The opinion of the court was delivered by: Lewis A. Kaplan, District Judge.
The Estée Lauder Companies Inc. ("ELC") saw its stock decline sharply in 2005 as Wall Street became disappointed with its financial performance. As has occurred with other companies in like circumstances, the ELC price decline led to class actions in which the plaintiffs claimed that the company had misled the investing public in order to prop up its stock, only to have the bad news eventually come out to the detriment of some investors.*fn1 Also as in other comparable circumstances, these events have led as well to this derivative action, in which a shareholder seeks to recover for ELC from its directors and management the corporate costs associated with such litigation, among other alleged damages. Defendants now pursue the well trodden path in such cases, moving to dismiss the complaint on the ground that plaintiff has not made, or sufficiently alleged facts excusing, a demand that the board cause the company to pursue the action in its own right.
I. The Alleged Wrongdoing
The complaint, the allegations of which are taken as true for purposes of outlining the alleged wrongdoing, claims the following:
A. The Financial Releases and the Stock Decline
On April 28, 2005, ELC issued a press release announcing earnings for the third fiscal quarter ending March 31, 2005 that were short of Wall Street analysts' expectations. The release attributed the shortfall to ELC's launch of new products and indicated that the company expected to make up the shortfall in the fourth quarter. In addition, it lowered slightly the company's full year guidance.*fn2 In a conference call with analysts, chief financial officer Richard Kunes said that inventory growth was attributable to slower than expected sales and dismissed speculation that the then imminent consolidation of two major customers, Federated Department Stores, Inc. and May Department Stores, Inc., would impact 2006 sales negatively.*fn3
On August 16, 2005,*fn4 ELC announced its results for the fourth fiscal quarter and the full fiscal year 2005. These were consistent with prior guidance, and the release indicated that the company expected diluted earnings per share for the first half and full fiscal year 2006 to "be essentially flat" with sales increasing between 5.5 and 6.5 percent.*fn5 In a conference call with analysts that day, William Lauder said that the impact of the Federated-May merger would be positive for ELC.*fn6 ELC stock rose sharply the next day.*fn7
About a month later, on September 19, 2005, ELC revised downward its guidance for the first half of 2006, although it reaffirmed its previously-announced outlook for the full year.*fn8 The stock, however, declined from $40.48 on September 19 to $35.98 on September 21, 2005,*fn9
Following the September 19, 2005 announcement, a number of analysts turned somewhat negative on ELC. Deutsche Bank issued a report that characterized the company's announcement as unexpected and noted that Lancôme, an ELC competitor, had not experienced similar problems. It expressed skepticism about ELC's fiscal 2006 guidance. Subsequent reports by Deutsche Bank and Citibank expressed concern that the earlier results had been inflated by channel stuffing (i.e., placing excess product in the hands of retailers).*fn10
On October 26, 2005, ELC announced results for the first quarter of fiscal 2006 that were well below Wall Street expectations, including a decline of as much as 33 percent in profits and significantly lower guidance for the full year. The stock dropped following this news, falling almost 8 percent that day.*fn11 The Court notes, however, that it has risen more or less steadily since then, to a price now around $50 per share.
B. The Alleged Insider Sales
During this period, the complaint alleges, a few ELC insiders sold company stock. The most significant transaction was announced on May 24, 2005, when the company disclosed that it had agreed to purchase 1.872 million shares of Class A Common Stock from Ronald Lauder at $39.25 per share, an aggregate price of $74.47 million. This transaction allegedly was approved by the entire ELC board.*fn12 The complaint alleges, however, that the company had not then announced to the general public a number of allegedly negative circumstances including principally these:
* Approximately one-third of ELC's business was driven by "gift with purchase" promotions and that ELC had been unable to analyze the effectiveness of these promotions for specific ELC brands, leaving it hampered in its ability to cut marketing costs.
* The number of customers purchasing ELC products through the traditional department stores in which those products were sold was declining sharply and thus having a material adverse effect on ELC's sales and earnings performance and prospects.
* ELC concealed its shortfall in sales and earnings by offering its products to retailers on exceptionally favorable terms. This in turn placed excess product in the company's retail channel that would cut into ELC's 2006 sales.*fn13
Ronald Lauder sold an additional 105,000 shares during the period May 24 through September 15, 2005. Other family members also sold shares during this period as follows:
* A trust for the benefit of Aerin Lauder and others sold 35,000 shares for over $1.4 million on August 24, 2005.
* Chief operating officer Daniel J. Brestle sold 133,332 shares for over $5.5 million on August 19, 2005.
* Executive vice president Malcolm Bond sold 82,932 shares on August 23, 2005 for over $3.3 million.*fn14
II. The Claims Asserted in the Complaint
The complaint alleges three claims for relief. It is important to focus upon them in view of the considerable disparities between the pleading and the accounts ...