Court Opinion

ID: 2818782
Source: CourtListenerOpinion
Date Created: 2015-07-21 17:05:46.661076+00
Date Added: 2024-06-11T11:30:49.948359
License: Public Domain

COURT OF CHANCERY
OF THE
SAM GLASSCOCK 111 STATE OF DELAWARE COURT OF CHANCERY COURTHOUSE 1

VICE CHANCELLOR 34 THE CIRCLE
GEORGETOWN, DELAWARE 19947

 

 

Date Submitted: July 13, 2015
Date Decided: July 21, 2015

Blake A. Bennett, Esquire William M. Lafferty, Esquire 
The Brandywine Building Leslie A. Polizoti, Esquire 

1000 West Street, 101h Floor Lindsay M. Kwoka, Esquire 
PO. Box 1680 Morris, Nichols, Arsht & Tunnell LLP

Wilmington, DE 19899 1201 N. Market Street
Wilmington, DE 19801

Lisa A. Schmidt, Esquire
A. Jacob Werrett, Esquire

J. Scott Pritchard, Esquire
Richards, Layton & Finger P.A.

One Rodney Square
920 North King Street
Wilmington, DE 19801

Re: In re Abb Vie Inc. Stockholder Derivative Litigation,
Consolidated Civil Action No. 9983-VCG

Dear Counsel: i
Where a corporation creates and then spins off a subsidiary, there is obvious |

business value in a clean break between the new entity and the Old, including

through mutual general releases of liability between the entities, and their

employees and directors, as part of the transaction. Of course, where the directors

approve such a release, which includes release of their own liability for theoretical

claims that formerly the company, and now the sub, may have against them, they

 

convey some beneﬁt to themselves as well. Whether such an approval, useful to
the company on its face, invokes an equitable remedy nonetheless, on account of
the directors’ self—dealing, depends on the extent to which tangible, valuable
choses in action against the directors are released, and on the directors’ knowledge
of such potential liability at the time they approved the transaction.

The matter before me involves the creation of a subsidiary, Abeie Inc.
(“Abeie”), by Abbott Laboratories (“Abbott”), the transfer of assets and
liabilities to Abeie (including those relating to the drug TriCor, a former Abbott
property), and, as part of that transfer, mutual releases that are problematic for the
reasons described above. Subsequently, Abbott distributed all of its 100% interest
in Abeie as a dividend to its stockholders, who thereby became Abeie
stockholders as well. The Plaintiffs, Abeie stockholders, seek to sue derivatively
on behalf of Abeie, alleging that at the time Abeie was created, a former
Abbott employee was pursuing damages in a qui tam1 action against Abbott for
purported violations of the False Claims Act in connection with Abbott’s
marketing of TriCor (the “Qui Tam Action”); that the Qui Tam Action persists,

resulting in defense costs payable by Abeie, and might result in damages against

 

 

 

 

1 “Qui tam” is from the Latin phrase “qui tam pro domino rege quam pro se ipso in [we parte
sequitur,” which translates to: “who as well for the king as for himself sues in this matter.”
Black’s Law Dictionary (10th ed. 2014). It is “[a]n action brought under a statute that allows a
private person to sue for a penalty, part of which the government or some speciﬁed public

institution will receive.” Id.

 

 

 

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9916

misdeeds. It also noted that the purpose of Section 327 is to prevent the

purchase of stock after a transaction solely for the purpose of pursuing a derivative
claim based on that transaction, an evil absent in Shaev (and here as well).'7

On a motion for reargument, the Court reiterated that its decision was a

matter of equity:

Here, plaintiff lost his chance to ﬁle a double derivative action
because, after the spin—off, [the parent] and [the subsidiary] were no
longer in a parent/subsidiary relationship. Were this Court to apply
section 327 strictly, plaintiff would also be barred from ﬁling a
derivative action. Under those circumstances, I refuse, as I believe one
charged with the duty to apply equitable principles must, to adhere
blindly to a technical legal rule and to allow thereby an alleged
corporate wrongdoer to thumb his nose at the possibility of redress.
Thus, I found that plaintiff has equitable standing to bring a derivative
action on [the subsidiary’s] behalf, notwithstanding the fact that the
challelrigged actions occurred before he owned any [of the subsidiary’s]
stock.

The Plaintiffs contend that Shaev is on point with the present case: Like the
Plaintiffs here, the plaintiff in Shaev challenged a transaction that allegedly harmed
a wholly owned subsidiary, of which the plaintiff became a stockholder by way of
dividend following a spin—off.

I do not read Shaev to say that the ownership requirement of Section 327
only applies where the Court determines that the plaintiff’s motive is champertous,

and otherwise is waived; such a policy determination would be for the legislature.

‘6 Id. at *4
'71d. at *4, n.l9.

'8 Shaev v. Wyly, 1998 WL 118200, at *2 (Del. Ch. Mar. 6, 1998), aﬂ'd, 719 A.2d 490 (Del;

1998) (emphasis in original).
1 l

 

 

Instead, I read Shaev to hold that this Court will not countenance a wrong to

 

stockholders by fiduciaries that is both egregious and irremediable; instead, this
Court will employ a special equitable standing on behalf of a stockholder, where

the complaint discloses a wrong abhorrent to equity. While this case and Shaev are

 

procedurally similar, I ﬁnd the equitable considerations at play in Shaev to be
lacking here because the Plaintiffs have not pled facts from which I can reasonably

infer that Abb Vie was harmed.

The Plaintiffs allege that the Individual Defendants (other than Gonzalez,

who was not an Abbott director at the time) “knowingly or recklessly acted

contrary to the interests of Abbott and Abeie when they approved the Separation
Agreement because they failed to provide any material consideration to Abbott or 
Abeie in exchange for the Release of liability.”19 The Plaintiffs allege that g
Gonzalez, Abeie’s CEO, was “acting contrary to the interests of Abbott when he 
signed the Separation Agreement [on behalf of Abeie, then Abbott’s wholly l5

owned sub] because he failed to provide any material consideration to Abbott in

exchange for the Release of liability.”20 

Even accepting as true all well pleaded factual allegations and drawing all If
reasonable inferences therefrom, I do not find it reasonably conceivable that ‘

Abeie has been harmed such that the Plaintiffs here should be afforded equitable

: — — —— _—‘——._n.'

‘9 Compl. 11 96,. n
20 Idaho 11 95. n

12

 

 

standing to proceed on behalf of Abeie for alleged wrongdoing that occurred
while Abeie was a wholly owned subsidiary of Abbott.

I note at the outset that there is not a reasonably conceivable waste claim
against the Individual Defendants for their approval of the Release. Waste
involves claims that a board “‘irrationally squander[ed]’ corporate assets—for
example, where the challenged transaction served no corporate purpose or where
the corporation received no consideration at all.”21 I do not ﬁnd it reasonably
conceivable that the Release lacked any business purpose. This Court has long
recognized that derivative litigation is burdensome to companies, by way of the
direct costs of the litigation, including advancement and indemniﬁcation
obligations, as well as indirect costs, such as distraction to management and the
board, and possible detriment to employee morale.22 The Release here, moreover,
is not simply a release of the defendant directors; it is a broad general release via
which the two entities ensured their full legal separation, free of entanglement. To
say that the Release is entirely devoid of value is conclusory and will not withstand

judicial scrutiny, even on the lenient motion-to-dismiss standard, in the absence of

 

21 White v. Panic, 783 A.2d 543, 554 (Del. 2001).

22 See, e. g., In re INFOUSA, Inc. S’holders Litig, 953 A.2d 963, 986 (Del. Ch. 2007) (“A board
may in good faith refuse a shareholder demand to begin litigation even if there is substantial
basis to conclude that the lawsuit would eventually be successful on the merits. It is within the
bounds of business judgment to conclude that a lawsuit, even if legitimate, would be excessively
costly to the corporation or harm its long-term strategic interests”).

13

 

 

 

 

any facts from which I could reasonably infer that these beneﬁts were lacking. The
Complaint makes no such pleading.

Further to the point, the inchoate beneﬁt to Abbott’s directors at the time of
the Release, and the corresponding “loss” to Abbott and its wholly owned
subsidiary, Abeie, is too attenuated to reasonably support an inference that the
Release was a self-dealing transaction that harmed Abeie and requires an
equitable override of Section 327. At the time of the Release, the United States
had already declined to intervene in the Qui Tam Action, in which it is the
theoretical party-in-interest,23 and Abbott had ﬁled a motion to dismiss.24 Even if
the Action results in some kind of payout for which Abeie is responsible because
of the transfer of that liability from Abbott, there would remain a daunting leap
between Abeie’s monetary liability for Abbott’s off—label marketing of TriCor
and Abbott’s directors being personally liable for bad faith or failure of oversight
in connection with that marketing. The pleadings are devoid of allegations that

would support such a claim against Abbott’s directors for the company’s improper

marketing of TriCor.25

23 See supra note 1.
24 See US. ex rel. Bergman v. Abbot Labs, 995 F. Supp. 2d 357, 363 (ED. Pa. 2014).

25 The Complaint alleges that Abbott has faced scrutiny in the past for off-label marketing and
that its peers have as well. It alleges that off—label marketing is endemic in the pharmaceutical
industry. In particular, the Complaint alleges, in May 2012, Abbott paid a $1.5 billion settlement
to resolve criminal and civil investigations regarding off-label marketing of Depakote. See, e. g.,
Compl. W 79—80. It does not, however, plead the Individual Defendants’ culpability with
respect to illegality in marketing TriCor, except in conclusory fashion.

14

 

 

 

 

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Abeie, which has assumed the TriCor liability; and that the facts of the Qui Tam
Action might disclose that a chose in action existed at the time Abeie was
created, in favor of Abbott against its directors, under a theory of failure of
oversight under the Caremark rationale or under a theory of bad faith. The
Plaintiffs further assert that, should damages result from the Qui Tam Action,
Abbott would not have an incentive to pursue a claim against its directors, because
it had transferred TriCor—related liability to Abeie and thus would suffer no
damages, and Abeie could not pursue the claim due to the mutual releases. In
other words, the Plaintiffs point to that equitable anathema, a wrong without a
remedy. They purport to sue the defendant directors derivatively on behalf of
Abeie, alleging that the releases represent a conﬂicted transaction, or constitute
waste. The Plaintiffs seek to set aside the releases, freeing Abeie—and the
Plaintiffs derivatively—to pursue a Caremark or bad faith claim against Abbott’s
directors, should the Qui Tam Action prove fruitful and should the facts warrant.
The Plaintiffs lack statutory standing to derivatively sue the defendant
directors for breach of duty in connection with the releases on behalf of Abeie
because they were not Abeie stockholders at the time of the alleged wrong. They
contend correctly, however, that this Court in Shaev v. Wyly2 has allowed such an

action in similar procedural circumstances, despite the statute, in light of

 

 

2 1998 WL 13858 (Del. Ch. Jan. 6, 1998), aﬂ'd, 719 A.2d 490 (Del. 1998).

 

 

otherwise-irremediable self—dealing by directors of a parent. The remedy problem
the Plaintiffs point to is real, and analogous to Shaev, but unlike that case, the
equitable considerations here are too tenuous to support the equitable exception to
the statute that Plaintiffs invoke}-
I. BACKGROUND FACTS3’

A. T he Spin-OJ?r and Separation Agreement

In April 2012, Abbott incorporated Abeie as its wholly owned subsidiary
to hold Abbott’s research-based pharmaceutical business. On November 28, 2012,
Abbott’s board of directors approved the separation of Abbott and Abeie. The
two entities entered into the Separation and Distribution Agreement By and
Between Abbott Laboratories and Abeie Inc. (the “Separation Agreement”), and
Abbott declared a special dividend distribution of all outstanding shares of Abeie
common stock. On January 1, 2013, Abbott made the pro rata distribution of
100% of Abeie’s outstanding common stock to the Abbott stockholders of record
as of December 12, 2012. Abeie then became a publicly traded company on the
New York Stock Exchange.

The Separation Agreement set forth the transfer of assets and liabilities from

Abbott to Abeie. It also contained “mutual releases,” pursuant to which Abbott

3 Unless otherwise indicated, all facts are taken from the Consolidated Amended Veriﬁed
Shareholder Derivative Complaint for Breach of Fiduciary Duty for Self-Dealing, Waste of
Corporate Assets, and Unjust Enrichment (the “Complaint”).

 

 

 

and Abeie each released the other of all liability in connection with the assets
transferred to Abeie and the assets retained by Abbott, respectively.4 Relevant
here, Abeie’s release of Abbott provided that Abeie “does hereby . . . remise,
release and forever discharge: (1) Abbott, each Abbott Subsidiary, and their
respective successors and assigns; [and] (2) all Persons who at any time are or have
been shareholders, directors, officers, agents or employees of Abbott or an Abbott
Subsidiary” from all liabilities transferred to Abeie (the “Release”).5 The
liabilities transferred to Abeie included those associated with the drug TriCor, an
asset that was transferred to Abeie.

At the time of the Release, the Qui Tam Action was (and it remains)
pending. The Qui Tam Action was brought by a former employee in 2009,
alleging that, during the time of her employment (2000 to 2008), Abbott engaged
in marketing TriCor for off—label uses, in violation of the False Claims Act. The
United States declined to intervene, and the action is being prosecuted by the
relator, the former employee, on behalf of the United States. In January 2014, over

a year after the Release was executed, a federal district court granted in part and

denied in part Abbott’s motion to dismiss the claim.6

 

 

4 See Compl. W 30—31; Opening Br. in Supp. of Mots. To Dismiss the Consolidated Am.
Veriﬁed S’holder Deriv. Compl. Ex. A § 4.01.

5 Id. §4.01(a).

6 See US. ex rel. Bergman v. Abbot Labs., 995 F. Supp. 2d 357, 363 (ED. Pa. 2014). The
Defendants represent that the Qui Tam Action makes no allegations about Abbott’s directors.

 

 

B. The Parties

The Plaintiffs were Abbott stockholders at the time of the Separation
Agreement and received Abeie stock in connection with Abbott’s special
dividend distribution on January 1, 2013. They have continuously held Abeie
stock since that time,

The nominal defendant Abeie is a Delaware corporation with its principal
place of business in Chicago, Illinois.

Defendant Richard A. Gonzalez, Abeie’s Chairman and CEO, signed the
Separation Agreement on behalf of Abeie.

The individual defendants include certain directors who sit on both the
Abbott and Abeie boards, who approved the Separation Agreement in their
capacity as Abbott directors at the time: Robert J. Alpern, Roxanne S. Austin,
Edward M. Liddy, and Glenn F. Tilton.

The remaining members of Abbott’s board who approved the Separation
Agreement on behalf of Abbott are also individual defendants: Sally E. Blount, W.
James Farrell, Nancy McKinstry, Phebe N. Novakovic, William A. Osborn,
Samuel C. Scott 111, and Miles D. White, who is also Abbott’s CEO. Gonzalez,
Alpern, Austin, Liddy, Tilton, Blount, Farrell, McKinstry, Novakovic, Osborn,

Scott, and White are together referred to as the “Individual Defendants.”

 

 

 

 

 

C. Procedural History

Plaintiff Donald Dempster ﬁled a complaint on July 31, 2014. A second
complaint, by plaintiff Richard W. Berstein Irrevocable Family Trust-2006, was
ﬁled on August 12, 2014. I consolidated these actions on September 17, 2014.
The Defendants ﬁled motions to dismiss on October 17, 2014 and briefs in support
of those motions on December 1, 2014. In response, the Plaintiffs ﬁled the
Amended Complaint on January 16, 2015. The Defendants again moved to

dismiss and the parties submitted brieﬁng on those motions that concluded in June.

I heard oral argument on July 13, 2015,,-
II. STANDARD OF REVIEW
Under Rule 23.1, which, among other things, procedurally implements 8
Del. C. § 327,7 a derivative plaintiff must allege that he owned stock at the time of

the complained—of transaction or that his shares devolved upon him by operation of

8
law.

Standing is a legal question that is well suited to resolution on a motion to
dismiss. Where, as here, the question of standing is “so closely related to the

merits,” and the question is not whether this Court has jurisdiction to grant

{3 ___: _———:—- =——5;

7 See Quadrant Structured Products Co. v. Vertirt, 102 A.3d 155, 178 (Del. Ch. 2014).

8 Ct. Ch. R. 23.1. Rule 23.1 also requires a plaintiff to allege with particularity that demand has
been made and wrongfully refused or that it would be futile and should be excused. Because I
am deciding the pending Motions to Dismiss solely on the standing requirement set forth in 8
Del. C. § 327 and implemented by Rule 23.1, as discussed below, I need not reach the demand
futility argument and the heightened pleading standard that it entails.

 

 

requested relief to any plaintiff, but rather, is whether the Court can grant the

 

requested relief to these plaintiffs, the appropriate framework is under Rule
12(b)(6).9
On a motion to dismiss under Rule 12(b)(6), this Court accepts as true all 

well pleaded factual allegations, including even vague allegations if they give the

opposing party notice of the claim, and draws all reasonable inferences in favor of

 

the non-moving party.10 The Court will deny a motion to dismiss unless, with the

foregoing principles in mind, there is no reasonably conceivable set of

circumstances under which the plaintiff could recover.11

III. ANALYSIS '

The Plaintiffs, in their capacity as Abeie stockholders, are seeking to 
pursue derivatively a claim against certain of both Abbott’s and Abeie’s directors 
for breaches of fiduciary duties in connection with their approval of the Release. I

The Plaintiffs allege:

[B]ecause the wrongful conduct . . . occurred when Abeie was a
wholly owned subsidiary of Abbott and in connection with the .5.
Separation Agreement, in the context of this derivative action, the I,
Individual Defendants owed fiduciary duties to Abbott shareholders
prior to and in connection with the Separation, to Abbott, Abeie’s 

—— =——‘_——n'-

9Appriva S’holder Ling. C0., LLC v. EV3, Inc., 937 A.2d 1275, 1285 (Del. 2007).

'0 Central Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 535 (Del,,_.
2011). II
” 1d. 1

 

 

sole shareholder before the spin-off, and to Abeie shareholders at
and after the time of the Separation Agreement.‘2

The Plaintiffs, however, purport to sue only on behalf of Abeie.

The alleged harm in approving the Release, which approval the Plaintiffs
contend was a self-dealing transaction, is that Abeie has incurred litigation
expenses relating to, and faces potential liability from, the Qui Tam Action, but is
left without a chose in action against Abbott’s directors for purported breaches of
their ﬁduciary duties of loyalty in connection with the TriCor marketing. The
ultimate relief sought is that the Release be rescinded, so that Abeie may sue the
Abbott directors for bad faith or lack of oversight in connection with the marketing
of TriCor, and thus recoup any loss to Abeie that might, hypothetically, result
from the Qui Tam Action;

A stockholder wishing to pursue a derivative claim on behalf of a
corporation must meet the standing requirements set forth in 8 Del. C. § 3272;:

In any derivative suit instituted by a stockholder of a corporation, it

shall be averred in the complaint that the plaintiff was a stockholder of

the corporation at the time of the transaction of which such

stockholder complains or that such stockholder's stock thereafter
devolved upon such stockholder by operation of law.13

The Plaintiffs cannot meet this requirement since Abeie was a wholly owned

subsidiary at the time of the complained—of transaction, i.e., the Release, in

 

12 Compl.1[24.
13 As noted above, this statutory requirement is implemented by Court of Chancery Rule 23.15;;
See Quadrant Structured Products Co. v. Vertin, 102 A.3d 155, 178 (Del. Ch. 2014).

 

 

 

November of 2012, and because the Plaintiffs received their stock by an Abbott
dividend, rather than by operation of law.14 The Plaintiffs, however, argue that
they should be accorded equitable standing in order to redress a wrong to Abeie
that would otherwise go unremedied, consistent with this Court’s holding in Shaev
v. Wyly.15

In Shaev, a stockholder of a subsidiary sought to bring derivatively a claim
on behalf of that subsidiary. The plaintiff had long been a stockholder of the
parent entity and received shares in the subsidiary as a result of a spin-off of the
parent’s wholly owned subsidiary and a subsequent dividend. Prior to the Spin-off,
the subsidiary’s directors granted themselves options on nine million shares of the
subsidiary’s stock, conveying to themselves corporate property with a net value of
up to $245 million, which the plaintiff alleged to be excessive compensation. In
ﬁnding that the plaintiff had standing to pursue the claim on behalf of the
subsidiary, the Court noted that the plaintiff at one time had standing to maintain a
double-derivative action as a stockholder of the parent entity, but had lost that right
once the spin-off was complete. The Court noted that “to deny standing on these

facts would insulate defendants from potential liability for their alleged

'4 The Complaint avers that the Plaintiffs received their shares by operation of law, but the
Plaintiffs’ brieﬁng and oral argument more appropriately, in light of the receipt of shares by

contract, relied on the theory of equitable standing under Shaev.
‘5 1998 WL 13858 (Del. Ch. Jan. 6, 1998) aﬂ'd, 719 A.2d 490 (Del. 1998).

10