Opinion
No. X01 CV 03-0180263S
September 16, 2005
MEMORANDUM OF DECISION MOTION TO STRIKE ((#110)
Factual Background
This is a shareholders' derivative action in which the Plaintiff has sued each of the individual members of the Board of Directors ("Board") of Crompton Corporation ("Crompton"); Crompton is a nominal defendant. The governing complaint, the First Amended Derivative Complaint of November 19, 2004 ("Complaint"), is in two (2) counts. Count I is as against each member of the Board individually for breach of fiduciary duties owed Crompton; Count II asserts each board member is liable to Crompton in contribution and indemnification for damages sustained.
Crompton manufactures and sells specialty chemicals, polymer processing equipment controls, and other specialty products. The corporation's business is composed of a Polymer Products unit and a Specialty Products unit; this suit's focus is on the conduct of the Polymer Products unit and asserts that, from October 26, 1998, through October 8, 2002, that unit was involved in illegal antitrust conspiracies, as a result of which Crompton: a) is being investigated by or has already entered into plea agreements with the Department of Justice ("DDJ"), the Canadian Competition Bureau ("CCB"), the European Commission, and the Japan Fair Trade Commission, has already pled guilty in the United States and Canada with regard to certain rubber chemicals investigations, and will pay fines totaling CT Page 12005-er $57 million (Para 22); and b) is defending numerous federal and state civil antitrust actions as a result of its participation in antitrust conspiracies. The Plaintiff has pled board members caused Crompton and its predecessor companies to "engage in a continuing agreement, understanding, and conspiracy in restraint of trade to artificially raise, fix, maintain, or stabilize prices" for plastic additives, rubber chemicals, and/or other products in the United States in violation of the Sherman Act, 15 U.S.C. § 1 and that these conspiracies enabled the Board and their co-conspirators to charge prices for these products at artificially high and non-competitive levels (Paragraphs 28 and 48) and to agree to allocate among themselves their major customers, accounts, or territories (Paragraphs 27, 28, 35, and 39). Further, the plaintiff asserts the illegal antitrust conspiracy was accomplished by participating in meetings to discuss product prices, agreeing to charge prices at certain levels, and exchanging price quotations so as not to undercut a competitor's price (Paragraph 43) as well as by giving pretextual reasons for such pricing, thus hiding the fact that pricing was the direct result of collusion. Additionally, it is alleged that, despite representations and warranties contained in its May 31, 1999, Merger Agreement that no information therein was untrue and that it — and each of its subsidiaries — had been in compliance with all applicable laws (§§ 411 and 4.12 of Merger Agreement), Crompton had in fact made materially false and misleading statements of its financial condition and operational performance not only to the public and its shareholders but also to the SEC with whom it filed quarterly and annual reports and a Registration Statement on Form S-4. Those reports included, inter alia, unaudited pro forma balance sheets and failed to disclose the company's anticompetitive price fixing scheme of which the Board then knew or which they recklessly disregarded to obfuscate the impaired financial and operational condition of Crompton. See e.g., Paragraphs 59-82. Defendant board member Calarco signed the Form S-4. Paragraph 58. Thus, the Plaintiff states, the individual members of the Board, in view of their advisory, executive, managerial, and directorial positions with Crompton, were required to exercise reasonable and prudent supervision over the CT Page 12005-es management, policies, practices, and control of the company's financial affairs and breached their fiduciary duties in that they were able to and did, directly or indirectly, exercise control over the wrongful acts. Paragraphs 141-56.
Paragraph 23 alleges violations of the Sherman Antitrust Act have resulted in Crompton's having to defend itself in ten (10) actions pending in the Northern District of California, thirteen (13) actions in this state's district court, nine (9) actions brought in the Eastern District of Pennsylvania, and nine (9) CT Page 12005-fe actions in the Western District of Pennsylvania. The allegation of Paragraph 24 is that Crompton has been required to defend eleven (11) indirect purchaser state class action lawsuits brought by purchasers of products manufactured and/or sold by Crompton and one (1) direct purchaser class action in Ohio on behalf of purchasers of polyvinyl chloride modifiers.
It is asserted, for example, that, as regards rubber chemicals, Crompton is the third largest supplier in the world with an 11% market share, that the three (3) largest companies control 50% of the worldwide market, and that the six (6) largest companies control 80% of U.S. sales. It is further alleged that certain market factors and the enactment of more stringent environmental regulations have aggravated the industry's cost structure and that new capacity has undermined pricing such that net sales of rubber chemicals during fiscal 2001, 2000, 1999, and 1998 were 7.6%, 8.6%, 12.7%, and 14.7% of Crompton's net sales respectively. (Para 29.) Crompton has stated it is the leading manufacturer of high performance liquid castable urethane prepolymers in the world (Paragraph 36); sales of urethane polymer and ethylene-propylene-diene rubber ("EPDM") accounted for $271 million in 2002 (Paragraph 40).
Crompton was created in September 1999, by the merger of Crompton Knowles Corporation and Witco Corporation. The surviving entity was known as CK Witco Corporation until April 25, 2000, when the shareholders approved changing the name to Crompton Corporation. Paragraph 7.
The Board consisted of seven (7) members when this suit was commenced — Calarco, Headrick, Woolf, Higdon, Piccolo, Wesson, and Fox — more specifically to be discussed later herein.
The parties are agreed no demand was made upon the Board that it institute suit before this action was commenced. See also Paragraph 152. The defendants have moved to strike the complaint for the failure to make such demand and to assert particularized facts excusing a demand. The parties have thoroughly briefed their positions and oral argument was heard on July 21, 2005.
The defendants have styled their motion a "Motion to Strike" but nevertheless urge the court to "dismiss" the action. See e.g., pp. 1 and 14 of their supporting memorandum. The defendants are bound, however, by their own pleading and the court therefore treats the motion as it is characterized — a motion to strike.
"A motion to strike challenges the legal sufficiency of a pleading, and, consequently, requires no factual findings by the trial court." (Citation omitted.) Fort Trumbull Conservancy, LLC v. Alves, 262 Conn. 480, 498 (2003). It tests whether the complaint states a claim upon which relief can be granted. Vacco v. Microsoft Corp., 260 Conn. 59, 65 (2002); P.B. § 10-39. The trial court's role is to examine the complaint and construe it in favor of the pleader. Suffield Development Associates, Ltd. Partnership v. National Loan Investors, L.P., 260 Conn. 766, 772 (2002). Specifically, the court must "assume the truth of both the specific factual allegations and any facts fairly provable thereunder" and "read the allegations broadly, rather than narrowly." Craig v. Driscoll, 262 Conn. 312, 321 (2003). The requirement of favorable construction does not extend, however, to legal opinions or conclusions stated in the complaint but only to factual allegations and the facts "necessarily implied and fairly provable under the allegations." Forbes v. Ballaro, 31 Conn.App. 235, 239 (1993). The motion is to be tested by the allegations of the pleading, which allegations cannot be enlarged by the assumption of any facts not therein alleged. Alarm Applications Co. v. Simsbury Volunteer Fire Co., 179 Conn. 541, 549-50 (1980). If any facts provable under the express and implied allegations of the complaint support a cause of action . . . the complaint is not vulnerable to a motion to strike. Bouchard v. People's Bank, 219 Conn. 465, 471 (1991). The motion is properly granted if the complaint CT Page 12005-et alleges mere conclusions of law unsupported by the facts alleged. Fidelity Bank v. Krenisky, 72 Conn.App. 700, 720 (2002); Donar v. King Associates, Inc., 67 Conn.App. 346, 349 (2001).
Applicable Substantive Law
Crompton is a Delaware corporation (Paragraph 7) with principal executive offices in Middlebury, Connecticut. In a derivative suit, an individual shareholder seeks to enforce a right that belongs to the corporation. Kamen v. Kemper Fin. Svcs., Inc., 500 U.S. 90, 95 (1991). "However, given the basic principle of corporate governance that the decisions of a corporation — including the decision to initiate litigation — should be made by the board of directors or the majority of shareholders, most jurisdictions require a pre-suit demand be made of the corporation's board of directors. This allows the directors to exercise their business judgment and determine whether litigation is in the best interest of the corporation." Id., at 96. Delaware Chancery Rule 23.1 provides in pertinent part:
In a derivative action brought by 1 or more shareholders . . . 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 . . . allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors . . .
(Emphasis added.)
The United States Supreme Court, in Kamen, supra, held the function of the demand doctrine was a substantive matter — not procedural — and that the demand requirements for a derivative suit are determined by the law of the state of incorporation. Id., at 97. The issues of demand futility rest upon the allegations of the complaint. Aronson v. Lewis, 473 A.2d. 805, 808 (Del. 1984).
The defendants urge the application of the rule announced in Rales v. Blasband, 634 A.2d. 927 (Del. 1993); the plaintiff disagrees and cites to Aronson, CT Page 12005-eu supra. The "challenged transaction" in Aronson, the first decided of the two cases, was the board's approval of an employment agreement between the company and a 75-year-old board member who also owned 47% of the company's outstanding stock. The agreement was for five (5) years with a provision for automatic renewal each year thereafter indefinitely. The director was to be paid $150,000 per year plus a bonus of 5% of pre-tax profits over $2,400,000. The company was required to provide six (6) months notice pre-termination while the director was not required to give any termination notice. At termination, the board member would become a "consultant" and be paid the same $150,000/yr. for the first three (3) years, $125,000/yr. for the next two (2) years, and $100,000/yr. thereafter for life. The agreement also provided for death benefits. While the director agreed to devote best efforts and substantially his entire business time to advancement of the company's interests, the agreement provided his compensation was not to be affected by an inability to perform his duties (No claim was made that the director/employee was in poor health.). Additionally, the board had approved and made interest-free loans to him totaling $225,000, which loans were unpaid and outstanding when suit was commenced. 473 A.2d., at 808-09. Pre-suit demand was claimed futile since: (a) the directors had participated in, expressly approved, or acquiesced in the hiring of the director and had approved the agreement; (b) the director had selected each of the other board members and controlled and dominated them; and (c) the commencement of litigation by the present directors would require them to sue themselves, thereby placing the conduct of the action in hostile hands and preventing effective prosecution. Id., at 809. Defendants moved to dismiss for failure to make demand or to allege with particularity why demand was excused. The chancery court denied the motion, holding that, under Rule 23.1, the plaintiff had successfully alleged demand futility. The trial court focused on the underlying transaction to determine whether the board's action was wrongful and not protected by the business judgment rule and concluded that, if the underlying transaction supported a reasonable inference the business judgment rule did not apply, the directors approving the transaction were potentially liable for breach of their fiduciary duty and CT Page 12005-ev could therefore not impartially consider a demand. Id., at 810. It also concluded the board's approval of the provision permitting the director's consulting compensation to remain unaffected by his ability to perform may have been a transaction wasteful on its face and thus the board's potential liability for waste prevented impartial consideration of a demand. Id. The Supreme Court of Delaware reversed and remanded, holding the plaintiff's allegation of demand futility was fatally defective because he didn't allege sufficient facts to establish bias on the part of the directors or that those directors took action sufficiently hostile to the company's interests as to create a reasonable doubt whether the business judgment rule applied. Id., at 818. The Court announced its adherence to the following legal principles: (1) Demand futility was inextricably bound to issues of business judgment; (2) The protection of that rule can only be claimed by disinterested directors whose conduct otherwise meets the tests of business judgment; (3) To invoke the rule's protection, directors have a duty to inform themselves, prior to making a business decision, of all material information reasonably available to them and then to act with requisite care in the discharge of their duties; and (4) The business judgment rule operates only in the context of director action. Id., at 812-13. "It has no role where directors have either abdicated their functions or, absent a conscious decision, failed to act. But it also follows that, under applicable principles, a conscious decision to refrain from acting may nonetheless be a valid exercise of business judgment and enjoy the protections of the rule." Id., at 813. The Court established a two-pronged futility test requiring a determination whether, under the particularized facts alleged, a reasonable doubt is created that: (a) the directors are disinterested and independent; and (b) the challenged transaction was otherwise the product of a valid exercise of business judgment. Id., at 814. The Court went on to state that, if an "interested" director transaction is involved, such that the business judgment rule is inapplicable to the board majority approving the transaction, the inquiry ceases since demand futility has been established by any standard. Id., at 815, citing to Bergstein v. Texas International Co., Del.Ch., 453 A.2d. 467 (1982) (Because five [5] of nine CT Page 12005-ew [9] directors approved a stock appreciation rights plan likely to benefit them, the board was "interested" for demand purposes and demand was futile. 453 A.2d., at 471.).
This plaintiff argues that, under Aronson, the Crompton board was "interested" in that the entire board had participated in and knew of the anticompetitive practices extending over six (6) years. Specifically, she states, four (4) members (Woolf, Piccolo, Wesson, and Fox) were members of the Audit Committee and therefore had the responsibility, under the company's Proxy Statement, to provide "general oversight with respect to the adequacy and effectiveness of the Company's internal administrative and business process controls and to the accounting principles employed in the Company's financial reporting" and to review the Company's quarterly reports on Form 10-S and annual report on Form 10-K prior to their filing." Paragraph 157. This Board met eleven (11) times from 1999-2002 "to review the Corporation's major financial risks, review the scope of the annual audit and the policies relating to internal auditing procedures and controls; provide general oversight with respect to the accounting principals (sic) employed in the company's financial reports, and to review the Corporation's annual report on Form 10-K prior to its filing." Paragraph 163. Additionally, it is claimed that the "insured vs. insured" exclusion of the liability insurance policy would prevent Crompton from suing officers and directors for lack of coverage (Paragraph 171) and the board members, by bringing an action, would jeopardize their own financial and professional well-being since each director also served on the boards of other companies and they would almost certainly lose their directorships at those other companies if they were sued (Paragraph 172). Finally, plaintiff urged board members could not exercise disinterested independence because their defense to a suit would require them to take an "ignorance of the facts" posture which would threaten their ability to continue to serve (Paragraph 173) and the directors' authorization of litigation would be "tantamount to self-incrimination" (Paragraph 174). Vis-a-vis the second prong of the Aronson test, the plaintiff argued the Board failed to CT Page 12005-ex exercise valid business judgment in that, given the totality of the circumstances underlying the anticompetitive practices over six (6) years, there existed more than a reasonable doubt the Board violated the rule. See Paragraphs 3, 5, 22, 23, 25, and 26. She noted the business judgment prong of the Aronson test is not limited to a board's decision to act affirmatively; the Sixth and Seventh Circuits have found it applicable to a conscious decision by the directors not to act. See e.g., Abbott Labs, 325 F.3d 795, (C.A.7 [Ill.] 2003); McCall v. Scott, 239 F.3d 808 (C.A.6 2001), amended on denial of re-hearing, 250 F.3d 997 (C.A.6 2001). In fact, Aronson so provides. 473 A.2d., at 813. See also Rales, supra, 634 A.2d. 927, at 933.
Defendants concede the "interest" of board member and CEO Calarco (presumably for the representations made to trade periodicals and in press releases regarding the company's financial health); there remain, therefore, six (6) board members, three (3) of whom (together with Calarco), would constitute the "majority" the Court in Aronson found relevant. However, as plaintiff points out, the Supreme Court of Delaware, in 2004, concluded demand is excused where a board is evenly divided between interested and disinterested members. Opp. Memorandum, at 11, citing to Beam v. Stewart, 845 A.2d. 1040 (2004).
Before the Court in Rales was a certified question whether, under the circumstances of that case, appellant Blasband, in accord with the substantive law of Delaware, had alleged facts sufficient to excuse a pre-suit demand. The central allegation by Blasband on behalf of Easco was that the expenditure of over $61.9 million of proceeds from the sale of $100 million of Senior Subordinated Notes to buy highly speculative "junk bonds" was contrary to the prospectus which stated that, after repaying outstanding indebtedness, funding corporate expansion, and using the funds for "general corporate purposes," the balance of the net proceeds was to be invested in "government and other marketable securities which are expected to yield a lower rate of return than the rate of interest borne by the notes." Id., at 930-31. Blasband asserted the Rales brothers, who were directors and officers of Easco and together owned approximately 52% of Easco's common stock (and 44% of the common stock of the co-defendant), urged the purchase of the junk bonds from a brokerage house with whom the brothers had had a prior business relationship and whom they wanted to help at a time when that brokerage firm was under investigation and having difficulty selling such bonds. That brokerage firm (Drexel) was also the underwriter of the offering of the Easco Notes. Id., at 931. No demand was made and the defendants moved to dismiss — ultimately, to certify the above question.
Blasband urged — as does the plaintiff here — the CT Page 12005-ey application of the Aronson test with which the defendants — as do these defendants — disagreed. The anomaly in Rales was that the board in existence when suit was filed was not the same board as had originally made the decision (owing to a corporate merger); the Rales brothers, however, continued to serve as directors.
The defendants there argued for the Court's adoption of a universal demand requirement or a requirement that a plaintiff must demonstrate a reasonable probability of success on the merits before a demand is excused as futile. The Court rejected both proposals as unnecessarily onerous. Id., at 934.
The Court began with the observation the facts before it represented a significant departure from the facts before the Aronson Court in that the "after merger" board, unlike the board in Aronson, did not "approve" the challenged transaction and, in fact, "made no decision to act or refrain from acting." Id., at 933. Thus, because no business decision had been made by a majority of the directors, it was not possible to consider the Aronson inquiry whether the directors had acted in conformity with the business judgment rule and it concluded the Aronson test for demand futility should not be applied under these circumstances. The appropriate inquiry was whether the board that would be addressing the demand could impartially consider the merits of that demand without being influenced by improper considerations. "[A] court must determine whether or not the particularized factual allegations 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." Id., at 934. The Court concluded that, because the Rales brothers and another director from the current board were also members of the Easco board at the time of the alleged wrongdoing, they would not have been disinterested in any decision the board would have made had there been a demand. It also concluded there was reasonable doubt regarding the ability of two (2) other present directors to have acted with independence — one because of a "substantial financial stake in maintaining his current offices" and the other because "it can be inferred that he is beholden to the Rales brothers in light of his employment." Id., at 937.
It also concluded the Aronson test was inapplicable where: (a) a business decision was made by the board but a majority of the directors making the decision had been replaced, and (b) no business decision had been made. Id., at 934.
It would therefore be error to literally take the Court at its word that, under such circumstances as presented, "the business judgment rule has no application." Id., at 933. Instead, the inquiry is not whether the challenged transaction was the valid exercise of business judgment but whether the board could have exercised its disinterested business judgment in responding to the demand. The focus shifts from the challenged transaction to the makeup of the board under the Rales formulation.
The threshold determination for this court is whether the individual defendants "participated" in the anti-competitive practices which eventuated in investigations, prosecutions, guilty pleas, and CT Page 12005-fz ultimately to the imposition of huge fines. If there was "participation" in the wrongdoing so as to conclude the majority of this Board made a business decision to approve the misconduct, then the Rales test (urged by defendants at oral argument) does not apply since no one of the three (3) scenarios involving that Court's test here presents. See 634 A.2d. 927, at 934. Under those circumstances, the Aronson test (urged by the plaintiff at argument) applies. The well-pleaded factual allegations of the derivative complaint are accepted as true on this motion; conclusory allegations are not accorded the same deference. In the instant case, the "challenged transaction" or "wrongful conduct" consists of the anticompetitive practices and antitrust violations asserted. See e.g., Complaint, Paras 3, 5; Opp. Memo, at 8. Clearly those phases embrace such conduct as allegedly engaging in a price-fixing scheme with its competitors so as to drive a more stable price environment within the industry by agreeing on the prices each would charge the other (Para 3). Many of the Complaint's allegations focus on the deliberate falsification or the making of false statements disseminated via corporate releases to the press, the public, or trade publications regarding Crompton's financial health or stability, its earnings, revenues, profits, or prospects for continued growth. The pleading includes frequent references to the company's filing of annual reports on forms required to be filed with the SEC. These releases, communications, commentary, and SEC filings are described as "materially false and misleading" not for reason of expressly stated inaccuracies of fact (as, for example, in the reporting of incorrect numbers) but because they failed to disclose that the impetus for the increased earnings was not "greater product demand" or "continued market penetration" (Para 134), "partial recovery of higher raw material and energy cost" (Paras 108, 109), "lower operating costs" (Para 108) or "product performance," "customized products," "outstanding technical and customer service," "excellence," or "customer loyalty" (Para 130), etc. but was instead the company's alleged participation in an international price-fixing scheme which worked to restrict competition. That these communications and filings are appropriately described as "anticompetitive practices" is clear when one CT Page 12005-fa considers their effect on individual investors and the brokerage and securities industries which served the investing public relying, for example, on the belief that a given company's earnings are as a result of free market forces at work. Regarding these specific anticompetitive practices, however, the only board member identified as disseminating the "materially false and misleading" statements is Calarco (already conceded to be an interested director); the allegation is that the individual defendants caused the company to announce, to comment upon, or to release financial information when they "knew or recklessly disregarded" the truth that Crompton's financial status was dependent upon the illegal price conspiracy. See e.g., Paras 80, 82. Such conclusory assertions unsupported by stated facts are not accepted as true for the purpose of this motion and presume what is nowhere explicitly alleged — that individual board members had specific information which mandated the conclusion the company's financials were a reflection of something other than market forces at work (since there likely would not have been a written commemoration of a price-fixing agreement). These allegations cannot therefore establish "participation" in the challenged transaction nor can the assertions of Paragraphs 141-49 which generally allege that, in view of their "advisory, executive, managerial, and directorial positions with Crompton, each of the Individual Defendants had access to adverse non-public information about the financial conditions, operations, and improper representations of Crompton." Paragraph 142. Unsupported conclusions as they are, the court may not consider them as expressions of participation.
Rales does not require a formal declaration of approval but clearly contemplates the failure to act may be a "business decision" so long as there is a conscious decision with respect to the asserted misconduct. "Where there is no conscious decision by directors to act or refrain from acting, the business judgment rule has no application." (Emphasis added.) Id., at 933.
The Complaint makes frequent reference to the inclusion of materially false and misleading statements on the company's quarterly reports on Form 10-Q and annual reports on Form 10-K, both of which were filed with the SEC. See e.g., Paras 157, 140. Paragraph 113 states the company's 2000 form 10-K "was signed by Defendants Calarco, Fox, Headrick, Higdon, Piccolo, Wesson, and Woolf." Paragraph 127 states the same directors (which were all of the directors at the time the complaint was filed) signed both the originally filed and the amended annual reports for 2001 with the CT Page 12005-fb SEC on Form 10-K. That act of signing is affirmation the information included therein is true and accurate and constitutes "participation" in the alleged wrongdoing of disseminating "material false and misleading statements" — which the court is bound to accept as true because it is asserted those statements failed to disclose the true reason for the increased earnings (the price fixing conspiracy). Whether, for example, such signing was accompanied by knowledge of the price-fixing conspiracy or whether the signing by all directors represented approval or ratification of the company's wrongdoing are questions of fact to be determined by a jury at trial. For the purpose of this motion, it is to plead sufficient facts to premise a claim for participation which must be viewed as a business decision. Thus, the Rales test is not here applicable as defendants urge.
The court finds no allegation the directors signed the 2002 Form 10-K though it appears likely they did.
The "business decision" in Aronson, supra, was the Board's "approval" of the employment agreement in question. Further, a conscious decision to refrain from doing an act (i.e., making disclosure) may be the exercise of a business judgment. 473 A.2d. 808, at 813.
The two-pronged test of Aronson requires the court's determination whether there is reasonable doubt that: (a) the directors are disinterested and independent, and (b) the challenged transaction was otherwise the product of a valid exercise of business judgment. 473 A.2d. 800, at 814.
Plaintiff rests her claim the directors are interested and not independent on allegations: (a) they cannot be viewed as disinterested in view of their participation by "approving, issuing, and signing" Form 10-K (Paragraphs 162c, 163b, 164b, 166b, 167e, 1686); (b) they would not knowingly incriminate themselves by commencing litigation (Paragraphs 173, 174): (c) four (4) directors (Fox, Piccolo, Wesson, and Woolf) served on the Audit Committee of the Board and that committee was charged with such responsibility as oversight responsibilities for the accounting principles employed in such forms as the 10-Q and the 10-K (Paragraph 157); (d) authorizing suit would constitute admissions by the directors that they were either ignorant of the facts relating to the company's finances or would reveal their own misconduct in participating in the wrongdoing (Paragraphs 172, 173); (e) each of the directors served on the board of at least one (1) other company with at least one (1) other director of Crompton and, thus, to bring suit would jeopardize their own financial and CT Page 12005-fc professional well-being (Paragraphs 162-68 and 172); and (f) bringing suit would likely result in their not being insured for reason of the "insured vs. insured" policy exclusion (Paragraph 171).
It needs first be stated that the commencement of suit is not the only acceptable alternative available to a disinterested board which concludes there has been wrongful conduct that needs be addressed. As the cases make clear and as defense counsel stated at argument, a disinterested board might respond to a demand by, for example, authorizing an investigation of company practices and requiring a report of results and recommendations for further action, by instituting immediate policy, administrative, accounting charges, etc. Additionally, considered alone, many of the above allegations fail; allegations (a), (b), (d), (e), and (f) are demonstrative of the bootstrapping of allegations of futility against directors who arguably will not sue themselves. Jarolawicz v. Krass, 1999 WL 436409 (Conn.Super.), citing to Pogostin v. Rice, 480 A.2d. 619, 625 (Del. 1984). In Jarolawicz, the plaintiff asserted a derivative claim against a Delaware company's directors and officers, which claim stemmed from a federal investigation of price-fixing in the graphite electrodes industry. There, as here, there were allegations of fiduciary breaches and demand futility was claimed as a result of the defendants' lack of independence "by allowing, the company to violate the federal anti-trust laws" and the directors' failure to "properly manage the company and avoid the company's involvement in illegal securities transactions." 1999 WL 436409, at #2. The court applied the Aronson test and concluded the plaintiff failed to allege facts with sufficient particularity to excuse demand. Id., at #3. This court agrees the argument "You can't expect directors to sue themselves" — without more — is increasingly rejected. See e.g., Lewis v. Fites, 1993 WL 47842, at #3 (Del.Ch. 1993); Silversweig v. Unocal Corp., 189 WL 3231, at #5, n. 1 (Del.Ch. 1989). While it can perhaps be argued allegation (c) is merely a conclusory allegation that the four (4) named directors had heightened responsibilities as members of the Audit Committee, it ignores the factually explicit assertion (in Paragraphs 113 and 127) that those same four (4) CT Page 12005-fd directors — as well as their other three (3) colleagues on the Board — signed off on the Form 10-Ks filed with the SEC. Surely the conscious decision to sign off on forms required to be filed with a federal investigative body was intended as a "vouching" for the accuracy and integrity of the information there provided and, if it is established at trial that that information was materially false and misleading, a bevy of remedies — both criminal and civil — are available to address that wrong. The potential imposition of such sanctions on skilled professionals whose portfolios rest as much upon their personal integrity as it does on their financial acumen cannot be underestimated since, for these directors (and their families), this is a far more significant outcome than is the potential need to resign from other boards on which they presently serve or not being asked to serve on the next board. The court concludes there is reasonable doubt these directors ( all — as opposed to a mere majority) are disinterested and independent and there is, thus, reasonable doubt "that the protections of the business judgment rule are available" to them. 473 A.2d. at 814.
While relevant, the court cannot muster the same degree of enthusiasm for Jarolawicz as do the defendants who describe it as a "strikingly similar case." Memo, at 9. One (1) of ten (10) paragraphs in the opinion addresses the allegations of the complaint. Though we are told no particularized facts are provided within the pleading, the court later states the plaintiff had failed to allege "enough" facts with particularity to meet the Aronson requirements. Id., at # 3. This court does not therefore know the number or nature of the specific recitations in the underlying complaint.
The court need not further consider the business judgment requirement under Aronson's second prong. In the words of that court, "Certainly, if this is an `interested' director transaction, such that the business judgment rule is inapplicable to the board majority approving the transaction, then the inquiry ceases. In that event futility of demand has been established by any objective or subjective standard." Id., at 815, citing to Bergstein v. Texas Internat'l Co., 453 A.2d. 467, 471 (Del.Ch. 1982). It having been asserted all directors signed off on the Form 10-Ks and this court being bound to construe all factual allegations in a light most favorable to the plaintiff she concludes the motion to strike should be — and is — denied.