Livermore v. Engles

RICHARD LIVERMORE, Derivativelyon Behalf of Nominal Defendant DEANFOODS COMPANY Plaintiff,

v.GREGG L. ENGLES, ET AL. Defendants.

NO. 3-10-CV-0882-BD

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

Dated: January 26, 2011

MEMORANDUM ORDER

In this shareholder derivative action, 11 current or former officers and directors of Dean Foods Company ("Dean Foods"), together with Diary Farmers of America, Inc. ("DFA"), National Dairy Holdings, L.P. ("NDH"), Southern Marketing Agency, Inc. ("SMA"), and Dairy Marketing Services, LLC ("DMS"), have filed a Rule 12(b)(6) motion to dismiss plaintiff's amended complaint alleging a conspiracy to manipulate prices for fluid Grade A milk products in violation of federal antitrust laws. Plaintiff amended his complaint after the court determined that he failed to plead particularized facts, as required by Rule 23.1 and Delaware law, to establish that demand on the Dean Foods board of directors would be futile. See Livermore v. Engles, No. 3-10-CV-0882-BD, 2010 WL 3583999 at *3 (N.D. Tex. Sept. 13, 2010). Rather than dismiss the case outright, the court allowed plaintiff to amend his complaint in an attempt to cure this pleading defect. Id, 2010 WL 3583999 at *4. Plaintiff took advantage of that opportunity by filing an amended complaint with new allegations of demand futility. Defendants contend that plaintiff's current pleading suffers from the same deficiency as his original complaint ~ it does not allege particularized facts to create areasonable doubt as to whether the actions of the individual defendants were a valid exercise of business judgment.¹ The issues have been fully briefed by the parties, and the motion is ripe for determination.

Rule 23.1, which governs shareholder derivative actions in federal court, provides that a complaint must state with particularity:

(A) 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

(B) the reasons for not obtaining the action or not making the effort.

Fed. R. Civ. P. 23.1 (b)(3). Where a plaintiff contends that demand on the directors would be futile, the complaint must allege particularized facts that create a reasonable doubt as to whether "(1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment." Aronsonv. Lewis, 473 A.2d805, 814 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000); see also Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993). Here, plaintiff argues that demand is excused under the second prong of the Aronson inquiry. {See Plf. Resp. at 10, 16, 17). Thus, the court's analysis is limited to determining whether the amended complaint alleges "particularized facts sufficient to raise [ ] a reason to doubt that the action was taken honestly and in good faith[.]" In re J.P. Morgan Chase & Co. Shareholder Litig., 906 A.2d 808, 824 (Del. Ch. 2005), affd, 906 A.2d 766 (Del. 2006), citing In re Walt Disney Co. Derivative Litig., 825 A.2d 275, 286 (Del. Ch. 2003). The presumption that the board's actions were the product of a valid exercise of business judgment mayalso be overcome in "rare cases" where the challenged transaction itself is "so egregious on its face that board approval cannot meet the test of business judgment[.]" Aronson, 473 A.2d at 815; see also White v. Panic, 793 A.2d 356, 367 (Del. Ch. 2000), affd, 783 A.2d 543 (Del. 2001) (noting that plaintiff who seeks to excuse demand through the second prong of Aronson faces "a heavy burden"); Khannav. McMinn, No. 20545-NC, 2006 WL 1388744 at *23 (Del. Ch. May 9, 2006) ("[A] plaintiff will bear a difficult, but not insurmountable, burden in pleading particularized facts demonstrating demand futility under [the second] prong of Aronson.").

Like his original pleading, plaintiff's amended complaint asserts derivative claims arising from a number of business decisions made by the Dean Foods board of directors, including approval of a merger with Suiza Foods Corporation ("Suiza"), for the ostensible purpose of gaining control of a majority of fluid milk bottling plants in the Northeast and Southeast United States, thereby restricting the access of independent dairy farmers to bottling plants in those regions. {See Plf. Am. Compl. at 22-28, ¶¶58-76 & 31-37, ¶¶ 83-98).² Plaintiff alleges that demand on the Dean Foods board is excused because "the Board's decision to engage in an illegal antitrust conspiracy in the Southeast and Northeast milk markets was not, and could not possibly have been, the product of a good faith exercise of business judgment." {See id. at 40, ¶108). Specifically, the complaint alleges:

Beginning with his time as a director of the board of Suiza, defendant Engles, has sought to violate the United States' antitrust laws in an effort to control the milk market. Even prior to the Merger, Suiza's board, including defendant Engles, and DFA were engaged in an antitrust conspiracy that included, among other things, collaborative agreements that forced independent farmers to DFA or DMS in orderfor them to have access to bottling plants. This conspiracy was furthered by the merger of Suiza and Former Dean Foods, which was approved by the boards of each company, including defendant Engles, with the intent of continuing and furthering the antitrust conspiracy. Defendant Engles' decision to violate antitrust laws and the Company's Code of Ethics in connection with the antitrust conspiracy is a breach of his fiduciary duties. Defendant Engel [sic] and the Board have since continued to engage in illegal anti-competitive activities since the Merger by, among other things, (i) refusing to deal with independent dairy farmers in the Southeast and Northeast markets so that they are forced to join DMS in order to access Dean Foods' bottling plants; (ii) informing Maryland & Virginia Coop, a dairy farmer coop unaffiliated with DFA, that the Company would no longer accept any of the coop's milk unless the coop became a member of SMA; (iii) directing Dean Foods to rebuke, and refuse even to negotiate with, a newly formed cooperative of independent dairy farmers called U.S. Milk, citing the Company's full-supply agreements with DFA; and (iv) paying Stop & Shop to close down its bottling plant in Readville, MA, which eventually forced St. Albans to join DMS in order to obtain access to sufficient bottling capacity. All of these actions were taken at the direction of the Board and given their illegal nature are not the product of a good faith business judgment. Accordingly, demand on the Board is futile.

(Id. at 40-41, ¶ 109). The amended complaint goes on to repeat these allegations-word for word-as to each of the 10 other members of the Dean Foods board of directors who are named as defendants in this suit. {See id. at 41-46, ¶¶ 110-115). The only change from one paragraph to the next is the name of the defendant and that one board member, Janet Hill, served as a director of the former Dean Foods Corporation, rather than Suiza, prior to the Dean Foods-Suiza merger. {See id. at 46, ¶ 116). As this court held in its prior opinion, "[s]uch 'group accusations' are insufficient to satisfy the pleading requirements of Rule 23.1." Livermore, 2010 WL 3583999 at *3 (citing cases).

In an attempt to avoid dismissal of his amended complaint, plaintiff points to specific paragraphs in the new pleading that supposedly contain "a plethora of particularized facts" establishing demand futility. {See Plf. Resp. Br. at 13, citing Plf. Am. Compl. at 19-35, ¶¶ 51, 56, 60, 61, 64, 67-70, 72, 80-85, 94). However, a close examination of those paragraphs reveals thatplaintiff merely realleges that: (1) the directors of Suiza and the former Dean Foods, as a group, conspired to bypass antitrust restrictions on the Dean Foods-Suiza merger and mislead the DOJ regarding their compliance with federal law; and (2) the directors of the new Dean Foods, as a group, caused the company to engage in further illegal anticompetitive practices after the merger. For example, one paragraph relied on by plaintiff states:

Throughout the negotiations leading up to the Merger, the Former Dean Foods and Suiza boards, including defendants Engles, Green, Hardin, Muse, Nevares, Schenkel, Turner, Bernon, Collens, Hill, and Davis, intentionally agreed to take actions to make it appear as if the companies were making a good faith effort to satisfy the DOJ's antitrust concerns, when in reality the companies and their respective boards of directors were engaging in anti-competitive conduct. In fact, the structure and effectuation of the Merger actually led to further consolidation and less competition in the milk market. Since the Merger, the Dean Foods Board has continued to take actions and make agreements that skirt the restrictions imposed on the Company during its formation.

(Id. at 29-30, ¶ 80) (emphasis added). Almost all the other paragraphs cited by plaintiff attribute illegal conduct, and specific knowledge of illegal conduct, to the board as a group, then list the names of the individual defendants who served on the board. (See id. at 19-36, ¶¶ 51, 56, 60, 61, 67, 69, 72, 82, 83, 85, 94). Nearly identical formulaic allegations of board misconduct and director participation appear throughout the amended complaint. (See id. at 20-36, ¶¶ 53, 58, 74, 76, 88, 90, 97). However, nowhere in this pleading does plaintiff allege particularized facts from which the court can infer that any individual defendant personally acted without honesty or good faith.

"[T]he simple expedient of naming a majority of otherwise disinterested and well motivated directors as defendants and charging them with laxity or conspiracy [ ] will not itself satisfy the standards for permitting a shareholder to be excused from demand or to override a board decision not to litigate a corporate claim."...