The opinion of the court was delivered by: Honorable Paul A. Crotty, United States District Judge
Related Case: 07 Civ. 5867
Plaintiff Steven W. Sampson ("Sampson" or "Plaintiff") brings this shareholder's derivative action on behalf of Nominal Defendant Bristol-Myers Squibb Co. ("Bristol-Myers" or the "Company") against nine members of the Bristol-Myers Board of Directors (the "Board"): James D. Robinson III ("Robinson"); Lewis B. Campbell ("Campbell"); James M. Cornelius ("Cornelius"); Laurie H. Glimcher, M.D. ("Glimcher"); Vicki L. Sato, Ph.D. ("Sato"); Leif Johansson ("Johansson"); Louis J. Freeh ("Freeh"); Michael Grobstein ("Grobstein"); and R. Sanders Williams, M.D. ("Sanders"), (collectively the "Directors" or "Defendants"). The action seeks redress for the harm purportedly caused to the Company by the Board's actions and/or inactions concerning the Company's efforts to settle patent litigation with a Canadian generic pharmaceutical drug company, Apotex Inc. ("Apotex"), over the highly profitable prescription drug Plavix. Plaintiff alleges derivative claims for: general breach of fiduciary duty; contribution and indemnification; breach of fiduciary duty of good faith in connection with management of Bristol-Myers; breach of fiduciary duty of good faith for dissemination of misleading and inaccurate information; and breach of fiduciary duty of good faith for failure to establish adequate internal controls.
Defendants move to dismiss for Plaintiff's failure to satisfy the pre-suit demand requirement of Federal Rule of Civil Procedure 23.1. For the reasons set forth below, Defendants' motion is granted.
The factual allegations concerning this case are set forth in the Court's Opinion and Order of August 19, 2008 in the related securities class action case of In re Bristol-Myers Squibb Co. Sec. Litig., No. 07 Civ. 5867 (PAC) (S.D.N.Y. Aug. 19, 2008), familiarity with which is assumed. The factual allegations are supplemented only as necessary.
Plaintiff asserts demand on the Bristol-Myers Board would be futile because, inter alia: (1) the acts and practices taken by the Board in the Apotex matter were unlawful, and therefore not within the protection of the business judgment rule (Am. Compl. ¶ 143); (2) the Defendants knowingly approved or unreasonably acquiesced to illegal conduct through their inaction, and/or should have been aware of the consequences of the Company's misconduct because of its history with regard to other generic drug settlements (Am. Compl. ¶ 144); (3) the Board demonstrated a sustained and systematic failure to manage the Company's operations (Am. Compl. ¶ 145); (4) a majority of Directors consciously and knowingly ignored "red flags" (Am. Compl. ¶ 146); (5) the Board was obligated to exercise a higher degree of care given the Company's history of misconduct (Am. Compl. ¶ 149); and (6) the Defendants ratified the purportedly fraudulent conduct, participated in, approved, and/or permitted the alleged wrongs, and are "interested" because they face a "substantial likelihood of liability for their breaches of fiduciary duty" (Am. Compl. ¶¶ 150-52). These allegations are vague, conclusory, unsupported, and insufficient to survive this motion to dismiss.
The stock price declines which provided the basis for the securities class action suit took place in late July and early August 2006, and the purported misconduct "tolerated" by the Board occurred well before that date, beginning no later than Spring 2006. Defendant Williams joined the Board on September 11, 2006, over one month after the alleged misconduct ended (Am. Compl. ¶ 42), and Defendant Grobstein did not join the Board until March 2007, long after the events in question. (Am. Compl. ¶ 40). Clearly, Williams and Grobstein played no role in the actions leading up to the stock price declines. Defendant Sato became a Board member on July 11, 2006, well after the Apotex settlement negotiations took place and the material misstatements were made to the public and to the Government (Am. Compl. ¶ 34). These three Defendants are quite removed from the allegations of wrongdoing so that demand on them would not have been futile.
Plaintiff alleges as to each of the other six Defendants that they "owed a duty to . . . be reasonably informed about the business, operations, and finances of the Company . . ." but instead of fulfilling these duties, "actively participated in or knowingly encouraged, sponsored or approved" the fraudulent acts alleged, and in so doing, violated their duties to the Company. (Am. Compl. ¶¶ 27, 29, 31, 33, 37, 39.) These sweeping allegations are unaccompanied by specific and particularized allegations (dates, statements, actions) concerning the conduct of each Defendant.
Additionally, Plaintiff alleges that certain Defendants belonged to corporate committees, giving rise to additional fiduciary duties which, in turn, were breached in conjunction with the Apotex settlement. Defendants Campbell, Glimcher, Johansson, Freeh, and Robinson, are all members of the Audit Committee, which purportedly had insufficient internal controls in place. (Am. Compl. 155.) Defendants Campbell, Glimcher, Freeh, Williams and Robinson are members of the Committee on Directors and Corporate Governance, which failed to establish and enforce "guidelines of corporate governance." (Am. Compl. ¶¶ 158-61). For good measure, Plaintiff claims that the combined impact of the Sarbanes-Oxley Act (Am. Compl. ¶ 162), the relevant Company insurance policies (Am. Compl. ¶ 163), unspecified "irreconcilable conflicts" between Board members and the Company (Am. Compl. ¶ 164), and the Board Members' "personal and financial interest" in the Company (Am. Compl. ¶ 165) would also have made demand futile. Plaintiff's assumption appears to be that the individual and collective maledictions of the Board are so egregious that, a fortiori, demand would be futile. (Am. Compl. 1-6).
The Court declines to leap to Plaintiff's conclusions that demand would be futile. Rather, the Court notes other (relevant) allegations to this motion:
(1) Aware of Bristol-Myers's less-than-stellar record of regulatory compliance as a result of prior misconduct, and in light of the federal consent decree and/or deferred prosecution agreement under which it was operating,*fn1 the Board appointed a monitor (a retired United States District Court judge) to act as an overseer of the Company. (Am. Compl. ¶ 122)
(2) The Company submitted its initial Apotex settlement agreement-as required-for regulatory approval, thus complying with the oversight mechanism put in place by the consent decree. (Am. Compl. ¶ 85)
(3) Upon rejection of the initial settlement, the Company was invited by regulators to renegotiate the terms of the settlement and resubmit the agreement for approval. (Am. Compl. ¶ 89)
(4) After discovering the misconduct regarding the Apotex settlement, the Board took immediate action and involuntarily terminated the CEO and the ...