Barillare, MORGAN, LEWIS & BOCKIUS LLP, Wilmington, Delaware;
Troy S. Brown, Laura Hughes McNally, Brian F. Morris, and Karen Pieslak
Pohlmann, MORGAN, LEWIS & BOCKIUS LLP, Philadelphia, Pennsylvania;
Counsel for Defendants Zimmer Biomet Holdings, Inc., Christopher B. Begley,
Betsy J. Bernard, Paul M. Bisaro, Gail K. Boudreaux, Tony W. Collins, David C.
Dvorak, Michael J. Farrell, Daniel P. Florin, Larry Glasscock, Robert A.
Hagemann, Arthur J. Higgins, Robert J. Marshall Jr., and Cecil B. Pickett, Ph.D.
William M. Lafferty, Ryan D. Stottmann, and Sabrina M. Hendershot, MORRIS,
NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Peter E. Kazanoff,
Sara A. Ricciardi, and Courtney G. Skarupski, SIMPSON THACHER &
BARTLETT LLP, New York, New York; Counsel for Defendants Michael W.
Michelson and KKR Biomet, LLC

William M. Lafferty, Ryan D. Stottmann, and Sabrina M. Hendershot, MORRIS,
NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Daniel V.
McCaughey and Erin Macgowan, ROPES & GRAY LLP, Boston, Massachusetts;
Christian Reigstad, ROPES & GRAY LLP, New York, New York; Counsel for
Defendants Jeffrey K. Rhodes, TPG Partners IV, L.P., TPG Partners V, L.P., TPG
FOF V-A L.P., TPG FOF V-B, L.P., TPG LVB Co-Invest LLC, and TPG LVB Co-
Invest II LLC
Daniel A. Mason and Matthew D. Stachel, PAUL, WEISS, RIFKIND, WHARTON
& GARRISON LLP, Wilmington, Delaware; Andrew J. Ehrlich and Brette
Tannenbaum, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, New
York, New York; Counsel for Defendants Blackstone Capital Partners V L.P.,
Blackstone Capital Partners V-AC L.P., Blackstone BCP V-S L.P., Blackstone
Family Investment Partnership V L.P., Blackstone Family Investment Partnership
V-SMD L.P., Blackstone Participation Partnership V L.P., and BCP V CoInvestors
L.P.

Kevin G. Abrams and J. Peter Shindel, Jr., ABRAMS & BAYLISS LLP,
Wilmington, Delaware; Paul Vizcarrondo and John F. Lynch, WACHTELL,
LIPTON, ROSEN & KATZ, New York, New York; Counsel for Defendants GS
Capital Partners VI Fund, L.P., GS Capital Partners VI Parallel, L.P., GS Capital
Partners VI Offshore Fund, L.P., GS Capital Partners VI GmbH & Co. KG,
Goldman Sachs BMET Investors, L.P., Goldman Sachs BMET Investors Offshore
Holdings, L.P., PEP Bass Holdings, LLC, Private Equity Partners 2004 Direct
Investment Fund, L.P., Private Equity Partners 2005 Direct L.P., Private Equity
Partners IX Direct L.P., and Goldman Sachs LVB Co-Invest, L.P.

WILL, Vice Chancellor
      This is a derivative suit brought by stockholders of Zimmer Biomet Holdings,

Inc., a company that manufactures and markets various products in the highly

regulated medical device industry. The plaintiffs’ claims stem from a September 12,

2016 “for cause” inspection of Zimmer’s North Campus site in Warsaw, Indiana by

the U.S. Food & Drug Administration. The compliance problems identified during

that inspection resulted in Zimmer issuing a blanket hold on shipments of products

processed at the North Campus facility.              Zimmer subsequently reported

disappointing financial results for the third quarter of 2016, reduced its fourth quarter

guidance, and saw its stock price fall 14%.

      After outside analysts reported on the results of the FDA’s North Campus

inspection, a federal securities action and this litigation followed. In this matter, the

plaintiffs seek to pursue derivative claims for breach of fiduciary duty, insider

trading, unjust enrichment, and breach of contract. These claims are brought against

current and former officers and directors of Zimmer and against multiple entities that

sold Zimmer stock in three registered offerings in 2016. The primary theory behind

the plaintiffs’ claims is that Zimmer’s officers and directors knew in 2015 and 2016

that Zimmer was facing serious regulatory compliance challenges but concealed

them from the market while facilitating sales of Zimmer stock by private equity

funds in possession of that material non-public information.

                                           1
      The defendants have moved to dismiss the complaint for failure to adequately

plead demand futility and for failure to state a claim. I conclude that those motions

must be granted. As with many derivative actions, a threshold issue in this case is

whether the plaintiffs’ failure to make a pre-suit demand on the Zimmer board is

excused. Of the eleven-member board in place when this lawsuit was filed, the

plaintiffs acknowledge that eight directors were independent, received no special

benefit from the challenged trades, and had no ties to the private equity funds that

traded. They argue that making a demand would nonetheless have been futile

because a majority of those directors face a substantial likelihood of liability.

      The plaintiffs have not alleged particularized facts to support that argument.

Zimmer has an exculpation provision in its charter, meaning that the plaintiffs must

plead facts suggesting a fair inference that the directors breached their duty of

loyalty. The plaintiffs’ complaint details a host of compliance violations—large and

small—at multiple Zimmer facilities from China to Puerto Rico to Indiana, along

with various remediation efforts Zimmer took throughout 2015 and 2016. But the

plaintiffs point to nothing until late 2016 that would have alerted a majority of the

directors to an imminent product ship hold at the North Campus and resulting

financial implications. By then, the secondary offerings had been completed. In

terms of disclosures, the plaintiffs cannot link what the Zimmer board knew before

late 2016 to any material misstatements or omissions that the board was directly

                                           2
involved in issuing. After the ship holds began in September 2016, the plaintiffs—

at most—connect the four Audit Committee members to an earnings release that

reduced guidance but cannot support a duty of loyalty claim against those directors.

      At bottom, the plaintiffs cannot show that a majority of the board faces a

substantial likelihood of liability for non-exculpated claims. There are no specific

facts pleaded to support a reasonable inference that the directors acted in bad faith,

intentionally concealed material information, knowingly facilitated insider trading,

or deliberately ignored “red flags.” Because the plaintiffs cannot demonstrate that

the board’s capacity for impartiality was compromised, demand is not excused as

futile. This case is dismissed in its entirety under Court of Chancery Rule 23.1.

I.    FACTUAL BACKGROUND

      The following facts are drawn from the Verified Consolidated Stockholder

Derivative Complaint (the “Complaint”) and the documents it incorporates by

reference.1

1
  Verified Consolidated S’holder Deriv. Compl. (“Compl.”) (Dkt. 47). See Winshall v.
Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013) (“[A] plaintiff may not reference certain
documents outside the complaint and at the same time prevent the court from considering
those documents’ actual terms.”); Freedman v. Adams, 2012 WL 1345638, at *5 (Del. Ch.
Mar. 30, 2012) (“When a plaintiff expressly refers to and heavily relies upon documents in
her complaint, these documents are considered to be incorporated by reference into the
complaint . . . .”). The parties agreed that documents produced by Zimmer pursuant to 8
Del. C. § 220 would be deemed incorporated into any complaint the plaintiffs filed. See
Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 797 (Del. Ch. 2016).

                                            3
          A.        Zimmer’s Business, Board, and the PE Funds

          Nominal defendant Zimmer Biomet Holdings, Inc. (“Zimmer” or the

“Company”) designs, manufactures, and markets a variety of medical devices

throughout the world.2 Because Zimmer’s products are “medical devices” under the

Food, Drug, and Cosmetic Act, it is regulated by the U.S. Food & Drug

Administration.3 Zimmer’s products include “Class III” medical devices (such as

implantable orthopedic devices used for knee, hip, and spine treatments), which are

subject to intense FDA scrutiny.4

          The Company, as it exists today, was formed through Zimmer Holdings, Inc.’s

(“Legacy Zimmer”) acquisition of Biomet, Inc. (“Legacy Biomet”) on June 24, 2015

for cash and stock consideration totaling nearly $15 billion.5 Before the merger,

Legacy Biomet was 97% owned6 by funds affiliated with The Blackstone Group,7

2
    Compl. ¶ 2.
3
    Id. ¶ 91.
4
    See id. ¶ 93.
5
    Id. ¶ 82.
6
    Id. ¶ 4.
7
 The defendant funds associated with The Blackstone Group are: Blackstone Capital
Partners V L.P., Blackstone Capital Partners V-AC L.P., BCP V-S L.P., Blackstone Family
Investment Partnership V L.P., Blackstone Family Investment Partnership V-SMD L.P.,
Blackstone Participation Partnership V L.P., and BCP V Co-Investors L.P. See id. ¶¶ 48–
49. Those entities are referred to collectively as the “Blackstone Funds.”

                                            4
Goldman Sachs Capital Partners,8 Kohlberg Kravis Roberts & Co. L.P.,9 and TPG

Global, LLC.10 That group of private equity funds will be referred to as the “PE

Funds.” After the merger, the PE Funds held about 15% of Zimmer’s publicly traded

common stock.11

          Zimmer entered into an April 14, 2014 Stockholders Agreement with Legacy

Biomet’s holding company (LVB Acquisition Holding, LLC) in connection with the

merger.12 The Stockholders Agreement provides that the PE Funds could require

Zimmer to register its securities, enabling the PE Funds to sell their holdings in

future public offerings subject to restrictions.13

8
 The defendant funds associated with Goldman Sachs Capital Partners are: GS Capital
Partners VI Fund, L.P., GS Capital Partners VI GmbH & Co. KG, GS Capital Partners VI
Offshore Fund, L.P., GS Capital Partners VI Parallel, L.P., GS LVB Co-Invest, L.P.,
Goldman Sachs BMET Investors, L.P., Goldman Sachs BMET Investors Offshore
Holdings, L.P., PEP Bass Holdings, LLC, Private Equity Partners 2004 Direct Investment
Fund L.P., Private Equity Partners 2005 Direct L.P., and Private Equity Partners IX Direct
L.P. See id. ¶¶ 52–53. Those entities are referred to collectively as the “Goldman Funds.”
9
 Defendant KKR Biomet LLC (the “KKR Fund”) is an affiliate of Kohlberg Kravis
Roberts & Co L.P. Id. ¶¶ 56–57.
10
  The defendant funds associated with TPG Global, LLC are: TPG Partners IV, L.P., TPG
Partners V, L.P., TPG FOF V-A, L.P., TPG FOF V-B, L.P., TPG LVB Co-Invest LLC,
and TPG LVB Co-Invest II LLC. See id. ¶¶ 59–60. Those entities are referred to
collectively as the “TPG Funds.”
11
     Id. ¶¶ 4, 84.
 Stachel Decl. Ex. 1 (“Stockholders Agreement”), as amended March 30, 2015 (Dkt. 71);
12

Compl. ¶ 371.
13
     Stockholders Agreement §§ 4.1, 4.3.

                                            5
          The Stockholders Agreement also allowed the PE Funds to nominate two

directors to Zimmer’s board of directors (the “Board”).14 The PE Funds nominated

defendants Jeffrey K. Rhodes (an affiliate of the TPG Funds) and Michael W.

Michelson (an affiliate of the KKR Fund).15 The Stockholders Agreement permitted

Michelson and Rhodes to share certain non-public information about Zimmer with

the PE Funds:16

          Notwithstanding anything to the contrary herein, without limiting any
          such Principal Stockholder Director’s fiduciary duties under
          Applicable Law, each of the parties hereto hereby consents to each
          Principal Stockholder Director sharing any information such Principal
          Stockholder Director (in his or her capacity as such) receives from the
          Company with the respective officers, directors, members, employees,
          attorneys, accountants, consultants, bankers and financial advisors of
          any Sponsor [PE Fund] . . . .17

          The plaintiffs allege that defendants Rhodes and Michelson used their Board

positions to engage in insider trading. Rhodes left the Board in 2017, before this

litigation was filed.18 Of the 11 directors on the Board when this suit commenced,

just three—defendants Michelson and Arthur J. Higgins (an affiliate of Blackstone)

14
    Compl. ¶ 85; Stockholders Agreement § 1.1 (“On or prior to the Closing Date, (i) the
Company’s board of directors (the “Board”) shall take all action necessary and appropriate
. . . to cause the number of directors on the Board to be increased by two (2) and (ii) the
Board shall appoint two individuals selected by the [PE Funds].”).
15
     Compl. ¶¶ 85, 87.
16
     Id. ¶ 85.
17
     Stockholders Agreement § 1.6(b); see also id. § 1.7.
18
     Compl. ¶ 45.

                                              6
and non-party Brian Hanson (Zimmer’s CEO)—purportedly lack independence.19

The remaining eight directors on the Board at that time—Christopher B. Begley,

Betsey J. Bernard, Gail K. Boudreaux, Michael J. Farrell, Larry C. Glasscock, and

Robert A. Hagemann (together, the “Director Defendants”), and non-parties Syed

Jafry and Maria Hilado20—are outside directors with no alleged ties to the PE Funds.

Two other former directors—Paul M. Bisaro and Cecil B. Pickett—are also

defendants but left the Board before this litigation was filed.21

          The Complaint also names as defendants two of Zimmer’s former executive

officers. David C. Dvorak was Zimmer’s Chief Executive Officer, President, and a

member of the Board.22 Defendant Daniel P. Florin was Zimmer’s Chief Financial

Officer until his resignation.23 Dvorak and Florin left Zimmer in 2017 and 2019,

respectively.24

19
     Compl. ¶¶ 294 n.29, 326.
20
     Id. ¶¶ 35–42, 294.
21
     Id. ¶¶ 43–44.
22
     Id. ¶ 33.
23
     Id. ¶ 34.
24
  Id. ¶¶ 33–34. The Complaint also, at times, lists “Collins” as a defendant. See, e.g., id.
¶¶ 133, 140, 151. The plaintiffs appear to be referencing Tony W. Collins, Zimmer’s Vice
President, Corporate Controller, and Chief Accounting Officer during the relevant time
period. He is not included in the “Parties” section of the Complaint and there are no
substantive allegations about him.

                                             7
         B.       The PE Funds Exit Their Investments in 2016.

         On February 4, 2016, consistent with the Stockholders Agreement, Zimmer

filed a Form S-3 shelf Registration Statement for planned public stock offerings by

the PE Funds.25 Zimmer’s directors, including Michelson and Rhodes, signed the

Registration Statement.26        Three public secondary offerings pursuant to the

Registration Statement followed.

         First, on February 10, 2016, the Blackstone Funds sold the entirety of their

Zimmer holdings and the Goldman Funds sold about half of their Zimmer

investment (the “February Offering”).27 In total, the Blackstone Funds and Goldman

Funds received proceeds of approximately $1.06 billion from the February

Offering.28 Zimmer issued a preliminary prospectus supplement in connection with

that February Offering on February 5, 2016 and a final prospectus supplement on

February 8, 2016.29

         Then, in a June 13, 2016 public offering, the TPG Funds and KKR Fund sold

about half of their remaining Zimmer shares and the Goldman Funds sold the rest of

25
     Id. ¶¶ 215, 260; see Stockholders Agreement § 4.3.
26
   See Compl. ¶¶ 42, 45, 260. Specifically, Begley, Bernard, Bisaro, Boudreaux, Dvorak,
Farrell, Florin, Glasscock, Hagemann, Higgins, Michelson, Pickett, and Rhodes each
signed the Registration Statement. Id. ¶¶ 33–45, 260.
27
     Id. ¶ 261.
28
  Id. The Blackstone Funds sold 7,351,708 shares in the offering at $95.91 per share. Id.
The Goldman Funds sold 3,675,850 shares of Zimmer stock at $96.66 per share. Id.
29
     Id. ¶ 260.

                                              8
their stake (the “June Offering”).30 For that June Offering, Zimmer supplemented

the Registration Statement with a preliminary prospectus supplement on June 13,

2016 and a final prospectus supplement on June 15, 2016.31

          Finally, in a third public offering on August 9, 2016, the TPG Funds and KKR

Fund each sold their remaining Zimmer shares (the “August Offering”).32 The

August Offering was also conducted pursuant to the Registration Statement.

Zimmer supplemented the Registration Statement with a preliminary prospectus

supplement on August 9, 2016 and a final prospectus supplement on August 11,

2016.33 As of August 9, 2016, the PE Funds were no longer invested in Zimmer.

          C.      The FDA’s Ongoing Monitoring and Inspection of Zimmer

          The plaintiffs challenge the February, June, and August Offerings because,

they contend, those offerings were conducted at a time when the PE Funds had

material non-public information obtained through Michelson and Rhodes.34 They

30
   Id. ¶ 262. The TPG Funds sold 3,675,855 shares—50% of its interest in the Company—
at $115.31 per share, netting proceeds of roughly $424 million. Id. The KKR Fund sold
3,764,820 shares—50% of its interest in the Company—for $115.31 per share, netting
proceeds of about $434 million. Id. And the Goldman Funds sold their remaining
3,675,858 Zimmer shares at $115.31 per share, also netting proceeds of approximately
$424 million. Id.
31
     Id. ¶ 263.
32
  Id. ¶ 264. KKR Biomet sold its 3,764,820 shares at $129.00 per share, netting proceeds
of roughly $486 million. Id. The TPG Funds sold their remaining 3,675,855 shares of
Zimmer stock at $129.00 per share, netting proceeds of about $474 million. Id.
33
     Id. ¶ 265.
34
     See, e.g., id. ¶¶ 1, 90, 250, 271.

                                            9
allege that the Board, including Michelson and Rhodes—and thus the PE Funds—

knew that Zimmer was facing a series of regulatory challenges that were hidden from

the market at the time of the Offerings.

           As a manufacturer of “Class II” and “Class III” medical devices, Zimmer is

subject to biennial FDA inspections.35 The FDA is also authorized to conduct pre-

approval, compliance follow-up, and “for cause” inspections.36 If an inspection

reveals regulatory violations, FDA inspectors may identify them in a written report

known as a “Form 483.”37 A company that receives a Form 483 generally responds

to the FDA within fifteen days with a comprehensive plan to remedy the

deficiencies.38 If the violations are not addressed, the FDA may issue a “Warning

Letter” that details the continued violations and gives the company a set amount of

time to address them before further action is taken.39 Receipt of a Warning Letter

means that an offending facility can no longer obtain premarket approval on new

35
     Id. ¶ 93.
36
     Id. ¶ 94.
37
  See FDA Form 483 Frequently Asked Questions, U.S. Food & Drug Admin. (Jan. 9,
2020), https://www.fda.gov/inspections-compliance-enforcement-and-criminal-
investigations/inspection-references/fda-form-483-frequently-asked-questions (explaining
that a Form 483 “is issued to firm management at the conclusion of an inspection when an
investigator(s) has observed any conditions that in their judgment may constitute violations
of the [FDCA] and related Acts”); Compl. ¶ 97.
38
     Compl. ¶ 103.
39
     Id.

                                            10
Class III medical devices until the observations are remediated.40 The FDA may

take more drastic actions, such as issuing a “Consent Decree,” where serious

concerns are unremedied.41 A “rare consequence” of an FDA inspection is a product

ship hold.42

           Both before and after the merger, various Zimmer facilities around the world

were the recipients of Form 483s and Warning Letters that outlined negative

observations. The Board received “detailed regular reports . . . that include[d]

discussions of the risks and exposures” concerning FDA-enforced laws and

regulations.43 Board meetings often included a discussion of FDA compliance

efforts and the results of both internal audits and FDA investigations.

           For example, at the first Board meeting held post-merger on July 17, 2015,

the Board received a presentation called “FDA and Project Trident Update.”44 The

presentation described an ongoing FDA compliance remediation program called

“Project Trident” in place at several Legacy Zimmer facilities.45 The presentation

40
     Id.
41
     Id. ¶ 104.
42
     Id. ¶ 19.
43
     Id. ¶ 8.
44
     Id. ¶¶ 127–28.
45
   The facilities involved in Project Trident included those located in Warsaw, Indiana;
Ponce, Puerto Rico; Parsippany, New Jersey; and Winterthur, Switzerland. Id. ¶ 128. The
plaintiffs allege that as of September 2015, Project Trident had cost Zimmer nearly $250
million. Id. ¶¶ 128, 138.

                                            11
identified the “[s]uccessful FDA re-inspections” at Zimmer’s West Campus facility

in Warsaw, Indiana and the Company’s Ponce, Puerto Rico facility as a top priority

for 2015.46 Both facilities had been issued Form 483s (identifying 12 deficiencies

at the West Campus facility and nine deficiencies at the Ponce facility, respectively)

after FDA inspections in 2014.47 The presentation noted that Zimmer’s North

Campus location—the facility central to the plaintiffs’ allegations given its role

manufacturing crucial products—had also been inspected by the FDA in 2014 and

received two negative observations.48

           Similar presentations about compliance matters were given to the Board and

Audit Committee at regular intervals during the remainder of 2015 and 2016.49

Those presentations about “FDA and Quality Matters” would mention, among other

things, FDA inspections and third-party audits at various sites, the results of those

inspections, responses to prior observations, and plans for remediation.50 The Board

46
     Id. ¶ 129.
47
     Id.
48
     Id. ¶ 131.
49
  The Complaint discusses Board and Audit Committee meetings and presentations in
2015 and 2016 on: July 17, 2015; September 25, 2015; December 11, 2015; February 23,
2016; May 3, 2016; July 15, 2016; August 5, 2016 (Audit Committee); September 23,
2016; October 24, 2016 (Audit Committee); and December 16, 2016. See id. ¶¶ 127–88.
50
     See id. ¶¶ 126–94.

                                           12
would be told about issues at Zimmer facilities spanning the globe from Jinhua,

China to Montreal, Canada.51

           In October and November 2015, the FDA conducted a scheduled inspection

of Zimmer’s West Campus facility in Warsaw, Indiana and issued a Form 483 listing

10 negative observations, nine of which were repeat observations from prior FDA

inspections.52 Around the same time, the FDA was also inspecting the Company’s

Ponce, Puerto Rico facility.53 That inspection resulted in four negative observations,

including three repeat observations.54 The Zimmer Board learned about the West

Campus Form 483, the Ponce inspection, and other FDA inspections of Zimmer

facilities during its December 11, 2015 meeting.55

           By the time of the February Offering, the Board was aware that certain

facilities were having “extensive FDA compliance problems”—including that West

Campus and Ponce had received Form 483s and that Zimmer’s Jinhua, China facility

had received an FDA Warning Letter.56 The plaintiffs also allege that the Board

51
     See id. ¶ 11.
52
     Id. ¶¶ 106–07.
53
     Id. ¶ 109.
54
     Id.
55
  Id. ¶¶ 143–44. On December 21, 2015, Zimmer responded to the West Campus Form
483, noting that it was working to “address systemic issues.” Id. ¶ 108. On February 12,
2016, Zimmer told the FDA that its remediation efforts at the West Campus would not be
complete until June of 2017. Id. ¶ 110.
56
     Id. ¶ 268.

                                          13
knew that Zimmer planned to conduct internal audits into FDA-readiness at various

sites.57

         D.     Zimmer Conducts Internal Audits and the Board Receives
                Regular Updates on Compliance.

         Various compliance matters at Zimmer facilities were identified for the Board

after the February Offering. A Board presentation given at a February 23, 2016

meeting listed eight separate FDA investigations that identified one or more negative

observations, including seven negative observations at Zimmer’s Montreal site.58 At

that same meeting, the Board was told about the Company’s plans to audit Zimmer’s

network of manufacturing facilities, including the North Campus.59

         The results of those internal audits were issued in March, April, and June 2016

reports, including observations from Zimmer’s North Campus facility—where “key

brands” providing the Company with some of its “best competitive opportunities”

were made—among others.60 Zimmer’s March 31, 2016 internal audit report titled

“Corporate Complaints Process Audit” detailed six major and two minor

57
   Id.; see also Barillare Decl. Ex. 11 (Sept. 25, 2015 Zimmer Board meeting minutes and
presentation slides) (Dkt. 75).
58
  Compl. ¶¶ 111 (quoting Barillare Decl. Ex. 12 (Feb. 23, 2016 Zimmer Board meeting
minutes and presentation slides)), 154.
59
     Id. ¶¶ 153–55; see Barillare Decl. Ex 12.
60
     Compl. ¶ 12.

                                                 14
observations at the North Campus facility.61 The April 13, 2016 internal audit report

titled “Corporate Design Controls Audit” listed four critical and 15 major

observations at the North Campus.62 And the June 7, 2016 internal audit report titled

“Corporate General QMS Audit” described 15 major and five minor observations at

the North Campus.63

           The plaintiffs assert that the “audit results were provided to the Board no later

than May 3, 2016 (with the third report then in draft).”64 But the plaintiffs do not

allege that the Board received a copy of the audit reports or a description of the

compliance issues they addressed. The Board was given the following information

in a May 3, 2016 Board presentation slide that allegedly corresponds to the three

North Campus internal audits:65

61
  Id. ¶ 124; see Barillare Decl. Ex. 17 (Dec. 16, 2016 Zimmer Board meeting minutes and
presentation slides) at 2.
62
     Compl. ¶ 124.
63
     Id.
64
     Id. ¶ 13; see also id. ¶ 147 & n.15.
65
  Id. ¶ 159 & n.18; see Barillare Decl. Ex. 13 (May 3, 2016 Zimmer Board meeting minutes
and presentation slides).

                                              15
 Zimmer Biomet Location  Audit     Entity  Status                          Result
  Establishment           Date
  EtQ Complaints    N/A Dec ‘15 –  ZBQC   Reports                        13 – Major
 Enterprise Audit –      Mar ‘16            issued                       4 – Minor
   Multiple Sites                          3/31/16
  Biomet Warsaw Warsaw, March 14- PAREXEL Report                         4 – Critical
  North (Design &   IN     18       K&S     issued                       15 – Major
     Package)                              4/13/16
  Corporate Audit   N/A  Mar 2      DLSS  Report in                         TBD
      Process                                draft

The slide also listed similar information for 11 other audits, with varying degrees of

results.66 In total, the audits listed on the slide noted seven critical and 62 major

observations.67 The May 3, 2016 Board meeting was the last meeting before the

June Offering.68

         The Board next met on July 15, 2016. Once again, the Board received a

presentation on “FDA and Quality Matters” at various Zimmer facilities.69 The

directors were updated on ongoing compliance remediation efforts at Zimmer sites.70

They were informed, among other things, that certain remediation efforts at the

66
     See Compl. ¶ 159; Barillare Decl. Ex. 13.
67
     Compl. ¶¶ 159, 161.
68
  On May 27, 2016, the FDA issued a Warning Letter to Zimmer’s Montreal facility. Id.
¶ 165. The plaintiffs do not allege that the Board was informed of that Warning Letter
before the June Offering.
69
  Id. For example, the Board learned that a recent FDA inspection at Zimmer’s Dover,
Ohio facility had resulted in four negative observations. Id.
70
     Id. ¶ 167.

                                             16
North Campus would not be complete until 201871 and that several observations

from the West Campus Form 483 remained open.72 The July 15, 2016 meeting was

the last time the full Board met before the August Offering, though the Audit

Committee met on August 5, 2016.73

           E.     Zimmer Lowers Guidance After the 2016 North Campus FDA
                  Inspection and Product Ship Hold.

           The FDA inspection at the core of the plaintiffs’ Complaint occurred on

September 12, 2016—more than a month after the August Offering.74 That day, the

FDA commenced an unannounced for cause inspection at Zimmer’s North Campus

facility.75 The Board was told about the in-progress inspection during an “FDA

Update” at a regularly scheduled meeting on September 23, 2016.76

           Between the start of the inspection and September 28, 2016, the FDA

identified significant issues with Zimmer’s quality systems at the North Campus.77

The inspection led to immediate disruptions to the North Campus’s operations and

71
     Id.
72
     Id. ¶ 169.
73
  The Audit Committee met to discuss the KKR Fund’s and TPG Funds’ planned sales of
Zimmer stock in the August Offering. Id. ¶ 172.
74
     Id. ¶ 113.
75
     Id.
76
  Id. ¶ 175; Barillare Decl. Ex. 15 (Sept. 23, 2016 Zimmer Board meeting minutes and
presentation slides).
77
     See Compl. ¶ 114.

                                          17
the shipment of key products.78 As a result, on September 29, 2016, Zimmer

implemented a blanket product ship hold “to stop shipments of all final product

cleaned, sterile packed, and sterilized at the Warsaw North Campus.”79 The third

quarter ended the next day. A month’s worth of supply shortages came after the ship

hold.80

           In the weeks that followed, the Company implemented other holds on

materials and finished products at the North Campus.81 On October 21, 2016, the

blanket product ship hold began to be released in stages based on remediation

efforts.82

           On October 24, 2016, the Audit Committee—along with Zimmer’s officers,

its counsel, and its external auditor—met to review the Company’s draft earnings

release for the third quarter of 2016 and were given an “update on the ongoing FDA

inspection” of the North Campus.83 After discussion, the Audit Committee members

“expressed no objections” to the contents of the draft release.84

78
     Id.
79
     Id. ¶ 115 (quoting Barillare Decl. Ex. 17 at 4).
80
     Id.
81
     Id.
82
     Id.
83
 Id. ¶ 181 (quoting Barillare Decl. Ex. 18 (Oct. 24, 2016 Zimmer Audit Committee
meeting minutes) at 2).
84
     Id. (quoting Barillare Decl. Ex. 18 at 2).

                                                  18
           Zimmer released its third quarter 2016 results on October 31, 2016.85 It

reported organic sales growth of 1.6%, which was below expectations. 86 The

Company also reduced its revenue guidance for the fourth quarter of 2016.87 The

results caused Zimmer’s stock price to drop nearly 14%, from a high of $122.55 the

previous trading day to a closing price of $105.40 on October 31. 88 The North

Campus FDA inspection and the related product ship holds were not mentioned in

the earnings release or during Dvorak’s earnings call with investors.89

           On November 8, 2016, Zimmer filed its Form 10-Q for the period ending

October 31, 2016.90 The Company reported that its below guidance revenue results

were attributable in part to “some temporary disruption in product supply . . . related

to several factors, including implementation of operational process enhancements

that have resulted in various shipment delays, and manufacturing forecasting

constraints related to continued integration of our supply chain . . . .”91 The Form

10-Q did not explicitly mention the FDA inspection at the North Campus or the

related product ship holds.

85
     Id. ¶ 217.
86
     Id.
87
     Id.
88
     Id.
89
     See id. ¶¶ 218–19.
90
     Id. ¶ 221.
91
     Id. (alterations in original).

                                          19
           F.     The North Campus Inspection and Product Ship Holds Are
                  Reported.

           The same day that Zimmer filed its third quarter 2016 Form 10-Q, an analyst

at Northcoast Research reported on the FDA’s inspection of the North Campus and

the related product ship holds.92 Northcoast reasoned that the “product supply

issues” Zimmer had announced were due “at least [in] part” to the FDA inspection

and shut down of certain product lines.93          Zimmer disclosed, in response to

Northcoast’s report, that it was “in the process of deploying new demand planning

and production planning tools” and that “enhance[ments]” to “harmonize[ ] and

optimize[ ]” its processes “led to certain product shipment delays, including product

manufactured at the [North Campus].”94 Zimmer also said that it expected “to return

to full shipping capacity with the impacted products over the next few weeks.”95

Zimmer’s stock price continued to decline, reaching a low of $97.99 on

November 14, 2016.96

92
     Id. ¶ 220.
93
     Id.
94
     Id. ¶ 222.
95
     Id.
96
     Id. ¶ 223.

                                            20
          G.       The FDA Issues a Form 483 Related to the North Campus
                   Inspection.

          On November 22, 2016, the FDA issued a 57-page Form 483 based on the

North Campus inspection.97 The FDA identified 14 negative observations, two of

which were repeat observations from the North Campus’s 2014 FDA inspection.98

Analysts obtained the Form 483 through Freedom of Information Act requests on or

around December 14, 2016.99 Morningstar Research reported it was “skeptical” that

the FOIA requests would uncover any information and noted that they had “seen

other medical device firms take a more proactive stance in these situations to

reassure investors that management was working decisively to resolve the FDA’s

issues.”100 A consultant for Wells Fargo & Company commented that the 57-page

Form 483 was “the longest one he remembers seeing” and that it was “quite unusual”

for a Form 483 “to be so thorough in documenting a company’s perceived

shortcomings.”101

          On December 14, 2016, Zimmer responded to the Morningstar Research

report, noting that it “ha[d] developed and [wa]s executing a remediation plan to

97
     Id. ¶ 116.
98
     Id. ¶¶ 116–17.
99
     Id. ¶¶ 228–29.
100
      Id. ¶ 229.
101
      Id. ¶ 230.

                                          21
fully address the issues cited by the FDA.”102 Zimmer also said that it was “taking

the necessary steps to address certain regulatory compliance gaps” at the North

Campus site.103 Zimmer further explained that “the anticipated full impact of all of

the above-described matters was included in [its] sales and earnings guidance update

issued on October 31, 2016.”104

            The Board met two days later for a regularly scheduled meeting on December

16, 2016.105 As usual, the Board was given a presentation called “FDA and Quality

Matters.”106 The directors were updated on the status of Zimmer’s internal audit

remediation efforts, including a site remediation plan for the North Campus.107

            Between December 21, 2016 and April 25, 2017, Zimmer sent four written

responses to the FDA about the North Campus.108 In total, these responses to the

FDA consisted of more than 22,000 pages.109 The responses outlined the Company’s

internal audits and actions to address “systemic issues.”110 The Board continued to

102
      Id. ¶ 231.
103
      Id.
104
      Id.
105
      Id. ¶ 184.
106
   Id.; Barillare Decl. Ex. 16 (Dec. 16, 2016 Zimmer Board meeting minutes and
presentation slides).
107
      Compl. ¶ 185; Barillare Decl. Ex. 16.
108
      Compl. ¶ 190.
109
      Id.
110
      Id.; see Barillare Decl. Ex. 17 at 2.

                                              22
receive regular updates on the North Campus inspection and Zimmer’s response

throughout 2017 and 2018.111

          H.       Litigation Ensues

          Lawsuits began within a month of Zimmer reducing its guidance for the third

quarter of 2016. On December 2, 2016, a securities class action was filed in the

United District Court for the Northern District of Indiana against Zimmer and certain

of its directors and officers (the “Securities Class Action”).112 The PE Funds other

than the Blackstone Fund were later named as defendants in a second amended

complaint filed in October 2017.113 On September 26, 2018, the district court in

Indiana denied Zimmer and the individual defendants’ motion to dismiss the

Securities Class Action,114 but granted the PE Funds’ motions to dismiss.115 At the

time the Complaint in this action was filed, the parties to the Securities Class Action

had announced a proposed settlement of $50 million.116

111
      See Compl. ¶¶ 189–94.
112
      Id. ¶ 279.
113
   See Second Am. Class Action Compl. for Violations of the Fed. Sec. Laws, Shah v.
Zimmer Biomet Hldgs., Inc., 348 F. Supp. 3d 821 (N.D. Ind. 2018) (No. 3:16-cv-00815-
PPS-MGG), 2017 WL 5494812 (Dkt. 60).
114
   See Compl. ¶¶ 283–86; Shah v. Zimmer Biomet Hldgs., Inc., 348 F. Supp. 3d 821, 851
(N.D. Ind. 2018).
115
      Shah, 348 F. Supp. 3d at 851.
116
      Compl. ¶ 287.

                                           23
         Litigation in this court began on June 14, 2019 with the filing of two separate

complaints that relied upon books and records Zimmer had produced under 8 Del.

C. § 220.117 Those actions were consolidated on September 4, 2019.118 The

plaintiffs filed the operative Complaint on June 3, 2020.119

         The Complaint advances six counts derivatively on behalf of Zimmer: breach

of fiduciary duty against the individual defendants in Count I; insider trading against

Michelson and Rhodes under Brophy v. Cities Service Company in Count II;120

aiding and abetting against the PE Funds in Counts III and IV; unjust enrichment

against the individual defendants and the PE Funds in Count V; and breach of

contract against the PE Funds in Count VI. On September 14, 2020, each of the

defendants moved to dismiss the Complaint.121

II.      LEGAL ANALYSIS

         The defendants have moved to dismiss the Complaint under Court of

Chancery Rule 23.1 for failure to make a demand on the Board. All defendants

except Zimmer have also moved to dismiss the Complaint under Court of Chancery

117
      See Dkt. 10; Compl. at 3.
118
      Dkt. 10.
119
      Dkt. 47.
120
      70 A.2d 5 (Del. Ch. 1949).
121
  See Dkts. 67, 69, 72, 76. After briefing, the court heard oral argument on June 15, 2021.
Dkt. 104.

                                            24
Rule 12(b)(6) for failure to state a claim on which relief can be granted. The demand

requirement of Rule 23.1 presents a threshold issue as to all counts in the Complaint.

         A.     The Legal Standard for Demand Excusal

         “The decision whether to initiate or pursue a lawsuit on behalf of the

corporation is generally within the power and responsibility of the board of

directors.”122 A stockholder plaintiff can only pursue claims belonging to the

corporation if (1) the corporation’s directors wrongfully refused a demand to

authorize the corporation to bring the suit or (2) a demand would have been futile

because the directors were incapable of impartially considering the demand.123

Because the plaintiffs did not make a demand on Zimmer’s Board, the Complaint

must plead particularized factual allegations establishing that demand was

excused.124 All of the parties agree that the standard for assessing demand excusal

in this case is set forth in Rales v. Blasband.125 The court applies Rales when “the

board that would be considering the demand did not make a business decision which

is being challenged in the derivative suit,” such as “where directors are sued

derivatively because they have failed to do something.”126

122
  In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 120 (Del. Ch. 2009) (citing 8
Del. C. § 141(a)).
123
      See Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993).
124
      Ct. Ch. R. 23.1; see, e.g., Guttman v. Huang, 823 A.2d 492, 499 (Del. Ch. 2003).
125
      634 A.2d 927 (Del. 1993).
126
      Id. at 933–34 & n.9.

                                             25
          Under Rales, demand is excused if the allegations in a complaint “create a

reasonable doubt that, as of the time the complaint is filed, the board of directors

could have properly exercised its independent and disinterested business judgment

in responding to a demand.”127 To that end, “[a] director cannot exercise . . .

independent and disinterested business judgment where [the] director is ‘either

interested in the alleged wrongdoing or not independent of someone who is.’”128 If

“the directors face a ‘substantial likelihood’ of personal liability, their ability to

consider a demand impartially is compromised under Rales, excusing demand.”129

          While engaging in this analysis, I confine myself to the well-pleaded

allegations of the Complaint, the documents incorporated into the Complaint by

reference, and facts subject to judicial notice.130 All reasonable inferences from the

allegations in the Complaint are drawn in favor of the plaintiffs.131 “Rule 23.1 is not

satisfied by conclusory statements or mere notice pleading.”132 Instead, “[w]hat the

127
      Id. at 934.
128
   Teamsters Local 443 Health Servs. & Ins. Plan v. Chou, 2020 WL 5028065, at *15
(Del. Ch. Aug. 24, 2020) (quoting Hughes v. Hu, 2020 WL 1987029, at *12 (Del. Ch. Apr.
27, 2020)).
129
      Guttman, 823 A.2d at 501.
130
  See, e.g., White v. Panic, 783 A.2d 543, 546–47 (Del. 2001); see also In re Gen. Motors
(Hughes) S’holder Litig., 897 A.2d 162, 170 (Del. 2006).
131
      Brehm v. Eisner, 746 A.2d 244, 255 (Del. 2000).
132
      Id. at 254.

                                            26
pleader must set forth are particularized factual statements that are essential to the

claim.”133

            B.    The Demand Excusal Analysis in This Case
            The court “counts heads” of the members of a board to determine whether a

majority of its members are disinterested and independent for demand futility

purposes.134 The Board in place when this litigation was filed had 11 members:

Higgins and Michelson; Director Defendants Begley, Bernard, Boudreux, Farrell,

Glasscock, Hagemann; and non-parties Jafry, Hilado, and Hanson (together, the

“Demand Board”).135 The plaintiffs concede that Jafry, Hilado, and Hanson do not

face a substantial likelihood of liability.136 And they only allege that three members

of the Demand Board—Michelson, Higgins, and Hanson (as Zimmer’s CEO)—lack

independence or received some benefit from the PE Funds’ stock sales.137 Even if

the plaintiffs could sufficiently demonstrate that those three directors lacked

independence,138 they must also impugn the disinterestedness of at least three others

133
      Id.
134
   See In re EZCORP Inc. Consulting Agreement Deriv. Litig., 2016 WL 301245, at *34
(Del. Ch. Jan. 25, 2016).
135
      Compl. ¶ 294.
136
      See id. ¶ 29.
137
      Id. ¶¶ 294 n.29, 311–12, 326.
138
   The plaintiffs contend only that Michelson was personally interested in the challenged
stock offerings. See id. ¶¶ 311–12. Little is said about the interests of Higgins except that
he was employed by Blackstone’s healthcare group Blackstone Healthcare Partners as a
“Consultant.” Id. ¶¶ 41, 51. The plaintiff’s only allegation about Hanson is that he “is not
                                             27
(i.e., three of Begley, Bernard, Boudreux, Farrell, Glasscock, and Hagemann) to

show that a majority of the Demand Board was disabled from considering a

demand.139 The plaintiffs attempt to make that showing by arguing that the Director

Defendants all face a substantial likelihood of personal liability.

         “To establish a substantial likelihood of liability at the pleading stage, a

plaintiff must ‘make a threshold showing, through the allegation of particularized

facts, that their claims have some merit.’”140 Because Zimmer’s certificate of

incorporation contains an exculpation provision under 8 Del. C. § 102(b)(7),141 the

plaintiffs must plead with particularity facts that support a meritorious claim for

breach of the duty of loyalty.142 The Complaint primarily focuses on whether

material non-public information about Zimmer’s FDA compliance challenges

independent from interested directors due to his principal occupation as Zimmer’s CEO.”
Id. ¶ 294 n.29. The defendants declined to brief whether Higgins, Michelson, and Hanson
could impartially consider a demand. See Zimmer Defs.’ Opening Br. at 26 (saying the
court “need not consider” the plaintiffs’ allegations about the independence of those three
directors). I need not reach the issue of whether Michelson, Higgins, or Hanson could
impartially consider a demand because—even if they could not—the plaintiffs cannot
establish demand futility.
139
      See Pls.’ Answering Br. 7 n.2 (Dkt. 85).
140
  In re TrueCar, Inc. S’holder Deriv. Litig., 2020 WL 5816761, at *12 (Del. Ch. Sept. 30,
2020) (quoting Rales, 634 A.2d at 934).
  Barillare Decl. Ex. 9 (Zimmer’s Restated Certificate of Incorporation dated June 24,
141

2015) § 10.01.
142
   TrueCar, 2020 WL 5816761, at *12; In re Goldman Sachs Gp., Inc. S’holder Litig.,
2011 WL 4826104, at *12 (Del. Ch. Oct. 12, 2011).

                                                 28
played a role in the PE Funds’ sales of over $3.3 billion in Zimmer stock in 2016.143

The problem for the plaintiffs is that they failed to plead non-conclusory facts

suggesting that a super-majority of directors without ties to the PE Funds knowingly

facilitated insider trading. Perhaps recognizing that hurdle, they also assert that the

eight members of the Demand Board named as defendants in this action face a

substantial likelihood of liability for approving false and misleading disclosures, for

breaching their duty of oversight, and based on the Securities Class Action. I will

address each argument in turn below.

         The outcome of my analysis is that none of the six Director Defendants face

a substantial likelihood of liability in this action or the Securities Class Action. The

plaintiffs get closest with a disclosure claim against the four Audit Committee

members (Begley, Boudreaux, Glasscock, and Hagemann) but fall short of pleading

a breach of the duty of loyalty. The result is that at least eight of the 11 Demand

Board members are independent, had no ties to the PE Funds or disabling interests

from the stock sales, and did not face a risk of liability for a non-exculpated claim.

                 1.     The Disclosure Claim

         Although the crux of the wrongdoing alleged in the Complaint is insider

trading, the plaintiffs’ demand futility arguments mostly focus on disclosures. The

Complaint challenges numerous “SEC filings, press releases, conference calls, and

143
      See, e.g., Compl. ¶ 1.

                                           29
presentations to the public” Zimmer made during the relevant period,144 including

the Registration Statement and prospectuses related to the February, June, and

August Offerings.145 The gist of the plaintiffs’ disclosure argument is that Zimmer

was publicizing the “purported successful integration [of Legacy Zimmer and

Legacy Biomet] and the Company’s growing organic growth rate” at a time that

Zimmer was privately facing quality and regulatory deficiencies.146 In particular,

they assert that all of Zimmer’s public disclosures in 2016 were false and misleading

because they “touted the purported ongoing success of the integration of [Legacy]

Zimmer and [Legacy] Biomet,” but “failed to disclose known systemic quality

system and quality control problems,” “the Company’s FDA regulatory

deficiencies,” and “the massive remediation efforts that were necessary to bring

Zimmer into compliance with FDA regulations and that would adversely impact

production and distribution of key products.”147 The plaintiffs claim generally that

Zimmer omitted material information from its public statements rather than

challenge any specific statements by Zimmer as false or misleading.148

144
      Id. ¶ 196; see id. ¶¶ 215, 221, 263, 265–66, 306, 333.
145
      See id. ¶¶ 215, 257, 260, 306, 315, 317, 333.
146
      Id. ¶ 195.
147
      Id. ¶¶ 211, 266.
148
    See Citigroup, 964 A.2d at 133 (“[T]he disclosure allegations in the complaint do not
meet the stringent standard of factual particularity required under Rule 23.1. They fail to
allege with particularity which disclosures were misleading, when the Company was
                                               30
         “Whenever directors communicate publicly or directly with shareholders

about the corporation’s affairs, with or without a request for shareholder action,

directors have a fiduciary duty to shareholders to exercise due care, good faith and

loyalty.”149 The duty of disclosure “is not an independent duty, but derives from the

duties of care and loyalty.”150 The contours of that duty and what it requires of

fiduciaries are context specific. Where (like here) the disclosures at issue do not

concern a request for stockholder action, Malone v. Brincat requires that a plaintiff

demonstrate scienter—i.e., that the directors “deliberately misinform[ed]

shareholders about the business of the corporation, either directly or by a public

statement.”151 Because Zimmer’s certificate of incorporation includes a Section

102(b)(7) provision, the plaintiffs “must plead particularized factual allegations that

‘support the inference that the disclosure violation was made in bad faith, knowingly

or intentionally’”152 to establish demand futility.

         A determination of “whether the alleged misleading statements or omissions

were made with knowledge or in bad faith requires an analysis of the state of mind

obligated to make disclosures, what specifically the Company was obligated to disclose,
and how the Company failed to do so.”).
149
      Malone v. Brincat, 722 A.2d 5, 10 (Del. 1998).
150
  Pfeffer v. Redstone, 965 A.2d 676, 684 (Del. 2009) (citation and internal quotation
marks omitted).
151
      Malone, 722 A.2d at 14.
152
  Citigroup, 964 A.2d at 132 (quoting O’Reilly v. Transworld Healthcare, Inc., 745 A.2d
902, 915 (Del. Ch. 1999)).

                                             31
of the individual director defendants.”153 It is difficult to know one’s state of mind

at the pleadings stage, particularly for independent directors that lack any obvious

motivations to act disloyally.154 Delaware courts may infer scienter for Malone

claims where certain types of specific factual allegations are made. A plaintiff must

plead with particularly that directors “had knowledge that any disclosures or

omissions were false or misleading or . . . acted in bad faith in not adequately

informing themselves.”155 A plaintiff also must allege “sufficient board involvement

in the preparation of the disclosures”156 to “connect the board to the challenged

statements.’”157 Despite having access to the relevant Board minutes and materials,

however, the plaintiffs cannot link what the directors learned about continuing FDA

compliance challenges with any materially misleading statements they were

responsible for making.

153
   Id. at 134; see also Ryan v. Armstrong, 2017 WL 2062902, at *5 (Del. Ch. May 15,
2017) (discussing how directors’ “motives, background, or relationships” factor into the
demand futility analysis), aff’d, 176 A.3d 1274 (Del. 2017) (TABLE).
154
   See In re GoPro, Inc., 2020 WL 2036602, at *11 (Del. Ch. Apr. 28, 2020) (observing a
lack of pleaded facts allowing for an inference that a majority of the board was beholden
to defendants who sold shares “such that [the directors] would be motivated to facilitate or
cover up illegal insider trading”).
155
      Citigroup, 964 A.2d at 134.
156
   Id.; see also id. at 133 n.91 (explaining that a plaintiff must “sufficiently allege facts
showing that the director defendants were involved in preparing (or were otherwise
responsible for) the alleged misleading disclosures”).
157
  TrueCar, 2020 WL 5816761, at *13 (internal quotation marks omitted); see also In re
Dow Chem. Co. Deriv. Litig., 2010 WL 66769, at *11 (Del. Ch. Jan. 11, 2010).

                                             32
            The Complaint alleges that the Board knew about “undisclosed, serious, and

‘systemic’ quality control issues across many of its manufacturing facilities

throughout 2015 and 2016.”158 According to the plaintiffs, the eventual temporary

shutdown at the North Campus was “easily foreseeable” because of Zimmer’s

regulatory compliance issues.159 But, the plaintiffs say, despite “actual knowledge

of” Zimmer’s FDA compliance struggles, the Director Defendants “knowingly

failed” to disclose those risks and violations to the public.160

            The operative inquiry for the court is determining when a majority of the

Demand Board both learned about the potentially problematic event “and understood

its significance to [the company’s] financial performance.”161 This court’s decision

in TrueCar is instructive. There, the plaintiffs alleged that the board learned of a

website redesign that had a materially negative effect on the company’s financial

performance but failed to disclose it.162 The court found that because the board

materials did not reflect any expected financial harm from the redesign, the plaintiffs

“failed to allege with particularity facts sufficient to support a reasonable inference

158
      Compl. ¶ 7; see also Pls.’ Answering Br. 35.
159
      Compl. ¶ 112.
160
      Pls.’ Answering Br. 33, 35.
161
      TrueCar, 2020 WL 5816761, at *14.
162
      Id.

                                             33
of scienter, i.e., that the directors . . . knew before they signed or approved” the

challenged disclosure that the company’s business would subsequently “suffer.”163

          Here, the question I must consider for purposes of that analysis is when the

Board understood both that the North Campus was in severe violation of FDA

regulations and that the lack of compliance would have a materially negative effect

on Zimmer’s financial performance.           The plaintiffs argue that the Board’s

knowledge derives from the three internal audit reports, the FDA’s September 12,

2016 inspection of the North Campus, and the resulting blanket product ship hold.164

To examine the directors’ knowledge, the court will consider the plaintiffs’

allegations chronologically for three time periods: (i) before May 3, 2016; (ii) from

May 3, 2016, when the Board was informed about results from the internal audit

reports, to September 12, 2016; and (iii) from September 12, 2016, when the FDA’s

for cause inspection of the North Campus began, forward.

                      a.     Before the May 3, 2016 Board Meeting

          The plaintiffs allege that the Board “already kn[ew]” about “significant

violations” at the North Campus before the May 3, 2016 Board meeting where

internal audit results were first discussed.165 The Complaint explains that the Board

163
      Id. at *15.
164
      See Compl. ¶¶ 18–22, 113–19.
165
      Id. ¶ 18.

                                           34
routinely received presentations about the Company’s regulatory compliance

performance during regularly scheduled meetings after the merger closed in June

2015. But the presentations the Board received at meetings between July 17, 2015

(the first Board meeting post-merger) and May 3, 2016 contain only limited and

unremarkable mentions of the North Campus.166                None of the references to

“systemic” issues or negative observations at other Zimmer facilities are alleged to

be related to what eventually transpired at the North Campus.

          Each of the Board presentations during this time period follow a similar

pattern: they list the results of FDA inspections at various Zimmer facilities, certain

negative observations from those inspections, and plans for remediation.           For

example, on July 17, 2015, the Board was told that the North Campus (among other

Legacy Biomet facilities) had been inspected in 2014, receiving two negative

observations,167 and that the North Campus was due for its biennial FDA inspection

in 2016.168 The Board was also told that outside consulting firm Parexel had

performed a mock inspection of the North Campus that identified 11 major and seven

minor observations leading Zimmer to open 10 “action records” to address those

observations.169      For the next three Board presentations at meetings held on

166
      See id. ¶¶ 127–57 (discussing Board presentations from this time period).
167
      Id. ¶ 131.
168
      Id. ¶ 268.
169
      Id. ¶ 131.

                                              35
September 25, 2015, December 11, 2015, and February 23, 2016,170 the only

mention of North Campus that the plaintiffs identify is that the Company “planned

to audit the North Campus facility in the second quarter of 2016” as part of Zimmer’s

2016 corporate audit plan.171

          These Board presentations tell a story of Zimmer’s ongoing efforts to ferret

out compliance issues and fix them but provide no indication that the North Campus

was a “ticking time bomb.”172 That is, the portions of the presentations that the

plaintiffs highlight are insufficient to demonstrate with particularity that the Director

Defendants present at these meetings knew that serious compliance issues were

looming at the North Campus that would ripen into negative financial

consequences.173 This pleading deficiency is enough to eliminate an inference of

bad faith misconduct, especially since there is no allegation that the Director

Defendants failed to adequately inform themselves. But there are several other

issues that further undermine any finding that the Director Defendants face a

substantial threat of personal liability for a non-exculpated disclosure claim.

170
      See id. ¶¶ 135–57.
171
      Id. ¶ 147.
172
      Id. ¶ 270.
173
   E.g., TrueCar, 2020 WL 5816761, at *14-15. Eight Demand Board members are alleged
to have attended the July, September, and December 2015 Board meetings. Compl. ¶¶
133, 140, 151. Six Demand Board members are alleged to have attended the February
2016 Board meeting. Id. ¶ 156.

                                           36
         First, the “plaintiffs fail to allege with sufficient specificity the actual

misstatements or omissions that constituted a violation of the board’s duty

of disclosure.”174 It is entirely unclear from their scattered allegations what precisely

the plaintiffs believe was material information that the Board should have disclosed

during this period. Plainly, every negative observation from all of Zimmer’s

facilities would not have been important information to investors.175

         The closest the plaintiffs get to the required specificity is an allegation that the

Director Defendants “allow[ed]” Zimmer to “issue materially false and misleading

statements and omissions about the purported successful integration and the

Company’s growing organic growth rate.”176 There are no particularized facts in the

Complaint, however, that would support an inference that Legacy Zimmer and

Legacy Biomet were not integrating as planned. As to Zimmer’s organic growth

rate, Zimmer reported a better-than-expected growth rate of 1.2% for the first quarter

174
   See Citigroup, 964 A.2d at 133 (finding that “the disclosure allegations in the complaint
do not meet the stringent standard of factual particularity required under Rule 23.1”).
175
   In fact, disclosing every negative compliance violation would have cut against the goal
of highlighting material information for stockholders. See Abrons v. Maree, 911 A.2d 805,
813 (Del. Ch. 2006) (“Delaware courts must ‘guard against the fallacy that increasingly
detailed disclosure is always material and beneficial disclosure.’” (quoting Zirn v. VLI
Corp., 1995 WL 362616, at *4 (Del. Ch. June 12, 1995) (Chancellor Allen noting that “[i]n
some instances, the opposite will be true”), aff’d, 681 A.2d 1050 (Del.1996)); see also In
re Rouse Properties, Inc., 2018 WL 1226015, at *24 (Del. Ch. Mar. 9, 2018) (noting that
disclosure of “insignificant detail[s]” could “dilute the value and purpose of public
corporate disclosures”).
176
      Compl. ¶ 195.

                                              37
of 2016 and raised its revenue guidance for the remainder of the year.177 There is

nothing inherently misleading about the disclosures on these topics.

          Moreover, the Complaint lacks allegations demonstrating actual Board

involvement in or responsibility for disclosures. Several of the statements that the

plaintiffs appear to challenge during this time period were made by Zimmer officers

during earnings calls or at conferences where the Board is not alleged to have played

any role.178 The plaintiffs’ arguments about Zimmer’s public filings fare no better.

The disclosures filed with the Securities and Exchange Commission that the

plaintiffs challenge as “false and misleading” during this time period are: (1) the

2015 Form 10-K (filed with the SEC on February 29, 2016); (2) the first quarter

2016 Form 10-Q (filed with the SEC on May 10, 2016), (3) the Registration

Statement (filed with the SEC on February 4, 2016); and (4) the prospectus

supplements for the February Offering (filed with the SEC on February 5, 2016 and

February 8, 2016).179

          The only mentions in the Complaint of Board involvement in the 2015 Form

10-K, the Registration Statement, and the prospectus supplements are the types of

allegations that this court has repeatedly found inadequate for purposes of Rule 23.1.

177
      Id. ¶ 202.
178
      See id. ¶¶ 198–201.
179
      See id. ¶¶ 215, 260.

                                         38
A statement that the documents were signed by the Director Defendants,180 or that

they “approved” the disclosures and “caused” or “consented to” their filing,181 is

not—without more—a particularized allegation of fact.182 There are also no specific

180
    See id. ¶¶ 35–45, 306, 314; see also Pls.’ Answering Br. 21 (asserting that “[e]ight
directors reviewed, signed, approved, and issued the Registration Statement and
Prospectuses used in the three offerings”).
181
      Compl. ¶¶ 260, 263, 265, 328, 338.
182
    Ellis v. Gonzalez, 2018 WL 3360816, at *10 (Del. Ch. July 10, 2018), aff’d, 205 A.3d
821 (Del. 2019); Citigroup, 964 A.2d at 133 n.88 (“Pleading that the director defendants
‘caused’ or ‘caused or allowed’ the Company to issue certain statements is not sufficient
particularized pleading to excuse demand under Rule 23.1.”); see also Brehm, 746 A.2d at
254; In re China Auto. Sys. Inc. Deriv. Litig., 2013 WL 4672059, at *8 (Del. Ch. Aug. 30,
2013) (finding the allegation “that all five directors attested to the misleading financial
statements by signing one of the SEC filings at issue” insufficient to excuse demand
(internal citation omitted)).
       The Court of Chancery has found allegations that a defendant signed an allegedly
false or misleading disclosure sufficient to state a claim for relief under the lower pleading
standard of Rule 12(b)(6). See In re Hansen Med., Inc. S’holders Litig., 2018 WL 3025525,
at *11 (Del. Ch. June 18, 2018). That is not the case where the heightened pleading
standard of Rule 23.1 applies. In addition, having reviewed the prospectuses issued in
connection with the February, June, and August Offerings, none appear to bear the
signature of any Director Defendant. See Zimmer Biomet Hldgs., Inc., Prospectus Suppl.
(Form 424B7) (Feb. 5, 2016); Zimmer Biomet Hldgs., Inc., Prospectus Suppl. (Form
424B7) (Feb. 8, 2016); Zimmer Biomet Hldgs., Inc., Prospectus Suppl. (Form 424B7)
(June 13, 2016); Zimmer Biomet Hldgs., Inc., Prospectus Suppl. (Form 424B7) (June 15,
2016); Zimmer Biomet Hldgs., Inc., Prospectus Suppl. (Form 424B7) (Aug. 9, 2016);
Zimmer Biomet Hldgs., Inc., Prospectus Suppl. (Form 424B7) (Aug. 11, 2016); see
also Gen. Motors (Hughes), 897 A.2d at 170 (permitting the court to take judicial notice of
“hearsay in SEC filings” that is not subject to reasonable dispute).
        The plaintiffs also note that “[t]o the extent the Director Defendants seek to limit
their liability solely to public filings that they ‘signed,’ that argument would have little
effect here, where the Registration Statement and the Offering Documents incorporated by
reference other public filings at issue in this case such as the 10-K, including, specifically,
the risks and uncertainties disclosed in each of those public filings.” Pls.’ Answering Br.
41 n.12. The plaintiffs cite no case to support this argument, and the court is aware of
none.

                                              39
allegations in the Complaint about the first quarter 2016 Form 10-Q. The plaintiffs

only make general assertions about the role of the Audit Committee in reviewing

quarterly financial statements and overseeing certain internal controls disclosures,183

which are insufficient to demonstrate the Audit Committee’s actual involvement in

the statements in (or omissions from) the Form 10-Q.184 The lack of well-pleaded

allegations about the Director Defendants’ involvement in the disclosures

“independently preclude[s] a finding of demand futility.”185

                       b.     Between the May 3, 2016 Board Meeting and
                              September 12, 2016 Inspection

         The plaintiffs contend that the Board’s knowledge of serious problems

changed after May 3, 2016. According to the Complaint, the Board learned “no later

than May 3, 2016” that Zimmer’s “most important” facility—the North Campus—

“was in a terrible state of FDA compliance” and a “disaster waiting to happen.”186

183
   Compl. ¶ 79. The Complaint describes the Audit Committee’s responsibilities as
including “review[ing] and discuss[ing] with management and the independent auditor the
quarterly financial statements prior to their public release.” Id.
184
    See Wood v. Baum, 953 A.2d 136, 142 (Del. 2008) (“Plaintiff also asserts that
membership on the Audit Committee is a sufficient basis to infer the requisite scienter.
That assertion is contrary to well-settled Delaware law.”); Ellis, 2018 WL 3360816, at *11
(finding argument that audit committee members could not impartially consider a demand
given their “oversight responsibility” unpersuasive because it “runs up against the well-
settled rule that mere membership on a board committee is insufficient to support a
reasonable inference of disloyal conduct”). Further, these allegations are not determinative
as to the court’s demand futility analysis because the Audit Committee members constitute
a minority of the Demand Board.
185
      Ellis, 2018 WL 3360816, at *9.
186
      Compl. ¶ 13; see also id. ¶ 125.

                                            40
The basis for that knowledge is alleged to be a May 3, 2016 Board presentation

revealing “poor results of at least two—and potentially all three—of Zimmer’s 2016

North Campus internal audits.”187

          The plaintiffs focus on a slide from that presentation that they say describes

the results of the March 31, 2016 and April 13, 2016 internal audit reports that listed

a total of four critical, 21 major, and two minor observations related to the North

Campus.188 That slide does not include the results of the June 7, 2016 audit report,

which was “in draft” form with the result “TBD.”189 Although the plaintiffs say that

copies of the internal audit reports “were provided to the Board no later than May 3,

2016,” there are no particularized facts pleaded in support.190 The plaintiffs are not

even certain that the information described on the slide corresponds to the three

North Campus audits in the first place.191

          The difficulty for the plaintiffs is an absence of pleaded facts implying bad

faith on the part of the Director Defendants. Even if the court accepts as true that

the slide the plaintiffs highlight described the three North Campus internal audits,

187
      Id. ¶ 159.
188
    Id. ¶¶ 85, 124, 159. The slide the plaintiffs highlight lists the March 31, 2016 internal
audit report as including 13 major and four minor observations. Id. ¶ 159. The plaintiffs,
however, allege that only six major and two minor observations from that audit report relate
to the North Campus. Id. ¶ 124.
189
      Id. ¶ 159.
190
      Id. ¶¶ 13, 18.
191
      Id. ¶ 159 n.18.

                                             41
there are no particularized allegations supporting a reasonable inference that the

Board knew the results of the North Campus internal audits would be spell

“disaster.”192 As with the prior time period, the North Campus is not singled out.

The results of 11 other audits at Zimmer facilities—all with some degree of critical,

major, and minor observations—are also included with the same level of detail.193

The plaintiffs acknowledge that the May 3, 2016 presentation was largely “[l]ike

other presentations before it” because it “led the Board on a global overview of all

of Zimmer’s FDA inspections during 2015 and 2016 to-date.”194

          The Board presentation given at the next meeting on July 15, 2016 likewise

cannot support an inference of scienter. The plaintiffs again point to one slide from

the July 15, 2016 Board deck that they say indicated the “severity and scope of

Zimmer’s manufacturing problems” at the North Campus.195 More specifically, they

focus on one line of a six-line chart on a slide that lists “Network Remediation

Activities.”196 Over a dozen facilities are discussed, including “Warsaw Biomet

(2016/2017/2018)” (i.e., the North Campus) with the “Driver” for remediation

192
      Id. ¶ 13; see also ¶¶ 159–161.
193
      Id. ¶ 159.
194
      Id. ¶ 158.
195
      Id. ¶ 167.
196
      Id. ¶ 166.

                                          42
described as: “Corporate Audit and Zimmer Warsaw/Ponce lessons learned from

Form 483 Observations.”197

          The plaintiffs make much of the fact that only the North Campus was

scheduled to have remediation efforts last into 2018.198 That may be so. But even

if the court were to deduce from that detail that the North Campus’ problems were

“not an easy set of issues to remediate”199 and would require a period of time to fully

address, it cannot reasonably follow that the Board knew they would escalate and

cause Zimmer to suffer financial harm in the future.200 Consequently, there is no

basis to infer that the Board intentionally “concealed” information about the internal

audits from stockholders by creating misleading public filings.201

          Further, the Complaint lacks allegations suggesting Board-level involvement

in preparing the disclosures that satisfy the heightened pleading requirements of

Rule 23.1. The only disclosures that the plaintiffs challenge during this time period

are: (1) the second quarter 2016 Form 10-Q (filed with the SEC on August 8,

197
      Id.; see also id. ¶ 187.
198
      Id. ¶¶ 167, 187.
199
      Id. ¶ 167.
200
   See TrueCar, 2020 WL 5816761, at *15 (finding no scienter where the plaintiffs failed
to allege facts demonstrating “that the directors in attendance at the meeting knew before
they signed or approved” the challenged disclosure that the company’s “business . . . would
suffer”).
201
      Compl. ¶ 167.

                                            43
2016),202 and (2) the prospectus supplements for the June and August Offerings

(filed with the SEC on June 13, 2016, June 15, 2016, August 9, 2016, and August

11, 2016, respectively).203 Beyond the sort of contentions about “causing” or

“approving” disclosures I previously found wanting,204 the only facts pleaded that

address the Board’s role in these disclosures relate to an August 5, 2021 Audit

Committee meeting where the August Offering was discussed.205 But there is no

allegation that the Audit Committee approved of the second quarter Form 10-Q or

the prospectus supplement for the August Offering at that meeting.206 “[F]actual

details” about “how the [B]oard was actually involved in creating or approving the

statements” are “crucial to determining whether demand on the [Board] would have

been excused as futile.”207 Without them, I cannot conclude that the Director

Defendants acted with scienter and face a substantial likelihood of liability for

202
      Id. ¶ 215.
203
      Id. ¶¶ 263, 265.
204
      See supra at 38–40.
205
  Compl. ¶ 172. The plaintiffs do not allege that the Audit Committee discussed any FDA
compliance issues at that meeting, let alone the specific compliance issues at the North
Campus.
206
    Guttman, 823 A.2d at 498 (dismissing complaint that was “devoid of any pleading
regarding the full board’s involvement in the preparation and approval of the company’s
financial statements” and of “particularized allegations of fact demonstrating that the
outside directors had actual or constructive notice of the accounting improprieties”).
207
      Citigroup, 964 A.2d at 133 n.88.

                                          44
material omissions or misstatements in the Form 10-Q or August Offering

documents.

                        c.    After the September 12, 2016 Inspection

            The primary harms alleged in this case began with the September 12, 2016

FDA inspection of the North Campus, which resulted in negative observations,

product ship holds, a Form 483, and preceded reduced revenue guidance and a

decline in Zimmer’s stock price. All of the PE Funds had exited their investments

at least a month before the inspection began. The plaintiffs’ focus largely is on

ordinary course SEC filings issued after the inspection, rather than filings connected

to the Offerings, during this time period.

            The Board first learned about the commencement of the FDA’s inspection

during a regularly scheduled September 23, 2016 Board meeting.208              Zimmer

management told the Board that the inspection was “‘for cause’ based on product

complaints that had been received” and that the inspection would last for about two

weeks.209 There are no well-pleaded facts stating that the Board was told a facility

shut down or product ship hold had occurred or would occur.210 There is also no

208
      Compl. ¶ 175.
209
      Id.
210
   The plaintiffs allege that the FDA inspection of the North Campus had “resulted in
multiple product ship holds” by the time of the September 23, 2016 meeting. Id. ¶ 176.
The plaintiffs do not allege, however, that the Board had any knowledge of these product
ship holds.

                                            45
reason to believe that the Board could have foreseen the ship hold, which plaintiffs

describe as a “rare consequence of an FDA inspection.”211 The Form 483 listing the

results of the FDA inspection was not issued until two months after the Board

meeting, on November 22, 2016.212

         The first time that the plaintiffs allege with particularity that the full Board

learned of the fallout from the North Campus inspection is at a December 16, 2016

Board meeting.213 At oral argument, the plaintiffs clarified that they are challenging

certain disclosures that were issued before that December 16, 2016 meeting.214

Those disclosures appear to be: (1) Zimmer’s third quarter 2016 earnings release

(issued on October 31, 2016),215 (2) Dvorak’s statements to investors during an

earnings call (also on October 31, 2016),216 (3) Zimmer’s third quarter 2016 Form

10-Q (filed with the SEC on November 8, 2016),217 and (4) Zimmer’s December 14,

211
   Id. ¶ 19. The plaintiffs do not allege that any Zimmer or Biomet facility had ever been
subject to a product ship hold before September 29, 2016.
212
   Id. ¶ 116. The Complaint lists the date of the Form 483 as November 20, 2016 (see id.
¶ 9) but that appears to be an error.
213
      Id. ¶¶ 113, 184–88.
214
   See Oral Arg. Tr. 72 (June 15, 2021) (Dkt. 105) (responding to the court’s question
about what disclosures were challenged after September 12, 2016).
215
      See Compl. ¶¶ 181–82.
216
      See id. ¶ 218.
217
      See id. ¶ 221.

                                            46
2016 press release in which it mentioned “certain regulatory compliance gaps at the

legacy Biomet operation in Warsaw.”218

          As with disclosures from the earlier time periods, there is ambiguity

around which misstatements or omissions in those disclosures the plaintiffs

believe are material. There are also no particularized allegations that would

suggest the Director Defendants had knowledge that the statements were

materially wrong before December 16, 2016. Of course, it is not unreasonable

to think that the Board would have been given updates on the North Campus

inspection and the product ship holds throughout the fall of 2016. But there

are no specific, factual allegations in the Complaint that would support such

an inference.       Even if there were, the plaintiffs still must plead facts

demonstrating that the Board intentionally concealed that information from

the public by causing Zimmer to issue materially misleading disclosures.

They have not done so.

          With the exception of the earnings release (which I will address next),

the plaintiffs do not describe any Board-level involvement in these

disclosures. They say nothing that could tie the directors to Dvorak’s October

31, 2016 statements. There is also no allegation that the Board had any

involvement in the press release, which could hardly evidence deceit in any

218
      Id. ¶ 231.

                                            47
event since it explained that Zimmer “ha[d] developed and [wa]s executing a

remediation plan to fully address the issues cited by the FDA.”219 As to the

third quarter Form 10-Q, the plaintiffs’ conclusory statement that Form 10-Q

was “reviewed and approved by the Audit Committee and Board” does not

satisfy Rule 23.1’s pleading requirements.220

         The only challenged disclosure that comes close to directly implicating any of

the Demand Board members is the third quarter earnings release that was reviewed

and approved by the Audit Committee. The third quarter earnings release covered

the period ending September 30, 2016—just one day after the first ship hold went

into effect. It is uncertain how much, if at all, the ship hold affected Zimmer’s third

quarter results (or what the Audit Committee knew about potential effects).221 But

based on the Complaint, there is reason to infer that the Audit Committee members

219
    Id. ¶ 231. The Complaint states that this press release was only a “partial public
disclosure[].” Id. ¶ 184. The plaintiffs do not, however, allege with particularity what
material facts were omitted.
220
      Id. ¶ 221. See supra note 182 (citing cases); see also Citigroup, 964 A.2d at 134.
        Like the earnings release discussed next, it is also not apparent that the Form 10-Q
could support a finding of bad faith. That public filing announced that the company’s
below-guidance revenues were due to “some temporary disruption in product supply . . .
related to several factors.” Compl. ¶ 221. Those sorts of statements seem inconsistent with
the plaintiffs’ cover-up theory.
221
   On December 14, 2016, Zimmer disclosed that “the anticipated full impact of” the North
Campus ship hold “was included in the Company’s sales and earnings guidance update
issued on October 31, 2016.” Id. ¶ 231. The plaintiffs do not allege that this statement in
particular was false or misleading.

                                              48
knew that the FDA inspection of the North Campus would have an effect on

Zimmer’s revenue guidance when they approved the earnings release. As the

Complaint points out, the Audit Committee was given an update “on the ongoing

FDA inspection of [North] Campus” during its October 24, 2016 meeting.222 “At

the conclusion of [that] discussion, the Committee members expressed no objections

to the contents of the draft earnings release.”223

         The earnings release cannot, however, support a finding that the Audit

Committee members face a substantial likelihood of liability for a duty of loyalty

claim. The plaintiffs’ allegations emphasize that the earnings release revealed

problems to the market. According to the Complaint, the earnings release “reduced

[Zimmer’s] revenue guidance for the fourth quarter of 2016, causing a massive

decline in the share price.”224            The plaintiffs describe the third quarter 2016

disclosures as painting “a drastically different outlook” than Zimmer had previously

222
      Id. ¶ 181; Barillare Decl. Ex. 18.
223
      Compl. ¶ 181; Barillare Decl. Ex. 18.
224
      Compl. ¶ 23; see also id. ¶¶ 217, 223.

                                                49
provided.225 It is difficult to square these allegations with the plaintiffs’ contention

that the directors were engaging “in a scheme to defraud Zimmer investors.”226

         The plaintiffs nonetheless argue that the earning release was an attempt to

“hide and obscure” information from the public because the release “contained no

disclosure of the FDA inspection or manufacturing shutdown.”227 In other words,

the Audit Committee did not ensure that Zimmer adequately disclosed a potential

reason for its reduced guidance. That assertion might call into question the Audit

Committee members’ “‘erroneous judgment’ concerning the proper scope and

content of the disclosure.”228 But that would, at best, support an exculpated claim

225
    Id. ¶ 217. It is also not apparent what about the earning release was false or misleading,
given the more negative outlook that it presented. The roughly 14% decline in Zimmer’s
stock price that the plaintiffs say demonstrates harm occurred weeks before the plaintiffs
allege the market was informed about the Form 483 and ship holds at the North Campus.
The plaintiffs do not allege that Zimmer’s stock price fell when the market learned about
the Form 483 and the product ship hold at the North Campus on December 14, 2016. The
final allegation in the Complaint about the effects on Zimmer’s stock price is that “[b]y
November 14, 2016, Zimmer’s stock price reached a low of $97.99.” Id. ¶ 223. The dearth
of allegations demonstrating any negative reaction to the disclosure of events at the North
Campus further undercuts the plaintiffs’ argument that those events were material ones
requiring disclosure beyond the financial information Zimmer released at the end of the
third quarter. Notably, the December 14, 2016 press release quoted in the Complaint states
that the “full impact” of various matters including the North Campus inspection and Form
483 was “included in the Company’s sales and earnings guidance update issued on October
31, 2016.” Id. ¶ 231.
226
      See Pls.’ Answering Br. 6.
227
      Id. at 17–18.
228
   Orman v. Cullman, 794 A.2d 5, 41 (Del. Ch. 2002) (quoting Crescent/Mach I P’rs, L.P.
v. Turner, 846, A.2d 963, 987 (Del. Ch. 2000)); see also Morrison v. Berry, 2019 WL
7369431, at *18 (Del. Ch. Dec. 31, 2019) (“Bad faith, in the context of omissions, requires
                                             50
for breach of the directors’ duty of care.229 An inference cannot be drawn, from the

limited allegations in the Complaint, that the Audit Committee approved an earnings

release reducing revenue guidance while intentionally omitting material information

about a possible underlying cause.230 The plaintiffs do not ascribe any bad faith

actions or motives to the Audit Committee members that would demonstrate

otherwise.

                                     *      *      *

            To summarize, the Complaint lacks particularized factual allegations

supporting a reasonable inference that any Director Defendant faced a substantial

likelihood of liability for a disclosure claim under Malone.               There are no

particularized allegations that the directors knew that the North Campus was facing

atypical compliance struggles that would have a materially negative effect on

Zimmer’s financial performance until late 2016. The PE Funds had already exited

their investments in Zimmer by that point and, given the lack of any alleged ties

between a majority of the Demand Board and the PE Funds, why the directors would

that the omission be intentional and constitute more than an error of judgment or gross
negligence.”).
229
      Id.
230
    See Malone, 722 A.2d at 14 (explaining that a disclosure violation must be made “in
bad faith, knowingly or intentionally”); cf. infoUSA, Inc. S’holders Litig., 953 A.2d 963,
990 (Del. Ch. 2007) (explaining that directors violate their fiduciary duties “where it can
be shown that the directors involved issued their communication with the knowledge that
it was deceptive or incomplete”).

                                            51
“conceal” problems at North Campus is not apparent or alleged. The plaintiffs only

sufficiently allege Board-level involvement in one disclosure after the directors

gained some knowledge of the significance of the North Campus’s compliance

issues: the third quarter 2016 earnings release approved by the Audit Committee.

That earnings release, however, could support an exculpated duty of care claim at

the most.       The plaintiffs’ disclosure arguments are insufficient to establish a

substantial likelihood of liability for a non-exculpated claim. Demand is therefore

not excused for a single Demand Board member on the basis of alleged disclosure

violations.

                2.     “Knowing Facilitation” of Insider Trading

         The plaintiffs next argue that demand is futile because the Director

Defendants who constitute a majority of the Demand Board face a substantial risk

of liability in connection with the plaintiffs’ Brophy claim. To state a Brophy claim,

a plaintiff must plead that insiders (1) “possessed material, nonpublic company

information” and (2) “used that information improperly by making trades because

[they were] motivated, in whole or in part, by the substance of that information.”231

         The plaintiffs do not allege that any director personally sold stock in the

Offerings. They do not allege that the PE Funds (or anyone else) controlled a

majority of the Demand Board. The only Demand Board member who the plaintiffs

231
      In re Oracle Corp., 867 A.2d 904, 934 (Del. Ch. 2004).

                                             52
say “personally benefitted” from the PE Funds’ stock sales is Michelson, through

his affiliation with the KKR Fund.232 Michelson is also the only member of the

Demand Board named as a defendant on the plaintiffs’ insider trading claim.233

         The plaintiffs contend that the six Director Defendants face liability because

they “knowingly facilitated” the PE Funds’ insider trading by “approving the

offerings.”234 The plaintiffs argue that “knowing facilitation” is evidenced by the

directors “signing (and disseminating) the Registration Statement and related

documents.”235 This is simply another iteration of the plaintiffs’ disclosure claim.

The plaintiffs’ limited and conclusory allegations about Board-level involvement in

the Registration Statement and prospectus supplements cannot support an inference

of knowledge, and resulting scienter, for a Brophy claim just as they cannot support

a non-exculpated disclosure claim.236

232
      Pls.’ Answering Br. 47.
233
      See Compl. ¶¶ 343–48.
234
      Pls.’ Answering Br. 47.
235
      Id. at 47–48.
236
    See supra at 37–41; cf. In re Fitbit Inc. S’holder Deriv. Litig., 2018 WL 6587159, at
*13, *18 (Del. Ch. Dec. 14, 2018) (finding that a director “knowingly facilitated” insider
trading where the complaint adequately alleged that a majority of the demand board knew
that “the information at issue was material and nonpublic”); In re Emerging Commc’ns,
Inc. S’holders Litig., 2004 WL 1305745, at *39 (Del. Ch. May 3, 2004) (explaining that a
director was “culpable because he voted to approve the transaction even though he knew,
or at the very least had strong reasons to believe, that the . . . merger price was unfair”).

                                             53
         The plaintiffs’ other theory of “knowing facilitation” of insider trading is that

the Director Defendants approved the Offerings, “including a $250 million

repurchase on the February [O]ffering” and, “with respect to the August 2016

[O]ffering, grant[ed] waivers of the lock-up agreement which permitted the Private

Equity Defendants to sell their shares earlier.”237 For support, the plaintiffs rely on

this court’s decision in In re Fitbit Inc. Stockholder Derivative Litigation.238 The

plaintiffs’ argument fails for several reasons.

         First, to show that the Director Defendants knowingly permitted insider

trading by approving the Offerings, the plaintiffs must allege particularized facts

supporting an inference that the directors knew that the PE Funds received material

non-public information and that their sales were based on that information. 239 That

the Board knew about compliance issues before the Offerings is irrelevant.240 The

plaintiffs must plead that the Board knew that the PE Funds also had that material

non-public information before selling their Zimmer shares in the Offerings.

237
      Pls.’ Answering Br. 47–48.
238
      2018 WL 658715.
239
  See Guttman, 823 A.2d at 505; Stepak v. Ross, 1985 WL 21137, at *5 (Del. Ch. Sept. 5,
1985).
240
   See Pls.’ Answering Br. 48 (arguing that the Complaint “pleads chapter and verse about
the knowledge of Zimmer’s systemic manufacturing failures possessed by the Director
Defendants before the Offerings and throughout the relevant period leading up to the FDA
inspection”).

                                            54
            The plaintiffs contend that Michelson and Rhodes, “as agents of their

respective funds,” must have shared with the PE Funds the information about

Zimmer’s compliance challenges that they learned during Zimmer Board

meetings.241 That is so, according to the plaintiffs, because “under the terms of the

Stockholders Agreement, Michelson and Rhodes were assigned to the Board for the

express purpose of representing the interests of the [PE Funds] . . . and sharing with

them confidential Zimmer information.”242          These allegations are entirely

conclusory. In the Securities Class Action, the federal court rejected a similar

argument, finding there was no allegation in that case “that any information relating

to problems at North Campus was in fact shared with the Private Equity Defendants,

whether in this instance or any others.”243 Instead, the plaintiff there had alleged

only that “the Private Equity Defendants had potential access to information,”244

which is “not the same as actually possessing the specific information and knowing

it.”245

241
      Id. at 71.
242
      Id. at 69.
243
      Shah, 348 F. Supp. 3d at 849.
244
      Id.
245
   Id. (quoting Plumbers & Pipefitters Local Union 719 Pension Fund v. Zimmer Hldgs.,
Inc., 2011 WL 338865, at *21 (S.D. Ind. Jan. 28, 2011), aff’d, 679 F.3d 952 (7th Cir.
2012)).

                                          55
         The Complaint here has the same flaw. It discusses the potential for the PE

Funds to access information based on the Stockholders Agreement. There are no

particularized allegations that Michelson or Rhodes actually shared any information

with the PE Funds. Moreover, even if the court were to infer that Michelson and

Rhodes shared material non-public information with the PE Funds, the Complaint

lacks any basis to infer that the rest of the Board had knowledge regarding this

alleged information sharing.246

         The plaintiffs also do not allege that the Board knew the PE Funds’ sales were

based on knowledge of Zimmer’s compliance issues. The fact that the Board

“approved” the Offerings is not enough to demonstrate scienter. The plaintiffs try

to bolster their argument by arguing that the Board “grant[ed] waivers of the lock-

up agreement”247 as evidence of knowing facilitation, which was a focus of this

court’s decision in Fitbit.248 But the Complaint mentions a lock-up agreement only

once, noting that the “Defendants further facilitated the Private Equity Defendants’

illegal stock sales by . . . waiving the lockup provision for the August 2016

246
   In Fitbit, a majority of the demand board sold stock either personally or “through their
controlled funds.” Fitbit, 2018 WL 6587159, at *14. The court in that case did not need
to consider whether information shared with the board was subsequently shared with
outside entities that were connected to a single member of the demand board or whether a
majority of the demand board knew that information was shared.
247
      Pls.’ Answering Br. 47.
248
      See Fitbit, 2018 WL 6587159, at *17–18.

                                            56
offering.”249 There is nothing else pleaded about a lock-up. The Complaint does not

explain what “lockup provision” the plaintiffs are referring to, when it was

implemented, who implemented it, or how (when, or by whom) it was waived.250

         The plaintiffs’ allegations that the Board “approv[ed] a $250 million stock

repurchase in the February 2016 offering” are equally conclusory.251 The Complaint

does not include any particularized facts regarding the Board’s involvement in the

stock repurchase, when the Board voted to approve the stock repurchase, or the

249
      Compl. ¶ 318.
250
   To better understand the plaintiffs’ allegations, I reviewed the publicly-filed
prospectuses related to the June and August Offerings, which provide that Zimmer was
subject to and lacked the power to waive a lock-up agreement. See Compl. ¶ 263
(referencing the June 13, 2016 and June 15, 2016 prospectus supplements). Specifically,
on June 13, 2016, the Company filed a free writing prospectus which provided that Zimmer
and certain officers and directors affiliated with the PE Funds would enter into a 60-day
lockup after the June Offering. Zimmer Biomet Hldgs., Inc., Free Writing Prospectus
(Form FWP) (June 13, 2016) (“As part of the offering, Zimmer Biomet, its chief executive
officer and chief financial officer and certain of its directors and stockholders affiliated
with KKR, Goldman Sachs and TPG will enter into lock-up agreements with respect to the
sale of shares of common stock of Zimmer Biomet for a 60-day period following the
offering, subject to customary exceptions.”). Based on Zimmer’s June 15, 2016 final
prospectus supplement for the June Offering, it appears to me that the lock-up agreement
relevant to the August Offering could only be waived by “Goldman, Sachs & Co. and J.P.
Morgan Securities LLC,” not the Company or the Board. Zimmer Biomet Hldgs., Inc.,
Prospectus Suppl. S-7 (Form 424B7) (June 15, 2016) (“Pursuant to the foregoing lock-up
agreements, at any time and without notice, Goldman, Sachs & Co. and J.P. Morgan
Securities LLC may release all or any portion of our common stock subject to the lock-up
agreements.”); id. at S-16 (explaining that pursuant to the lockup agreements the relevant
parties could not trade “without the prior written consent of Goldman, Sachs & Co. and
J.P. Morgan Securities LLC” (emphasis added)). These filings further cut against the
plaintiffs’ assertion that “granting waivers of the lock-up agreement” creates a substantial
likelihood of liability for the Director Defendants.
251
      Compl. ¶ 318.

                                            57
Board’s composition at that time. These indefinite statements fall short of Rule

23.1’s pleading requirements and provide no basis for the court to draw an inference

of scienter for the Director Defendants. As a result, at least 10 members of the

Demand Board cannot be found to face a substantial likelihood of liability for

knowingly facilitating insider trading.

                3.     The Caremark Claim

         The plaintiffs next argue that a majority of the Demand Board faces a

substantial likelihood of liability under Caremark for failing to “[e]nsure FDA

[c]ompliance.”252 Despite adopting certain phrases from Caremark’s progeny and

asserting that the Board had “actual knowledge of ‘mission critical’ regulatory

compliance failures,”253 none of the counts in the Complaint are based on an

oversight claim. Instead, the basis for any potential Caremark liability appears to

be a hypothetical one raised for the first time in the plaintiffs’ answering brief. At

argument, counsel for the plaintiffs’ stated that “the complaint could encompass a

Caremark claim.”254

         Even if I were to read a loosely pleaded Caremark claim from the allegations

in the Complaint, it would not create a substantial likelihood of liability for the

252
      Pls.’ Answering Br. 50.
253
      Compl. ¶ 302.
254
      Oral Arg. Tr. 56 (emphasis added).

                                           58
Director Defendants. A Caremark claim would have required the plaintiffs to plead

particularized facts showing that either (1) “the directors utterly failed to implement

any reporting or information system or controls” or that (2) “having implemented

such a system or controls, [the directors] consciously failed to monitor or oversee its

operations thus disabling themselves from being informed of risks or problems

requiring their attention.”255 The Complaint is, on its face, inconsistent with a claim

under either prong of Caremark.

         First, rather than plead that Zimmer lacked a Board-level system of internal

controls, the Complaint details the oversight systems in place to address regulatory

compliance issues. For example, the plaintiffs allege that the Audit Committee was

responsible for “the Company’s compliance with legal and regulatory requirements,

including oversight of the Company’s Corporate Compliance Program.”256 The

Complaint also describes the Board’s oversight of regulatory compliance at multiple

meetings where it received updates on FDA inspections and voluntary internal audits

at Zimmer’s facilities.257

255
      Reiter v. Fairbank, 2016 WL 6081823, at *7 (Del. Ch. Oct. 18, 2016).
256
      Compl. ¶ 78.
257
   See id. ¶¶ 127–93 (alleging that the Zimmer Board met at least a dozen times between
2015 and 2018 and regularly received updates “giving the Board a global overview of all
of the Company’s FDA inspection results” and highlighting compliance related
developments); see also id. ¶ 8.

                                             59
         Any argument under the second prong of Caremark is also contradicted by

the allegations in the Complaint. The plaintiffs repeatedly allege that Zimmer

actively undertook remediation efforts to resolve compliance issues such as Project

Trident, “a long-running FDA compliance remediation program at several legacy

Zimmer facilities.”258        They describe multiple attempts to cure ongoing FDA

violations and regular updates to the Board.259 The story the plaintiffs tell in the

Complaint is a far cry from being about a board of directors ignoring “red flags.”260

         Because none of the members of the Demand Board face a substantial

likelihood of liability for a Caremark claim, demand is not excused on that basis.

                 4.     The Securities Class Action

         The plaintiffs’ final demand futility argument is that eight of the 11 Demand

Board members faced “live claims” as defendants in the Securities Class Action at

the time this action was filed.261 In Pfeiffer v. Toll, this court found that demand was

258
      See, e.g., id. ¶¶ 109, 123, 128, 138, 158, 177.
259
      See, e.g., supra at 10–16, 22–23 (describing Board presentations).
260
    The plaintiffs argue in their brief that these remediation efforts were “an abject failure
as the systemic problems were not being corrected, the purported remediation was
repeatedly delayed and subject to massive cost overruns, and most importantly did not
protect the Company from additional and ongoing FDA compliance problems for years.”
Pls.’ Answering Br. 50 n.20. Such second-guessing also cannot form the basis of a
Caremark claim. See, e.g., Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006); In re Caremark
Int’l Inc. Deriv. Litig., 698 A.2d 959, 971 (Del. Ch. 1996); In re Gen. Motors Deriv. Litig.,
2015 WL 3958724, at *1, *17 (Del. Ch. June 26, 2015); Citigroup, 964 A.2d at 127–29.
261
      Pls.’ Answering Br. 51; see Compl. ¶¶ 321–25.

                                                60
futile where a majority of the demand board faced a substantial likelihood of liability

for alleged misconduct in a pending parallel securities action.262 To support their

argument that facts like those in Pfeiffer are present in this case, the plaintiffs focus

on the denial of the defendants’ motion to dismiss in Shah.263 But in Pfeiffer—unlike

here—the federal complaint survived “under the rigorous standards for pleading

securities fraud” and raised a “powerful and cogent inference of scienter” against the

director defendants.264

         The plaintiffs here seize on language the federal court in the Securities Class

Action used to characterize the federal plaintiff’s allegations as telling a tale of

“fraud” and describing the defendants as “knowingly sitting on a proverbial ticking

time bomb of a factory known as North Campus.”265 It is not clear whether the

262
  989 A.2d 683 (Del. Ch. 2010), abrogated on other grounds by Kahn v. Kohlberg Kravis
Roberts & Co. L.P., 23 A.3d 831 (Del. 2011).
263
      See Compl. ¶¶ 323–25.
264
      Pfeiffer, 989 A.2d at 690.
265
    Shah, 348 F. Supp. 3d at 826–27. The “time bomb” quotation—pulled from the
introduction of the opinion—does not specify whether the comments regarding fraud
applied to all defendants or only to those who were subject to claims requiring a finding of
fraud. Dealing with similarly vague language, the court in TrueCar declined to find the
related securities action sufficient to impugn the board’s impartiality. See TrueCar, 2020
WL 5816761, at *22 (finding that “it is unclear from the paragraph quoted above containing
the district court’s analysis in the Securities Class Action whether its comments
concerning scienter were intended to apply to all defendants in that action or—as would
be logical—only to those who were the subject of scienter-based claims” (emphasis
added)). The court similarly expressed skepticism that strict liability claims would
compromise defenses to non-exculpated duty of loyalty claims, which require evidence of
bad faith. Id. (“As for Plaintiffs’ argument, it also is unclear what ‘factual defenses’ a
director would fear having compromised in a case that only asserts claims for strict liability
                                             61
sentences from the Shah decision that the plaintiffs draw attention to were intended

to apply to all defendants in that action. But the only claims in the Securities Class

Action against the Director Defendants here were for violations of Sections 11 and

15 of the Securities Act.266 As the plaintiffs acknowledge, “Sections 11 and 15 of

the Securities Act . . . are strict liability statutes that do not require a showing of

scienter.”267

         Given Zimmer’s exculpation provision, the plaintiffs must demonstrate that

the directors acted with scienter, “i.e., there was an ‘intentional dereliction of duty’

or ‘a conscious disregard’ for their responsibilities, amounting to bad faith.”268 Strict

liability under Section 11 or Section 15 of the Securities Act alone cannot meet this

high bar.269 It has no bearing on whether the directors acted in good faith. The

and negligence against him, for which the director would be exculpated from personal
liability.”).
266
   See Shah, 348 F. Supp. 3d at 827; Second Am. Class Action Compl. for Violations of
the Federal Securities Laws, Shah v. Zimmer Biomet Hldgs., Inc., 348 F. Supp. 3d 821
(N.D. Ind. 2018) (No. 3:16-cv-00815-PPS-MGG), 2017 WL 5494812, ¶¶ 454–59, 468–81,
490–97 (Dkt. 60).
267
      Pls.’ Answering Br. 51.
268
    Goldman Sachs Gp., 2011 WL 4826104, at *12 (quoting In re Walt Disney Co. Deriv.
Litig., 907 A.2d 693, 755 (Del. Ch. 2005), aff’d, 906 A.2d 27 (Del. 2006)).
269
   See TrueCar, 2020 WL 5816761, at *21 (finding that the presence of an “exculpatory
charter provision and the absence of scienter-based claims against the Demand Board
directors named in the Securities Class Action” meant that a majority of the demand board
“would not face a substantial likelihood of personal liability in that action so as to
compromise their ability to impartially consider a demand”); In re LendingClub Corp.
Deriv. Litig., 2019 WL 5678578, at *15 (Del. Ch. Oct. 31, 2019) (holding that “[l]iability
                                           62
claims in the Federal Securities Action therefore cannot provide a basis to conclude

that the Demand Board members named as defendants in Shah were unable to

impartially consider a demand when this action was filed.

         Relying on Fitbit once again, the plaintiffs argue that the Shah court’s factual

statements are probative of demand futility, even though the securities claims

sustained against the directors were non-scienter based.270 But in Shah, the scienter

analysis only addressed the states of mind of officer defendants who faced Section

10(b) claims.271 There were no “holistic” allegations that “suffice[d] to establish

scienter” for the Director Defendants.272 Furthermore, in Fitbit, the findings in the

related federal action reinforced the court’s conclusion that knowledge had been

sufficiently pleaded against a majority of the Fitbit demand board.273 As I previously

discussed, there are no well-pleaded allegations of Board-level scienter in the

Complaint that the Shah decision could bolster.

under Section 11 would not, in and of itself, have gotten to the heart of whether the directors
acted in bad faith concerning wrongdoing at issue in both actions”).
270
      Pls.’ Answering Br. 52.
271
   Cf. Pfeiffer, 989 A.2d at 690 (finding demand futile based, in part, on federal court
decision holding that the same individual defendants acted with scienter regarding “the
same trades at issue” in the Delaware action).
272
      Fitbit, 2018 WL 6587159, at *16.
273
      Id. at *16–17.

                                              63
III.   CONCLUSION

       For the reasons described above, the plaintiffs have failed to establish that

making a demand on the Zimmer Board would have been futile. At least eight

members of the eleven-member Demand Board could have impartially considered a

demand to pursue this action on Zimmer’s behalf. As such, the defendants’ motions

to dismiss the Complaint pursuant to Court of Chancery Rule 23.1 are granted. The

Complaint is dismissed with prejudice in its entirety.

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