Lavin v. Reed

1

BRIAN LAVIN, Plaintiff v. SAM K. REED, et al., Defendants

No. 17 CV 1014

United States District Court, N.D. Illinois, Eastern Division

November 1, 2023

MEMORANDUM OPINION AND ORDER

JEREMY C. DANIEL UNITED STATES DISTRICT JUDGE

Plaintiffs Brian Lavin and Donald Bartelt are shareholders of TreeHouse Foods, Inc. (“TreeHouse”) who filed this consolidated derivative action against TreeHouse's current and former officers and directors. They allege that Defendants breached their fiduciary duties and made material misrepresentations concerning TreeHouse's 2016 acquisition of ConAgra's private brands business. Plaintiffs designated a single operative complaint see R. 74, 75, which Defendants now move to dismiss. R. 79.^[1] For the reasons that follow, the Court grants Defendants' motion and dismisses Plaintiffs' claims with leave to amend.

BACKGROUND^[2]

TreeHouse is a publicly traded Delaware corporation headquartered in Oak Brook, Illinois, that manufactures branded food products for grocery stores, warehouse chains, and other retailers. R 1 ¶ 17. Defendants are current and former directors and officers of TreeHouse. See id. ¶¶ 18-51. Defendant Sam Reed is TreeHouse's former Chairman and CEO. R. ¶ 18. He served as the company's President from July 2011 to August 2016, when he was replaced by Defendant Christopher Sliva. Id. ¶¶ 18. Sliva was President until November 2016, when he stepped down and was replaced by Defendant Dennis Riordan (formerly the company's CFO and Executive Vice President). The remaining Defendants, George Bayly, Linda Massman, Dennis O'Brien, Frank O'Connell, Ann Sardini, Gary Smith Terdema Ussery, and David Vermylen (together with Reed, the “Director Defendants”) were members of TreeHouse's board of directors on or around February 2 2017, when the complaint was filed. See id. ¶¶ 18-51. The complaint alleges that all the Director Defendants except Massman (who joined TreeHouse's board in July 2016) own TreeHouse stock and receive compensation from the company in the form of base salary and restricted stock units. See id.

On February 1, 2016, TreeHouse acquired ConAgra Foods, Inc.'s private brands business-Ralcorp Holdings, Inc.- in an all-cash transaction for $2.7 billion (the “Private Brands Acquisition”). Id. ¶ 3. The company disclosed this transaction in its public filings with the Securities and Exchange Commission (“SEC”), including various Form 8-Ks, Form 10-Qs, and the company's 2015 Form 10-K, which was signed by each of the Director Defendants except Massman. See generally id. A February 11, 2016 press release stated that “TreeHouse net sales are expected to double in 2016 to approximately $6.3-6.5 billion, driven by the addition of the Private Brands Business.” Id. ¶ 79. In subsequent press releases, Reed commented positively on the progress of the acquisition, stating that the company was “making great progress,” id. ¶ 87, and that “[t]he detailed integration of legacy TreeHouse and Private Brands is well underway, and we are gaining momentum.” Id. ¶ 94

Despite these statements, integration of the Private Brands business was more difficult than anticipated. On November 3, 2016, the company announced that its third quarter earnings would be substantially below market expectations. Id. ¶¶ 10206. A press release published that same day indicated that the company's acquisition strategy was underperforming, that it was closing a facility in Delta, British Columbia, and that it was reducing headcount at a manufacturing facility in Battle Creek, Michigan. Id. ¶¶ 104-107. Compounding the bad news, the company announced that Sliva would resign as President after having served just three months, and Riordan, his interim replacement, would retire shortly thereafter. Id. ¶¶ 109, 111. The Wall Street Journal ran an article that same day, noting that Sliva's exit and Riordan's pending retirement were “troubling signs” and that “cracks in the deal are already starting to appear.” Id. ¶ 111. By the end of the day, TreeHouse's share price had fallen by nearly 20% from $85.59 to $69.72 per share. Id. ¶112. Public records also revealed that Sliva, Sardini, and Smith had collectively sold over a million dollars' worth of TreeHouse stock while the price was inflated following the acquisition and before the November 3 announcement. Id. ¶ 126.

Shareholders cried foul. The same month that the report was issued, a group of plaintiffs filed a class action securities fraud lawsuit in this District, alleging that TreeHouse's officers knowingly made false or misleading statements and material omissions about the Private Brands Acquisition. See Public Emps.' Ret. Sys. of Miss. v. TreeHouse Foods, Inc., 16 C 10632 (N.D. Ill. 2016) (the “Securities Class Action”). Other shareholders entered the fray and filed derivative actions, including the two above-captioned lawsuits and two other state court cases filed in the Circuit Court of Cook County, Chancery Division. See Wells v. Reed, et al., Case No. 2016-CH-16359; City of Ann Arbor Emps.' Ret. Sys, v. Reed, et al., Case No. 2019-CH-06753. In this case, Plaintiffs alleged that Reed, Sliva, Riordan, and the Director Defendants (i) breached their fiduciary duties to TreeHouse by making material misrepresentations and failing to exercise appropriate oversight, (ii) unjustly enriched themselves, (iii) abused their control over the company, (iv) grossly mismanaged the company, and (v) caused corporate waste. See R. 1.

The parties initially agreed to stay this case because the Securities Class Action involved “overlapping parties and factual allegations.” R. 18 at 2. The stay was extended after Judge Der-Yeghiayan denied a motion to dismiss the Securities Class Action and that case proceeded to discovery. R. 35. The parties stipulated that Plaintiffs in this matter would have access to the documents produced in the Securities Class Action as well as documents produced in the other derivative cases. Id. ¶ 4. Ultimately, the Securities Class Action was settled with court approval on November 17, 2021, renewing focus on the present litigation. See Securities Class Action, Dkt. No. 191. The parties engaged in settlement discussions but could not resolve their dispute. See R. 65 ¶ 9; R. 67. With no end in sight, the Court lifted the stay and ordered Plaintiffs to file a single operative complaint. R. 74.

Plaintiffs chose to designate the original February 7, 2017, complaint as the operative complaint for the consolidated action. R. 75. Though the complaint remained the same, the underlying facts had changed. According to publicly available filings, seven of the nine Director Defendants had left the company. See R. 81-5 (TreeHouse 2022 Form 10-K). Only two of the Director Defendants-Massman and Sardini-remained. See id.

Defendants moved to dismiss under Federal Rules of Civil Procedure 12(b)(6) and 23.1, contending that: (1) Plaintiffs are required, but failed, to plead demand futility as to TreeHouse's current board of directors; (2) even if Plaintiffs are not required to plead demand futility to the current board, they have not sufficiently pled demand futility as to the Director Defendants; and (3) Plaintiffs fail to state a claim. R. 79. The Court now addresses each of these arguments.

LEGAL STANDARD

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests the legal sufficiency of the complaint, not the merits of the allegations. McReynolds v. Merrill Lynch & Co., 694 F.3d 873, 878 (7th Cir. 2012). To overcome a motion to dismiss, a complaint must contain sufficient factual allegations to state a claim for relief that is plausible on its face, Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009), and raises the right to relief above a speculative level. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). The Court must accept all well-pleaded factual allegations in the complaint as true and draw all reasonable inferences in the plaintiff's favor. In re Abbott Labs. Derivative Sholder Litig., 325 F.3d 795, 803 (7th Cir. 2003).

When one or more shareholders or members of a corporation bring a derivative action to enforce a right that the corporation may properly assert but has failed to enforce, Federal Rule of Civil Procedure 23.1 applies. Fed.R.Civ.P. 23.1(a). Rule 23.1 provides that, if the plaintiff does not fairly and adequately represent the interests of similarly-situated shareholders, the derivative action may not be maintained. Id. Prior to initiating suit, the plaintiff must “state with particularity any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members” and “the reasons for not obtaining the action or not making the effort.” Fed.R.Civ.P. 23.1(b)(3). Rule 23.1 “concerns itself solely with the adequacy of the pleadings; it creates no substantive rights.” Starrels v. First Nat. Bank of Chi., 870 F.2d 1168, 1170 (7th Cir. 1989). Though federal law determines whether a plaintiff has pleaded facts with sufficient detail, state law determines whether a plaintiff's stated reasons are sufficient. Lowinger v. Oberhelman, 924 F.3d 360, 366 (7th Cir. 2019).

ANALYSIS

Because Plaintiffs allege harm to TreeHouse rather than harm to individual shareholders, their claims are derivative in nature. A derivative suit is brought by an investor on behalf of the corporation, asserting the corporation's (not the investor's) right to recover. Felzen v. Andreas, 134 F.3d 873, 875 (7th Cir. 1998). Derivative suits are “an anomaly of corporate governance.” Dorvit ex rel. Power Sols. Intl. Inc v. Winemaster, 950 F.3d 984, 988 (7th Cir. 2020). “Only when the corporation's board defaults in its duty to protect the interests of the investors” may a plaintiff pursue a derivative...