[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FILED
FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS
________________________ ELEVENTH CIRCUIT
March 13, 2008
THOMAS K. KAHN
No. 07-11653
CLERK
________________________
D.C. Docket No. 06-00467-CV-TWT-1
DORIS STAEHR
Derivatively on behalf of Coca-Cola Enterprises, Inc.,
Plaintiff-Appellant,
versus
JOHN R. ALM, LOWRY F. KLINE,
PATRICK J. MANNELLY, RICK L. ENGUM,
E. LISTON BISHOP, III, et al.,
Defendants-Appellees.
________________________
Appeal from the United States District Court
for the Northern District of Georgia
________________________
(March 13, 2008)
Before ANDERSON and BLACK, Circuit Judges, and HODGES,* District Judge.
PER CURIAM:
*
Honorable Wm. Terrell Hodges, United States District Judge for the Middle District of
Florida, sitting by designation.
Doris Staehr (Appellant), derivatively on behalf of Coca-Cola Enterprises, Inc.
(CCE) appeals the district court’s dismissal of her Verified Consolidated Shareholder
Derivative Complaint for failure to adequately plead demand futility.2 We affirm the
district court’s dismissal.
Background and Facts
Appellant is an owner of common stock in CCE. She filed a derivative lawsuit
on behalf of CCE against certain CCE officers and directors alleging violations of
Delaware state law, including breach of fiduciary duty, abuse of control, gross
mismanagement, waste of corporate assets and unjust enrichment.3 Specifically,
Appellant claimed that CCE, through its Board of Directors, engaged in “channel
stuffing” to manage its reported revenue earnings. According to the Amended
Complaint, “[c]hannel [s]tuffing is a deceptive business practice used by a company
2
Appellant also appeals the district court’s decision not to permit her the opportunity to
amend the Amended Complaint. However, Appellant did not file a motion seeking leave to
amend. Instead, Appellant included a footnote in her response to Appellees’ motion to dismiss,
asking an opportunity to amend if the district court granted Appellees’ motion. The footnote did
not state the substance of the proposed amendment or explain why justice would so require. As
such, Appellant failed to properly seek leave to amend, and this Court will not address that issue.
See Fed. R. Civ. P. 15(a); see also Wagner v. Daewoo Heavy Indus. Am. Corp., 314 F.3d 541
(11th Cir. 2002).
3
At the time the action was filed, CCE’s Board of Directors consisted of: Appellees
Lowry F. Kline, J. Trevor Eyton, Irial Finan, Gary P. Fayard, L. Phillip Humann, Paula G. Rosput
Reynolds, Calvin Darden, Marvin J. Herb, James E. Copeland, Jr., J. Alexander M. Douglas, Jr.,
Summerfield K. Johnston, III. Directors Fernando Aguirre and Donna A. James were not named
as Defendants.
2
to inflate its sales and earnings figures by deliberately sending retailers along its
distribution channel more products than they are able to sell to the public.” [R26:18].
Appellant alleged that Coca-Cola Company (Coke) induced CCE to exploit its
customer base using these tactics, causing CCE to sell product at lower prices than
it would have charged thereby increasing its own total sales volume for the benefit
of Coke. Appellant claimed that the individual Appellees were beholden to Coke
which allegedly controlled and dominated the CCE Board of Directors to maximize
Coke’s financial position to the detriment of CCE. As a result of the “channel
stuffing,” the individual Appellees allegedly caused CCE to restate earnings,
disseminate false and misleading public statements, including earnings conference
calls, earnings press releases and filings with the Securities and Exchange
Commission. Further, according to the Amended Complaint, certain of these
individual Appellees traded shares of CCE stock with insider knowledge of these
misstatements, thus selling their shares at artificially inflated prices.
Appellant filed the lawsuit against the individual Appellees and the nominal
CCE without making a demand on the Board of Directors requesting remediation of
these alleged corporate practices. Appellees filed a motion to dismiss on the basis
that Appellant failed to plead particularized facts that demonstrated demand was
excused by futility. Appellees also argued that, even if demand was excused, the
3
Amended Complaint should be dismissed because it failed to state a claim for breach
of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets,
unjust enrichment, and was barred by the statute of limitations, laches and
acquiescence. The district court granted the motion to dismiss on the ground that
Appellant failed to properly plead demand futility. This appeal followed.
Standard of Review
We review the district court’s dismissal of a shareholder derivative lawsuit for
abuse of discretion. See Stepak v. Addison, 20 F.3d 398, 402 (11th Cir.1994); See
also, Peller v. Southern Co., 911 F.2d 1532 (11th Cir. 1990). Appellant tacitly
concedes that the application of an abuse of discretion standard is appropriate, but
urges the Court to repudiate precedent and adopt the de novo review standard for this
appeal. This invitation is unavailing, however, because the established standard can
only be altered by the Court en banc. In any event, this is not an appropriate case to
reconsider the applicable standard, because Appellant loses under either mode of
review.
Discussion
This action is governed by the substantive law of Delaware. “A cardinal
precept of the General Corporation Law of the State of Delaware is that directors
rather than shareholders, manage the business affairs of the corporation.” Stepak, 20
4
F.3d at 402 (quoting Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984). Shareholder
derivative suits intrude upon this managerial authority. Under Delaware law,
therefore, an aggrieved shareholder must demand that the board take the desired
action prior to bringing such a suit. Id. This necessity for demand is reflected in
Federal Rule of Civil Procedure 23.1,4 which requires more stringent pleading
requirements than the mere notice pleading commanded in Fed. R. Civ. P. 8 and Fed.
R. Civ. P. 12(b)(6). Stepak, 20 F.3d at 402. Fed. R. Civ. P. 23.1 provides in part:
The [derivative] complaint shall also allege with particularity the efforts, if
any, made by the plaintiff to obtain the action the plaintiff desires from the
directors or comparable authority and, if necessary, from the shareholders
or members, and the reasons for the plaintiff’s failure to obtain the action
or for not making the effort.
If a plaintiff can show the demand would be futile, the demand is excused. A
finding of demand futility is authorized only where particularized factual allegations
of the derivative stockholder complaint create reasonable doubt that, as of the time
the complaint was filed, a majority of the board could have properly exercised its
independent and disinterested business judgment in responding to a demand. Rales
v. Blasband, 634 A.2d 927, 934 (Del. 1993). Interest is demonstrated where a
director, “will receive a personal financial benefit from a transaction that is not
4
Delaware Chancery Rule 23.1 and Federal Rule of Civil Procedure 23.1 contain similar
requirements.
5
equally shared by the stockholders,” or, “where a corporate decision will have a
materially detrimental impact on a director, but not on the corporation and the
stockholders.” Id. at 936.
Thus, in this case, to excuse a demand according to Delaware law, the
Appellant was required to establish in the Amended Complaint the bias of seven
Directors – a majority of the Board – to show that the Board itself was disqualified
to consider the issue. See Blasband, 634 A.2d at 934. The District Court held that the
Amended Complaint failed to establish that any of the thirteen CCE Directors was
interested or not independent. [R42:267-83].
Appellant does not dispute the District Court’s finding regarding the disinterest
of six of the Directors. She only challenges the district court’s individual finding of
independence as to Directors Douglas, Fayard, Finan, Humann, Darden, Johnston III
and Kline. [Brief of Appellant at 22-24, 27-31]. It follows that if the district court
was correct in its finding of disinterest with respect to any one of these seven
remaining Directors, the futility of a demand has not been established. Because we
find that Appellant failed to plead particularized facts to demonstrate that two of the
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seven remaining Directors – Defendants Darden and Johnston III - were interested,5
the district court did not abuse its discretion in dismissing the Complaint.
Appellant argues that Defendants Darden and Johnston III were interested by
virtue of their membership on the boards of other corporations, Target, Kroger
Company and/or Krystal Company.6 Appellant contends that the other corporations
are major retailers of Coke’s products and have close business relationships with CCE
and Coke. Appellant argues that demand was futile with respect to Directors Darden
and Johnston III, because the Directors could not support an action on behalf of CCE
without harming the relationship between Target, Kroger Company, Krystal Company
and Coke. The membership on Target, Krystal Company and/or Kroger Company’s
boards allegedly made Defendants Darden and Johnston III beholden to Coke, and
demonstrated that Coke influenced or had the capacity to influence the Directors’
discretion or independence.
Under Delaware law, an allegation of a collateral business relationship,
standing alone, is insufficient to raise a reasonable doubt about a director’s
5
This should not be taken to mean that any of the other challenged Directors were shown
to be interested. We simply find it unnecessary to consider them.
6
Although the record is unclear as to whether Director Johnston III was a board member
of Krystal Company, Kroger Company or both corporations, regardless of which company or
companies he served as a director for, our decision remains the same.
7
independence. Beam v. Stewart, 845 A.2d 1040, 1050 (Del. 2004); see also Orman
v. Cullman, 794 A.2d 5, 27 (Del. Ch. 2002) (finding that the law is well settled in
Delaware that a naked assertion of a previous business relationship is not enough to
overcome the presumption of a director’s independence.) Although Defendants
Darden and Johnston III may have held memberships on Target, Krystal and/or
Kroger’s boards, Appellant failed to allege any particularized facts showing that there
was any actual bias because of their positions. The bald allegation that Defendants
Darden and Johnston III were directors of outside companies, without more, does not
demonstrate that the Directors were interested, even if the companies had close
relationships with Coke. Accordingly, Appellant’s argument does not support her
demand futility claim.
Appellant also asserts that Defendant Darden and Johnston III lacked
independence because of their alleged insider trading activity, potential liability for
failure of oversight, potential loss of insurance coverage if the action was pursued by
the Board, and Defendant Darden’s compensation. In considering these assertions,
the District Court correctly found that: (1) Appellant’s conclusory allegation
regarding the insider trading activity lacked sufficient specificity to demonstrate
interestedness; (2) the Amended Complaint was devoid of particularized facts that
Defendants Darden and Johnston III faced a substantial likelihood of personal
8
liability for their alleged failure of oversight; (3) Appellant’s mere identification of
an insurance exclusion was not enough to show the Directors were interested; and (4)
Appellant failed to allege anything in regard to the claimed extravagance of
Defendant Darden’s compensation. In short, the District Court did not abuse its
discretion in finding that these allegations did not demonstrate interestedness for
demand futility purposes.
Conclusion
For the foregoing reasons, Appellant failed to plead particularized facts with
respect to at least two of the remaining seven Directors to create a reasonable doubt
that a majority of the Board could have properly exercised independence and
disinterestedness. Accordingly, the district court’s dismissal is AFFIRMED.
9