FILED
Jun 22 2012, 9:02 am
FOR PUBLICATION
CLERK
of the supreme court,
court of appeals and
tax court
ATTORNEYS FOR APPELLANT: ATTORNEYS FOR APPELLEES:
RICHARD E. SHEVITZ JOSEPH H. YEAGER, JR.
SCOTT D. GILCHRIST MATTHEW T. ALBAUGH
Cohen & Malad LLP Baker & Daniels LLP
Indianapolis, Indiana Indianapolis, Indiana
WALTER C. CARLSON
KRISTEN R. SEEGER
Sidley Austin LLP
Chicago, Illinois
IN THE
COURT OF APPEALS OF INDIANA
WILLIAM T. CARTER, derivatively on behalf of )
CNO FINANCIAL GROUP, INC., )
)
Appellant-Plaintiff, )
)
vs. ) No. 49A02-1106-PL-582
)
R. GLENN HILLIARD, et al., )
)
Appellees-Defendants. )
APPEAL FROM THE MARION SUPERIOR COURT
The Honorable David J. Dreyer, Judge
Cause No. 49D10-1006-PL-24523
June 22, 2012
OPINION - FOR PUBLICATION
NAJAM, Judge
STATEMENT OF THE CASE
William T. Carter, derivatively on behalf of CNO Financial Group, Inc. (“CNO”
or “the Company”), formerly known as Conseco, Inc. (“Conseco,” where applicable),
filed a complaint and later an amended complaint (“Amended Complaint”) against R.
Glenn Hilliard, Donna A. James, R. Keith Long, Debra J. Perry, C. James Prieur, Neal C.
Schneider, Michael T. Tokarz, John G. Turner, William Kirsch, Eugene Bullis, Michael
Dubes, James Hohmann, Edward Bonach, Ali Inanilan, and John Wells (collectively “the
Defendants”) alleging breach of Defendants’ fiduciary and good faith duties, unjust
enrichment, abuse of control, gross mismanagement, and waste of corporate assets. The
Defendants filed a motion to dismiss the Amended Complaint on the ground that Carter
had failed to allege claims showing that pre-suit demand on CNO’s Board of Directors
was futile, as required by Delaware Chancery Court Rule 23.1. Following a hearing, the
trial court granted the motion and dismissed the Amended Complaint. Carter presents
several issues for review, which we consolidate and restate as:
1. Whether Carter has alleged particularized facts to show that pre-suit
demand was excused under Delaware law.
2. Whether Carter has alleged particularized facts to show bad faith by
the Director Defendants so as to excuse pre-suit demand pursuant to
the standard set by the exculpatory clause in the corporate charter.
We conclude that Carter has not alleged particularized facts to show that the
Director Defendants face a substantial likelihood of liability for the conduct described in
the Amended Complaint, nor has he alleged particularized facts to show that the Director
Defendants breached their duties of good faith and loyalty. Therefore, Carter has not
shown under Delaware law that pre-suit demand on the Board would have been futile.
2
As such, we conclude that the trial court did not err when it granted CNO’s motion to
dismiss for failure to make pre-suit demand on the board of directors. We affirm.1
FACTS AND PROCEDURAL HISTORY
The facts in this case are not contested. The trial court’s Order Granting
Defendants’ Motion to Dismiss describes the parties:
Plaintiff Carter is a shareholder of CNO. CNO is a publicly[ ]traded
insurance holding company headquartered in Carmel, Indiana, and is a
Delaware corporation. At the time this suit was filed, CNO’s Board of
Directors consisted of ten individuals, nine of whom were independent,
outside Board members. Eight of those ten Board members were named as
defendants: Hilliard, James, Long, Perry, Prieur, Schneider, Tokarz, and
Turner. Of those eight, Hilliard, James, Long, Perry, Schneider, Tokarz,
and Turner are non-employee, outside directors (collectively, the “Outside
Directors”). In addition to serving as a director, Prieur is CNO’s Chief
Executive Officer. Defendant Bonach is a current officer of CNO.[2] The
remaining defendants are former officers of CNO.
Appellant’s App. at 14.
On June 2, 2010, Carter filed a purported shareholder derivative action against the
Defendants, current and former CNO directors and officers. Hilliard, James, Long, Perry,
Prieur, Schneider, Tokarz, and Turner are currently CNO directors (“Director
Defendants”), and Kirsch, Bullis, Dubes, Hohmann, Bonach, Inanilan, and Wells are
former or present CNO officers (“Officer Defendants”). Carter had not made a demand
on CNO’s board of directors (“the Board”) before filing the complaint. On July 26,
Defendants filed a motion to dismiss for failure to make pre-suit demand on the Board.
On November 1, Carter filed the Amended Complaint. Regarding Defendants, the
Amended Complaint alleges, in relevant part:
1
We heard oral argument in this case on April 19, 2012.
2
Since the Amended Complaint was filed, Bonach has become the CEO of the Company.
3
57. By reason of their positions as officers, directors, and/or fiduciaries of
CNO and because of their ability to control the business and corporate
affairs of CNO, Defendants owed CNO and its shareholders fiduciary
obligations of good faith, loyalty, and candor, and were and are required to
use their utmost ability to control and manage CNO in a fair, just, honest,
and equitable manner. Defendants were and are required to act in
furtherance of the best interests of CNO and its shareholders so as to
benefit all shareholders equally and not in furtherance of their personal
interest or benefit. Each director and officer of the Company owes to CNO
and its shareholders a fiduciary duty to exercise good faith and diligence in
the administration of the affairs of the Company and in the use and
preservation of its property and assets, and the highest obligation of fair
dealing.
58. Defendants, because of their positions of control and authority as
directors and/or officers of CNO, were able to and did, directly and/or
indirectly, exercise control over the wrongful acts complained of herein.
Because of their advisory, executive, managerial, and directorial positions
with CNO, each of the Defendants had knowledge of material non-public
information regarding the Company.
59. To discharge their duties, the officers and directors of CNO were
required to exercise reasonable and prudent supervision over the
management, policies, practices and controls of the Company. By virtue of
such duties, the officers and directors of CNO were required to, among
other things:
a. Exercise good faith to ensure that the affairs of the
Company were conducted in an efficient, business-like
manner so as to make it possible to provide the highest
quality performance of their business;
b. Exercise good faith to ensure that the Company was
operated in a diligent, honest and prudent manner and
complied with all applicable federal and state laws, rules,
regulations and requirements, and all contractual obligations
including acting only within the scope of its legal authority;
c. When put on notice of problems with the Company’s
business practices and operations, exercise good faith in
taking appropriate action to correct the misconduct and
prevent its recurrence; and
d. Assure that a corporate information and reporting
system was in place, which the Board concluded is adequate
and is designed to provide senior management and the Board
with timely, accurate information sufficient to allow
4
management and the Board to reach informed judgments
concerning the Company’s compliance with applicable laws
and its business performance.
60. Pursuant to the Company’s Corporate Governance Guidelines (the
“Governance Guidelines”), each member of the Board is specifically
responsible for “monitoring management’s performance and adherence to
corporate standards.” Further, according to the Governance Guidelines,
each member of the Board is responsible for understanding, reviewing, and
monitoring implementation of the Company’s strategic plans, capital plans,
operating plans, and budgets to assure effective:
* Capital allocation
* Debt levels and structure
* Investment policies and practices
* Risk and vulnerability assessment and management
* Growth opportunities
* Engagement on central issues facing company
* Grasp of tradeoffs at the heart of the company
61. Moreover, pursuant to the Governance Guidelines, each member of the
Board is specifically responsible for “focusing on the integrity, quality and
clarity of the corporation’s financial reports and public disclosures and the
processes that produce them” and is also duty-bound to “review the
adequacy of the corporation’s compliance and reporting systems.” Once
again, in order to adequately fulfill these duties (and their duties under
Delaware law), the Board was required to ensure that sufficient information
reporting systems were designed and implemented such that they could
adequately fulfill their oversight responsibilities.
62. Pursuant to the Audit Committee’s Charter, the members of the Audit
Committee are specifically required, inter alia, to:
a. Review the adequacy of the Company’s internal
controls that could materially affect the Company’s financial
statements;
b. Review and discuss, prior to public dissemination, the
annual audited and quarterly unaudited financial statements
with management;
c. Review and discuss earnings releases;
d. Review the results of internal audits and discuss
related significant internal control matters with the internal
auditors and management, including significant reports to
5
management prepared by the internal auditors and
management’s responses;
e. Review significant accounting and reporting issues and
discuss with management and the independent auditor their
impact on the Company financial statements; and
f. Review the adequacy and effectiveness of the
Company’s procedures to ensure compliance with legal and
regulatory requirements.
63. Pursuant to the Governance Committee’s Charter, the members of the
Governance Committee are specifically required, inter alia, to:
a. Consider matters of corporate governance and to
create, maintain and periodically review the Company’s
corporate governance principles and code of ethics;
b. Adopt policies designed to encourage the highest
levels of corporate conduct by the Board, the Company and
its officers, employees, and agents; and
c. Consider the Company’s corporate strategy, including
the evaluation of any significant acquisitions or divestitures
or other material transactions involving the Company.
64. Pursuant to the Compensation Committee’s Charter, the members of
the Compensation Committee are specifically required, inter alia, to:
a. Establish annual and long-term corporate and
individual performance goals and objectives for the
Company’s executive officers and key senior officers;
b. Recommend to the Board the compensation of the
CEO;
c. Approve the compensation for other executive officers
and key senior officers; and
d. Approve the overall compensation policy including
cash-based incentive compensation plans and equity-based
compensation plans.
Id. at 38-44. After detailing certain aspects of Defendants’ conduct beginning in 2003,
Carter made the following allegations to show that demand is excused in this case:
227.a. A majority of the members of the Board were aware of, or should
have been aware of, numerous red flags regarding the Company’s serious
problems with its LTC [Long Term Care] business segment, including
claims documentation issues, the failure to adequately set reserves, data
6
integrity issues, budget problems, and market conduct violations. As such,
a majority of the current Board knew[] or was recklessly indifferent to the
facts that, among other things: (i) multiple internal control failures caused
claim loss/reserve data to be inherently unreliable; and (ii) Defendants were
systematically understating reserves; which (iii) caused the Company’s
financial statements to be artificially and materially overstated. Notably,
half of the Company’s current directors (defendants Hilliard, Schneider,
Tokarz, Turner, and Perry) have served as directors of the Company since
2004 or prior to 2004. In particular, as alleged herein, by 2003, the Board
was meeting on a quarterly basis in the “War Room,” to specifically discuss
issues with LTC with the Company’s senior officers, and these meetings
began to occur with increasing frequency in 2005. DW1 [confidential
Defense Witness 1] has also stated that LTC Reports prepared by LTC
personnel regarding the LTC business containing a range of information
including claims issues, reserve issues, budget problems, and market
conduct violations were regularly provided to the Board in connection with
the War Room meetings, along with comprehensive compliance reports
personally prepared by DW1 (which “often” dealt, at least in part, with the
Company’s ongoing LTC issues). Moreover, as discussed above, during a
nine[-]month period spanning between [sic] 2004 and 2005, a
comprehensive internal audit of the LTC segment was performed, and after
the audit was concluded sometime in 2005, as Audit Committee members,
defendants Schneider, Perry, and Turner received detailed results of this
audit. Despite clearly being placed on notice of serious issues regarding
LTC which were causing the Company’s reserves to be inadequately set,
defendants Hilliard, Schneider, Tokarz, Perry, and Turner consciously
disregarded their fiduciary duties to CNO when, under their direction, the
Company’s ongoing LTC issues were not addressed and the Company
continued to inadequately set reserves over a multi-year period. Thus,
demand was not required upon Hilliard, Schneider, Tokarz, Perry, and
Turner. Because Hilliard, Schneider, Perry and Turner comprise a majority
of the directors on the Board (for demand futility purposes), demand is
excused;
227.b. Defendants Hilliard, Schneider, Tokarz, Turner, and Perry are also
interested in a demand because they engaged in conduct which is not
protected by the business judgment rule in connection with their decision to
not remedy the serious problems known to them through the various “red
flags” described above. These directors were clearly placed on notice for
years of the Company’s problems, yet chose to do nothing to remedy them.
Thus, demand is excused as to Hilliard, Schneider, Tokarz, Turner, and
Perry, and because they comprise a majority of the Board, demand is
excused;
7
227.c. Demand is further excused because the Board failed to exercise its
good faith judgment to ensure that the Company’s information and
reporting system was in concept and design adequate to assure the Board
that appropriate information will come to its attention in a timely manner as
a matter of ordinary operations. In particular, it is unquestioned that the
Board had actual knowledge of the Company’s LTC problems and failed to
do anything to prevent and/or remedy them[;] however[,] this knowledge
did not come as a result of an adequate system of information[-]reporting
during the ordinary course of operations. Rather[,] this information came
to the Board’s attention as a result of various audits, special meetings, and
government investigations. Had the Board properly ensured that an
adequate information[-]reporting system was in place from the beginning,
as they were required to do under Delaware law, the serious problems with
the Company’s LTC segment could have been remedied before the
Company suffered the substantial harm alleged herein. Thus, demand is
futile;
227.d. Demand is also excused because, as detailed herein, the Board
intentionally misled the Multistate Examiners or permitted others to do so,
thus clearly illustrating their hostility to the relief sought in this action.
Accordingly, a reasonable stockholder would not believe, based on the
confidential witness testimony detailed above, that the Board would have
been able to properly and impartially consider a demand in good faith.
Thus, demand is futile;
227.e. Every member of the Board is required to comply with the
Company’s Corporate Governance Guidelines. The Corporate Governance
Guidelines require each of the Company’s directors to monitor
“management’s performance and adherence to corporate standards.”
Further, the Corporate Governance Guidelines requires [sic] directors to
focus “on the integrity, quality and clarity of the corporation’s financial
reports and public disclosures and the processes that produce them.”
Therefore, defendants Hilliard, James, Long, Perry, Prieur, Schneider,
Tokarz, and Turner face a substantial likelihood of liability for their
breaches of fiduciary duties and any demand upon them is futile;
227.f. At times relevant hereto, defendants Long, Schneider, and Turner
served as members of the Audit Committee. Pursuant to the Audit
Committee Charter, members of the Audit Committee are charged with
oversight of the integrity of the Company’s financial statements, public
disclosures and financial reporting process. Defendants Long, Schneider,
and Turner breached their fiduciary duties of due care, loyalty, and good
faith, because the Audit Committee permitted the above false and
misleading statements to be made, which eventually led to a restatement.
8
Therefore, defendants Long, Schneider, and Turner face a substantial
likelihood of liability for their breach of fiduciary duties and any demand
upon them is futile;
227.g. At times relevant hereto, defendants Perry and Tokarz served as
members of the Governance Committee. Pursuant to the Governance
Committee Charter, members of the Governance Committee are charged
with adopting policies designed to encourage the highest levels of corporate
conduct by the Board, the Company and its officers, employees and agents.
Defendants Perry and Tokarz breached their fiduciary duties of due care,
loyalty, and good faith because the Governance Committee permitted the
pervasive misconduct described above to go undisclosed. Therefore,
defendants Perry and Tokarz face a substantial likelihood of liability for
their breach of fiduciary duties and any demand upon them is futile;
227.h. Defendants Tokarz, Perry, and James are interested as a result of
their conduct on the Compensation Committee. Pursuant to the Company’s
Compensation Committee Charter, directors on the Compensation
Committee are responsible for, inter alia, reviewing and approving the
compensation of the Company’s senior officers in conduction with
previously established performance metrics. Defendants Tokarz, Perry, and
James breached their fiduciary duties of due care, loyalty, and good faith,
because the Compensation Committee, inter alia, awarded the above-
discussed compensation based on admittedly false financial results as
evidenced by the Company’s need for a restatement. Further, the
Compensation Committee has done nothing to rectify its above failures.
Therefore, defendants Tokarz, Perry, and James (if not the entire Board)
each face a substantial likelihood of liability for their breach of fiduciary
duties and any demand upon them is futile; and
227.i. The principal professional occupation of defendant Prieur is his
employment with CNO as its CEO, pursuant to which he has received and
continues to receive substantial monetary compensation and other valuable
benefits. As a result, in the Company’s most recent annual proxy statement
filed in April 2010, the Board has conceded that Prieur is a non-
independent director. Thus, defendant Prieur lacks independence,
rendering him incapable of impartially considering a demand to commence
and vigorously prosecute this action.
Id. at 103-08.
On December 17, Defendants filed a motion to dismiss the Amended Complaint
under Delaware and Indiana law, alleging that Carter had not shown that pre-suit demand
9
was excused. On April 21, 2011, the trial court held oral argument on the motion to
dismiss. And on June 2, the trial court entered its order granting that motion and
dismissing the Amended Complaint (“the Order”). The Order provides, in relevant part:
B. The Allegations
CNO, through its subsidiaries, engages in the development,
marketing, and administration of supplemental health insurance, annuity,
individual life insurance, and other insurance products for senior and
middle-income markets in the United States. Carter’s Amended Complaint
focuses principally on the Company’s Long Term Care run-off business
(“LTC”) during the period from August 2005 through March 2008. Among
other things, Carter claims that Defendants concealed problems with the
Company’s claims handling process[] and that those problems impacted
CNO’s ability to accurately determine its liabilities and establish reserves.
Carter alleges that numerous improper claims practices occurred in the LTC
business, which in turn distorted and understated the Company’s true
claims exposure. Carter further alleges that the [D]efendants issued a series
of false and misleading statements.
***
On February 25, 2008, CNO announced that it would delay the filing
of its Form 10-K for the year ended December 31, 2007, and restate its
financial results for 2005 and 2006. On March 28, 2008[,] CNO finalized
its restatement. Thereafter, CNO announced on August 11, 2008[,] its plan
to transfer LTC to an independent trust and contributed capital to the trust
when LTC was transferred.
Carter alleges that the Company was harmed by these events. He
further alleges that he did not make a demand on CNO’s Board before
filing suit because it would have been futile to do so.
C. The Related Federal Securities Litigation
Carter based this shareholder derivative litigation largely on prior
pending federal securities litigation filed in the United States District Court
for the Southern District of New York. That litigation is styled Plumbers &
Pipefitters Local Union No. 719 Pension Trust Fund v. Conseco, Inc., No.
09-CV-6966 (S.D.N.Y.). The majority of Carter’s confidential witness
allegations are taken from the Plumbers complaint. . . . Plumbers names
only the officer defendants from this litigation. It does not name any of the
10
Outside Directors as defendants or direct any of its confidential witness
allegations at those individuals.[fn]
[Footnote: Defendants point out that Carter modified all
but one of the confidential witness allegations from Plumbers
when he incorporated them into the complaints he has filed
here, changing the subject of the allegations to include the
Outside Director defendants.]
The Plumbers matter was dismissed March 30, 2011. In dismissing
that litigation, United States District Court Judge John G. Koetl held that
the information that the CNO officer defendants allegedly possessed
relating to LTC’s prospects, reserves, and record keeping did not “support[]
a strong and plausible inference that the [defendants] made any of the
challenged public statements with knowledge that they were false or with
reckless indifference[.] . . . To the contrary, nearly all of this information
was addressed in some form in the company’s lengthy and thorough public
disclosures.” Plumbers & Pipefitters Local Union No. 719 Pension Trust
Fund v. Conseco, Inc., 09 Civ. 6966 (JGK), 2011 U.S. Dist. LEXIS 34241,
at *57 (S.D.N.Y. Mar. 30, 2011). Judge Koetl further held that the
Plumbers complaint was “wholly devoid of any particularized allegation
connecting the individual defendants to information suggesting unlawful
activity within the company[,]” (id. at *62-*63), and did not support the
inference that anyone knowingly made material misstatements[,] (id. at
*64-*65). Judge Koetl also detailed inadequacies of the confidential
witness allegations on which Carter heavily relies here.
Appellant’s App. at 14-17 (some alterations in original). In sum, the trial court granted
the motion to dismiss, finding that Carter had not shown that demand was futile as
required by Delaware law. Carter now appeals.
DISCUSSION AND DECISION
Derivative actions are suits “‘asserted by a shareholder on the corporation’s behalf
against a third party . . . because of the corporation’s failure to take some action against
the third party.’” G&N Aircraft, Inc. v. Boehm, 743 N.E.2d 227, 234 (Ind. 2001)
(quoting Black’s Law Dictionary 455 (7th Ed. 1999)). They are brought “to redress an
injury sustained by, or enforce a duty owed to, a corporation.” Id. (citation and internal
11
quotation marks omitted). Derivative actions are brought in the name of the corporation
and are usually governed by Trial Rule 23.1 and Indiana Code Section 23-1-32-1.
Before filing a derivative action, a plaintiff must make a demand on the board of
directors to take action against the third party on behalf of the corporation as sought in
the complaint. Indiana Trial Rule 23.1 provides: “[T]he complaint shall also allege with
particularity the efforts, if any, made by the plaintiff, to obtain the action he desires from
the directors or comparable authority and the reasons for his failure to obtain the action or
for not making the effort.” The issues presented in this case turn on whether the plaintiff
in a shareholder derivative action has pleaded facts sufficient to avoid the requirement
that he make a demand on the board before filing suit.
The substantive law on demand is the law of the state of incorporation. Piven v.
ITT Corp. (In re ITT Derivative Litig.), 932 N.E.2d 664, 667 (Ind. 2010) (citing Kamen
v. Kemper Fin. Servs. Inc., 500 U.S. 90 (1991)). CNO Financial is incorporated in
Delaware. Therefore, while we apply the procedural rules of Indiana, we must consider
Delaware substantive law to determine whether demand is excused in this case. See id.
Delaware Court of Chancery Rule 23.1 is almost identical to Indiana Trial Rule 23.1 and
also requires the shareholder in a derivative action to make a demand on the board before
filing suit. That rule, which is part of the substantive law of Delaware on demand futility,
provides in relevant part:
In a derivative action brought by one or more shareholders or members to
enforce a right of a corporation . . . , the corporation . . . having failed to
enforce a right which may properly be asserted by it, the complaint . . .
shall also allege with particularity the efforts, if any, made by the plaintiff
to obtain the action the plaintiff desires from the directors or comparable
12
authority and the reasons for his failure to obtain the action or for not
making the effort.
Del. Ch. Ct. R. 23.1. The Delaware Supreme Court has explained the reason for that rule:
It is a fundamental principle of the Delaware General Corporation
Law that “[t]he business and affairs of every corporation organized under
this chapter shall be managed by or under the direction of a board of
directors . . . .” Thus, “by its very nature [a] derivative action impinges on
the managerial freedom of directors.” Therefore, the right of a stockholder
to prosecute a derivative suit is limited to situations where either the
stockholder has demanded the directors pursue a corporate claim and the
directors have wrongfully refused to do so, or where demand is excused
because the directors are incapable of making an impartial decision
regarding whether to institute such litigation.
Stone v. Ritter, 911 A.2d 362, 366-67 (Del. 2006) (alterations in original) (citations
omitted).
Appellate review of decisions applying Delaware Chancery Court Rule 23.1 is de
novo. Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000). Here, the Defendants used a
Rule 12(b)(6) motion to dismiss as the vehicle for alleging Carter’s failure to meet the
pleading requirements discussed below. Our review of a trial court’s grant or denial of a
motion to dismiss for failure to state a claim is similarly de novo.
PricewaterhouseCoopers, LLP v. Massey, 860 N.E.2d 1252, 1256 (Ind. Ct. App. 2007),
trans. denied.
Pleading Burden
A plaintiff seeking to avoid the demand requirement of Delaware Chancery Court
Rule 23.1 faces a high pleading burden. That burden has been described as follows:
The demand requirement is not a mere procedural formality, but rather an
important stricture of substantive law. Court of Chancery Rule 23.1
requires that the complaint allege “with particularity” the reasons for the
plaintiff’s failure to make a demand on the board. This standard is more
13
stringent than the pleading standard under Court of Chancery Rule
12(b)(6). Thus, it is plaintiff’s burden to plead, with allegations of
particularized facts, why making a demand would have been futile.
Edward P. Welch et al., Folk on the Delaware General Corporation Law § 327.4.2.2, at
GCL-XIII-83 to -84 (5th ed. 2012) (footnotes omitted). Conclusory allegations of fact or
law that are not supported by allegations of specific fact may not be taken as true.
Brehm, 746 A.2d at 254.
Rule 23.1 is not satisfied by conclusory statements or mere notice pleading.
On the other hand, the pleader is not required to plead evidence. What the
pleader must set forth are particularized factual statements that are essential
to the claim. Such facts are sometimes referred to as “ultimate facts,”
“principal facts” or “elemental facts.” Nevertheless, the particularized
factual statements that are required to comply with the Rule 23.1 pleading
rules must also comply with the mandate of Chancery Rule 8(e) that they
be “simple, concise and direct.” A prolix complaint larded with conclusory
language . . . does not comply with these fundamental pleading mandates.
Id. (footnotes omitted).
Nevertheless, the “reasonable doubt” standard of Aronson[ v. Lewis,
473 A.2d 805 (Del. 1984), discussed below,] unavoidably calls upon the
trial court to make a decision that is highly particular and involves informed
judgment. That judgment will be factual in nature and will determine
whether the accumulation of all relevant factors pleaded creates a
reasonable doubt as to the availability of business judgment protection.
Delaware courts have refused to establish a particular “reasonable doubt”
standard, but instead employ an objective analysis to determine whether a
plaintiff’s complaint contains the facts necessary to support a finding of
reasonable doubt.
Welch, supra, § 327.4.2.2, at GCL-XIII-84 (footnotes omitted). “The pre-suit demand
futility analysis must be conducted for each claim in a stockholder derivative action.” Id.
at GCL-XIII-85.
14
Aronson Test
In cases based on a particular decision or transaction of a board of directors, the
test for determining whether demand is excused is set out in Aronson v. Lewis.3 Under
that test, demand will be excused only if the plaintiff alleges in the complaint
particularized facts creating a reasonable doubt that “(1) the directors are disinterested
and independent [or that] (2) the challenged transaction was otherwise the product of a
valid exercise of business judgment.” 473 A.2d at 814. Under the first prong of
Aronson, a director is “‘interested if he will be materially affected, either to his benefit or
detriment, by a decision of the board, in a manner not shared by the corporation and the
stockholders.’” Welch, supra, § 327.4.2.4.1., at GCL-XIII-89 (quoting Seminaris v.
Landa, 662 A.2d 1350, 1354 (Del. Ch. 1995)).4 Under the second prong of the Aronson
test, the shareholder plaintiff must demonstrate a reasonable doubt that the challenged
transaction was otherwise the product of a valid exercise of business judgment. Aronson,
473 A.2d at 814.
Rales Test
In some cases, the conduct complained of in the derivative action may not be
based on a particular business decision or transaction. For example, the shareholder
plaintiff may allege that the corporation has been damaged by the board’s failure to act.
“Where there is no conscious decision by directors to act or refrain from acting, the
3
Carter does not point to one or more particular transactions as the basis for his claims.
Therefore, the Aronson test does not apply. However, it is described here because it is the foundation for
the evolution of the pleading standard tests that followed.
4
With the exception of Prieur, Carter does not contend that the Director Defendants were not
independent, only that they are interested.
15
business judgment rule has no application.” Rales v. Blasband, 634 A.2d 927, 934 (Del.
1993), abrogated on other grounds by Hamilton Partners, L.P. v. England, 11 A.3d 1180,
1207 (Del. Ch. 2010), (citing Aronson, 473 A.2d at 813). “Instead, it is appropriate in
these situations to examine whether the board that would be addressing the demand can
impartially consider its merits without being influenced by improper considerations.”
Rales, 634 A.2d at 934. In such cases, the court
must determine whether or not the particularized factual allegations of a
derivative stockholder 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. If the derivative plaintiff satisfies this burden,
then demand will be excused as futile.
Id. at 935. The parties agree that the Rales test applies in this case.
Issue One: Demand Futility
In paragraph 227 of the Amended Complaint, Carter sets out nine reasons that
demand on the board was not required before filing his complaint. We consider each of
the demand futility allegations in turn under the Rales test. Again, under that test we
must determine whether Carter’s Amended Complaint alleges particularized factual
allegations creating a reasonable doubt that, as of the time the Amended Complaint was
filed, a majority of the Director Defendants could have properly exercised their
independent and disinterested business judgment in responding to a demand. See id. at
935. In other words, here we must review the Amended Complaint to determine whether
Carter has made particularized factual allegations to show a reasonable doubt that a
majority of the ten-member Board, at least six of them, could have impartially considered
16
the merits of demand without being influenced by improper considerations. See id. at
934.
“A director is considered interested where he or she will receive a personal
financial benefit from a transaction that is not equally shared by the stockholders.” Rales,
634 A.2d at 936. “Directorial interest also exists where a corporate decision will have a
materially detrimental impact on a director, but not on the corporation and the
stockholders.” Id. Additionally, the mere threat of personal liability is insufficient to
show that a director is interested. See id. But a director’s interest may be demonstrated
by showing that that director faces a substantial likelihood of liability. See id.
Carter first contends that demand on the board was excused because:
227.a. A majority of the members of the Board were aware of, or should
have been aware of, numerous red flags regarding the Company’s serious
problems with its LTC business segment, including claims documentation
issues, the failure to adequately set reserves, data integrity issues, budget
problems, and market conduct violations. As such, a majority of the
current Board knew[] or was recklessly indifferent to facts that, among
other things: (i) multiple internal control failures caused claim loss/reserve
data to be inherently unreliable; and (ii) Defendants were systematically
understating reserves; which (iii) caused the Company’s financial
statements to be artificially and materially overstated. Notably, half of the
Company’s current directors (defendants Hilliard, Schneider, Tokarz,
Turner, and Perry) have served as directors of the Company since 2004 or
prior to 2004. In particular, as alleged herein, by 2003, the Board was
meeting on a quarterly basis in the “War Room,” to specifically discuss
issues with LTC with the Company’s senior officers, and these meetings
began to occur with increasing frequency in 2005. [Confidential Defense
Witness 1 (“DW1”)] has also stated that LTC Reports prepared by LTC
personnel regarding the LTC business containing a range of information
including claims issues, reserve issues, budget problems, and market
conduct violations were regularly provided to the Board in connection with
the War Room meetings, along with comprehensive compliance reports
personally prepared by DW1 (which “often” dealt, at least in part, with the
Company’s ongoing LTC issues). Moreover, as discussed above, during
the nine[-]month period spanning between [sic] 2004 and 2005, a
17
comprehensive internal audit of the LTC segment was performed, and after
the audit was concluded sometime in 2005, as Audit Committee members,
defendants Schneider, Perry, and Turner received detailed results of this
audit. Despite clearly being placed on notice of serious issues regarding
LTC which were causing the Company’s reserves to be inadequately set,
defendants Hilliard, Schneider, Tokarz, Perry, and Turner consciously
disregarded their fiduciary duties to CNO when, under their direction, the
Company’s ongoing LTC issues were not addressed and the Company
continued to inadequately set reserves over a multi-year period. Thus,
demand was not required upon Hilliard, Schneider, Tokarz, Perry and
Turner. Because Hilliard, Schneider, Tokarz, Perry and Turner comprise a
majority of the directors on the Board (for demand futility purposes),
demand is excused[.]
227.b. Defendants Hilliard, Schneider, Tokarz, Perry and Turner are also
interested in demand because they engaged in conduct which is not
protected by the business judgment rule in connection with their decision
not to remedy the serious problems known to them through the various “red
flags” described above. These directors were clearly placed on notice for
years of the Company’s problems, yet chose to do nothing to remedy them.
This decision is not a protected business judgment. Thus, demand is
excused as to Hilliard, Schneider, Tokarz, Turner, and Perry, and because
they comprise a majority of the Board, demand is excused[.]
Appellant’s App. at 103-05. Details supporting these allegations are found earlier in the
Amended Complaint. But Carter has not stated anywhere in the Amended Complaint
particularized facts on which we could conclude that a majority of the Board members, or
any of them, received a personal financial benefit or detriment not shared by the
stockholders. Nor does the Amended Complaint allege facts to show that the named
directors face a substantial likelihood of liability arising from their alleged failure to
“remedy serious problems known to them through the various ‘red flags’ described
above.” Id.
In sum, the conclusory allegations in these sub-paragraphs are insufficient to
satisfy the Rales test. To the extent Carter contends that the business judgment rule
18
offers no protection, that rule has no application under the Rales test in any event. Rales,
634 A.2d at 934. Sub-paragraphs 227.a. and 227.b. do not contain particularized
allegations of fact to show that the Director Defendants were not disinterested or faced a
substantial risk of liability for their performance as directors. Therefore, Carter has not
shown in sub-paragraphs 227.a. or 227.b. that demand was futile.
Carter next contends:
227.c. Demand is further excused because the Board failed to exercise its
good faith judgment to ensure that the Company’s information and
reporting system was in concept and design adequate to assure the Board
that appropriate information will come to its attention in a timely manner as
a matter of ordinary operations. In particular, it is unquestioned that the
Board had actual knowledge of the Company’s LTC problems and failed to
do anything to prevent and/or remedy them[;] however[,] this knowledge
did not come as a result of an adequate system of information[-]reporting
during the ordinary course of operations. Rather[,] this information came
to the Board’s attention as a result of various audits, special meetings, and
government investigations. Had the Board properly ensured that an
adequate information[-]reporting system was in place from the beginning,
as they were required to do under Delaware law, the serious problems with
the Company’s LTC segment could have been remedied before the
Company suffered the substantial harm alleged herein. Thus, demand is
futile[.]
Appellant’s App. at 105-06. Again, Carter has not alleged, here or elsewhere in the
Amended Complaint, that a majority of the Directors were interested or faced a
substantial likelihood of liability for the conduct described in sub-paragraph 227.c. Nor
does this sub-paragraph summarize conduct that is detailed elsewhere in the Amended
Complaint for which we could conclude that the Directors were interested or faced a
substantial likelihood of liability. Thus, the demand futility allegations in sub-paragraph
227.c. also fail the Rales test.
Carter further contends that:
19
227.d. Demand is also excused because, as detailed herein, the Board
intentionally misled the Multistate Examiners or permitted others to do so,
thus clearly illustrating their hostility to the relief sought in this action.
Accordingly, a reasonable stockholder would not believe, based on the
confidential witness testimony detailed above, that the Board would have
been able to properly and impartially consider a demand in good faith.
Thus, demand is futile[.]
Appellant’s App. at 106. With regard to the Multistate Examination, Carter alleges that
“false and misleading information was provided to the Multistate Examiners,” and he
details the nature of the misinformation in paragraphs 165 through 170 of the Amended
Complaint. Id. at 75. There Carter alleges that “Defendants falsely reported”
information to the Multistate Examiners and “misrepresented . . . that the inappropriate
use of [a certain claims processing method, the No Letter Close,] was discontinued by
May 2007[.]” Id. at 78. But the complaint does not allege that the Board’s duties
included providing information to or in any way interacting with the Multistate
Examiners. Such work was likely the responsibility of the Company’s senior officers and
their subordinates. And the Complaint does not allege with particularity facts to show
that the Board was aware and “permitted others” to mislead or misinform the Multistate
Examiners. Id. at 106.
The allegations in sub-paragraph 227.d. are conclusory and do not show that the
Director Defendants were interested or faced a substantial risk of liability with regard to
the Multistate Examination. And the Multistate Examiners did not find any particular
person or persons liable for the problems they found at Conseco. As such, Carter has not
shown that demand is excused as to the Board’s conduct regarding the Multistate
Examination.
20
With regard to the Board’s duties under the corporate Governance Guidelines,
Carter alleges:
227.e. Every member of the Board is required to comply with the
Company’s Corporate Governance Guidelines. The Corporate Governance
Guidelines require each of the Company’s directors to monitor
“management’s performance and adherence to corporate standards.”
Further, the Corporate Governance Guidelines requires [sic] directors to
focus “on the integrity, quality and clarity of the corporation’s financial
reports and public disclosures and the processes that produce them.”
Therefore, defendants Hilliard, James, Long, Perry, Prieur, Schneider,
Tokarz, and Turner face a substantial likelihood of liability for their
breaches of fiduciary duties and any demand upon them is futile[.]
Appellant’s App. at 106. In sum, Carter alleges that the named Director Defendants
faced a substantial risk of liability because they did not perform their duties on the board
in compliance with the Corporate Governance Guidelines. But elsewhere the Amended
Complaint alleges that the Board was aware of and met to find solutions for the problems
plaguing the LTC segment. Specifically, beginning in 2003 the Director Defendants met
quarterly “to address[] multiple and serious problems with LTC[.]” Id. at 63. Those
meetings increased in frequency beginning in 2005. The meetings to address the
problems in the LTC segment demonstrate that the Board was attempting to monitor
“management’s performance and adherence to corporate standards.” Id. Moreover,
following the Multistate Examination, the company agreed to a settlement under which it
agreed to pay more than $32 million in fines and costs, $30 million of which was
dedicated to claims-handling improvements and restitution. Again, Carter has not alleged
with particularity facts to show that the Director Defendants did not perform their duties
in compliance with the Corporate Governance Guidelines. As such, Carter has not shown
that the Director Defendants are subject to a substantial likelihood of liability for the
21
conduct described in sub-paragraph 227.e. and, therefore, that sub-paragraph does not
show that demand was excused.
Finally, Carter asserts the following three claims based on the named Directors’
memberships on the Governance Committee, the Audit Committee, and the
Compensation Committee respectively as bases for excusing demand:
227.f. At times relevant hereto, defendants Long, Schneider, and Turner
served as members of the Audit Committee. Pursuant to the Audit
Committee Charter, members of the Audit Committee are charged with
oversight of the integrity of the Company’s financial statements, public
disclosures and financial reporting process. Defendants Long, Schneider,
and Turner breached their fiduciary duties of due care, loyalty, and good
faith, because the Audit Committee permitted the above false and
misleading statements to be made, which eventually led to a restatement.
Therefore, defendants Long, Schneider, and Turner face a substantial
likelihood of liability for their breach of fiduciary duties and any demand
upon them is futile[.]
227.g. At times relevant hereto, defendants Perry and Tokarz served as
members of the Governance Committee. Pursuant to the Governance
Committee Charter, members of the Governance Committee are charged
with adopting policies designed to encourage the highest levels of corporate
conduct by the Board, the Company and its officers, employees and agents.
Defendants Perry and Tokarz breached their fiduciary duties of due care,
loyalty, and good faith because the Governance Committee permitted the
pervasive misconduct described above to go undisclosed. Therefore,
defendants Perry and Tokarz face a substantial likelihood of liability for
their breach of fiduciary duties and any demand upon them is futile;
227.h. Defendants Tokarz, Perry, and James are interested as a result of
their conduct on the Compensation Committee. Pursuant to the Company’s
Compensation Committee Charter, directors on the Compensation
Committee are responsible for, inter alia, reviewing and approving the
compensation of the Company’s senior officers in conduction with
previously established performance metrics. Defendants Tokarz, Perry, and
James breached their fiduciary duties of due care, loyalty, and good faith,
because the Compensation Committee, inter alia, awarded the above-
discussed compensation based on admittedly false financial results as
evidenced by the Company’s need for a restatement. Further, the
Compensation Committee has done nothing to rectify its above failures.
22
Therefore, defendants Tokarz, Perry, and James (if not the entire Board)
each face a substantial likelihood of liability for their breach of fiduciary
duties and any demand upon them is futile[.]
Id. at 106-08. Even if we were to conclude that the detailed factual allegations preceding
paragraph 227 in the Amended Complaint support Carter’s contention that the named
Directors breached their respective Committee duties, Carter has not alleged with
particularity facts to show that the named Directors faced a substantial likelihood of
liability as a result of such breaches. Therefore, Carter has failed in these sub-paragraphs
to show that demand is excused under Rales.5
In sum, the Amended Complaint does not include particularized factual allegations
that would create a reasonable doubt as to whether a majority of the Director Defendants
could have properly exercised their disinterested business judgment in responding to a
demand. See Rales, 634 A.2d at 935. Nor do the allegations show that the Director
Defendants face a substantial likelihood of liability for the inadequate conduct set out in
the Amended Complaint. See id. As such, Carter has not shown that demand was
excused under Rales.6
5
Carter makes a final allegation regarding demand, namely that demand is excused as to Prieur
because Prieur, as a CEO of the Company, is not independent. Defendants concede that Prieur is not
independent. We conclude that Carter has not shown that any other Directors are interested or not
independent, and demand could not be excused based solely on Prieur not being an independent director.
6
In their briefs and at oral argument, the parties also debated whether the Amended Complaint
states oversight claims under In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del.
Ch. 1996). Oversight or Caremark claims arise where a claim is not based on a particular transaction or
decision but, instead, on an “unconsidered failure of the board to act in circumstances in which due
attention would, arguably, have prevented the loss.” Caremark, 698 A.2d at 967. Caremark claims must
satisfy an even higher burden for demand to be excused, namely, “(1) that the directors knew or (2)
should have known that violations of law were occurring and, in either event, (3) that the directors took
no steps in a good faith effort to prevent or remedy that situation, and (4) that such failure proximately
resulted in the losses complained of[.]” Id. at 971. But the Rales test also applies to Caremark claims.
Wood v. Baum, 953 A.2d 136, 140 (Del. 2008). Because we conclude that Carter’s Amended Complaint
23
Issue Two: Exculpatory Provision
Carter also contends that the trial court erred “by even considering, much less
relying on, CNO’s exculpatory provision in granting the motion” to dismiss. Appellant’s
Brief at 39. As discussed below, where a corporate charter contains an exculpatory
provision, a derivative action plaintiff faces a higher and slightly different burden to
avoid demand than under the Rales test. Carter argues that the burden imposed by the
inclusion of an exculpatory provision in a corporate charter does not apply at the motion
to dismiss stage and, even if that higher burden may be considered, that he has met that
burden. Assuming for the sake of argument that the exculpatory provision applies to the
claims in the Amended Complaint, we consider whether the Amended Complaint alleges
particularized facts to show that demand would have been futile under the higher and
slightly different standard that arises under CNO’s exculpatory clause.7
CNO’s certificate of incorporation contains an exculpatory provision provided for
in Delaware Code title 8, section 102(b)(7).8 In such cases, director defendants are
“exculpate[d] from personal liability for violations of fiduciary duty, except for, among
has not satisfied the Rales test for excusing demand, we need not consider whether the allegations in the
Amended Complaint satisfy the even higher demand futility burden imposed on oversight claims.
7
If we were to conclude that Carter’s Amended Complaint asserts claims that are not subject to
the higher pleading burden under the exculpatory clause, we would be left to evaluate his claims under
Rales. We have already determined that Carter has not shown that demand was futile under Rales.
8
Delaware Code title 8, section 102(b)(7) provides, in relevant part, that a certificate of
incorporation may include
[a] provision eliminating or limiting the personal liability of a director to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provision shall not eliminate or limit the liability of a director: (i) For
any breach of the director’s duty of loyalty to the corporation or its stockholders; (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; . . or (iv) for any transaction from which the director derived an
improper personal benefit. . . . .
24
other things, breaches of the duty of loyalty or actions or omissions not in good faith or
that involve intentional misconduct or a knowing violation of the law.” In re Citigroup
Inc. S’holder Derivative Litig., 964 A.2d 106, 124 (Del. Ch. 2009). “Such a provision
can exculpate directors from monetary liability for a breach of the duty of care, but not
for conduct that is not in good faith or a breach of the duty of loyalty.” Stone, 911 A.2d
at 367. Where, as here, a corporation has included a § 102(b)(7) exculpatory clause in
the certificate of incorporation, “a serious threat of liability may only be found to exist if
the plaintiff pleads a non-exculpated claim against the directors based on particularized
facts.” In re Citigroup, 964 A.2d at 124. “[T]he risk of liability does not disable
[directors] from considering a demand unless particularized pleading permits the court to
conclude that there is a substantial likelihood that the directors’ conduct falls outside the
liability exemption.” Welch, supra, § 327.4.2.4.2, at GCL-XIII-94.
The standard for assessing oversight liability under Caremark and the standard for
assessing a disinterested director’s decision under the duty of care when the company has
adopted a § 102(b)(7) exculpatory provision are similar. Id. at 125.
In either case, a plaintiff can show that the director defendants will be liable
if their acts or omissions constitute bad faith. A plaintiff can show bad
faith conduct by, for example, properly alleging particularized facts that
show that a director consciously disregarded an obligation to be reasonably
informed about the business and its risks or consciously disregarded the
duty to monitor and oversee the business.”
Id. That is to say, if, after applying the Rales test a court determines that “‘a majority of
the board is impartial . . . ,’ the court must then ‘consider whether the complaint sets forth
particularized facts that plead a non-exculpated claim of breach of fiduciary duty against
a majority of the board, thereby stripping away their first-blush veneer of impartiality.’”
25
King v. Baldino, 648 F. Supp. 2d 609, 617 (citing Guttman v. Huang, 823 A.2d 492, 501
(Del. Ch. 2003)) (footnote omitted). In Issue One above, we applied the Rales test and
determined that Carter has not shown a reasonable likelihood that the Director
Defendants were interested. Next we must consider whether Carter has shown the lack of
impartiality by demonstrating that the Director Defendants’ conduct constituted a breach
of the duty of good faith or loyalty.
We first observe that Carter’s entire analysis regarding his burden in light of the
exculpatory clause is found in only two paragraphs of his Appellant’s Brief. And those
paragraphs contain absolutely no citations to the record to point out which claims support
the argument. We remind counsel that analysis of an issue on appeal must be supported
in relevant part by citations to the Appendix or parts of the Record on Appeal relied on,
and failure to do so can result in waiver. Ind. Appellate Rule 46(A)(8)(a). And we will
not search the record to find a basis for a party’s argument. Nealy v. Am. Family Mut.
Ins., 910 N.E.2d 842, 845 n.2 (Ind. Ct. App. 2009), trans. denied. Waiver
notwithstanding, we exercise our discretion to consider the merits of Carter’s
Section 102(b)(7) claim.
Carter contends that “Section 102(b)(7) does not shield Defendants from liability
where, as here, there are allegations of a conscious disregard of one’s responsibilities and
other serious internal control deficiencies.” Appellant’s Brief at 42. Paragraphs 224
through 227 of the Amended Complaint pertain to Carter’s demand allegations, although
the detailed supporting factual allegations are found elsewhere in the complaint. In the
26
demand allegations Carter alleges the following breaches of duty relevant to his claim
that demand was excused notwithstanding the exculpatory provision:
1. “Despite clearly being placed on notice of serious issues regarding LTC
which were causing the Company’s reserves to be inadequately set,
defendants Hilliard, Schneider, Tokarz, Perry, and Turner consciously
disregarded their fiduciary duties to CNO when, under their direction, the
Company’s ongoing LTC issues were not addressed and the Company
continued to inadequately set reserves over a multi-year period.” (¶ 227.a.)
2. “[T]he Board failed to exercise its good faith judgment to ensure that the
Company’s information and reporting system was in concept and design
adequate to assure the Board that appropriate information will come to its
attention in a timely manner and as a matter of ordinary operations.” (¶
227.c.)
3. “[T]he Board intentionally misled the Multistate Examiners or permitted
others to do so, thus clearly illustrating their hostility to the relief sought in
this action.” (¶ 227.d.)
4. Members of the Audit Committee “breached their fiduciary duties of
due care, loyalty, and good faith, because the Audit Committee permitted
the above false and misleading statements to be made, which eventually led
to a [financial] restatement.” (¶ 227.f.)
5. Members of the Governance Committee “breached their fiduciary duties
of due care, loyalty, and goof faith, because the Governance Committee
permitted the pervasive misconduct described above to go undisclosed.” (¶
227.g.)
6. Members of the Compensation Committee “breached their fiduciary
duties of due care, loyalty, and goof faith, because the Compensation
Committee, inter alia, awarded . . . compensation based on admittedly false
financial results as evidenced by the Company’s need for a restatement”
and “has done nothing to rectify its [stated] failures.” (¶ 227.h.)
Appellant’s App. at 104-08.
We assume without holding that the paragraphs quoted immediately above allege
bad faith by the conscious disregard of duties, the failure to exercise good faith, the
intentional misleading of the Multistate Examiners, and the breach of the duty of good
27
faith constitutes bad faith. But, as we determined in Issue One above, Carter has not
alleged with particularity facts to show that the Directors consciously disregarded or
breached their duties to the corporation, failed to exercise good faith judgment, or misled
the Multistate Examiners. Indeed, Carter acknowledges in the Amended Complaint that
the Director Defendants were aware of the problems in the LTC segment, including the
reserves inadequacies, data integrity problems, and lack of policy records. He also
acknowledges that the Director Defendants met quarterly in “War Room” meetings to
address those issues from 2003, increased the frequency of those meetings in 2005, and
attempted to remedy some of the problems by hiring consultants and implementing
various new internal procedures. And in 2005 CNO’s quarterly financial filing with the
Securities and Exchange Commission disclosed that the LTC segment’s losses had been
larger than expected. Starting in 2006, CNO issued press releases disclosing problems in
the LTC segment and that those problems had affected the company’s overall financial
performance.9
Carter has not made particularized factual allegations to support his conclusion
that Director Defendants knew or should have known the exact extent of the problems in
the LTC segment. Nor has he made particularized factual allegations to show that they
9
In Plumbers & Pipefitters Local Union No. 719 Pension Trust Fund v. Conseco, Inc., 2011 WL
1198712, at *60-*61 (S.D. N.Y.), the district court found that Conseco had made “extensive disclosures”
from which the
most compelling inference is that the [Conseco officers] actively and diligently sought to
apprise the market of information relevant to Conseco’s corporate prospects, and the risks
and prospects of the LTC business and the challenges it faced, particularly with respect to
reserves. The most compelling inference, in the face of the extensive negative
information that was disclosed, is that the defendants were unaware of any more severe
material adverse information[] and that much of what the plaintiff calls inadequate
disclosures are simply pejorative characterizations of what was disclosed.
28
hid the fact or extent of those problems from the internal auditors, the Multistate
Examiners, or the public. The facts as alleged in the Amended Complaint point in the
opposite direction. Therefore, we conclude that Carter’s Amended Complaint does not
include particularized facts to support his allegations that the Director Defendants acted
in bad faith in their capacity as members of CNO’s board of directors.
Conclusion
Pre-suit demand on a board of directors is a prerequisite to filing a derivative
action. Here, to show that demand on the Director Defendants would have been futile,
the Amended Complaint must allege with particularity facts to show either that the
directors could not have made a disinterested decision upon demand or that they faced a
substantial likelihood of liability for their conduct as board members. The Amended
Complaint contains only conclusory allegations on these points. Carter also could have
avoided demand by showing that the Director Defendants had breached their duties of
good faith or loyalty. Again, the Amended Complaint falls short, failing to allege with
particularity facts to show such breaches. Therefore, again, Carter has not shown that
demand would have been futile. As such, the trial court did not err when it granted
Defendants’ motion to dismiss for failure to make pre-suit demand.
Affirmed.
BAKER, J., and VAIDIK, J., concur.
29