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In Re Tronox

January 5, 2011

IN RE TRONOX, INC. SECURITIES


The opinion of the court was delivered by: A. Scheindlin, U.S.D.J.:

X SHIRA

OPINION AND ORDER LITIGATION

I. INTRODUCTION

This action arises from alleged false and misleading statements made by Tronox, Inc. ("Tronox") during and following its initial public offering in 2005 (the "IPO" or "Tronox IPO"). On June 28, 2010, I issued an Opinion and Order ("Tronox I")*fn1 ruling on defendants' motions to dismiss various claims asserted in plaintiffs' Consolidated Amended Complaint ("CAC") and granting plaintiffs leave to replead certain claims. On July 30, 2010, plaintiffs filed their First Amended Consolidated Complaint ("FAC" or "Amended Complaint"). Count IV of that complaint alleges that Kerr-McGee Corporation ("KMG"); Anadarko Petroleum Corporation ("Anadarko") (as successor-in-interest to KMG and pursuant to respondeat superior); and Luke Corbett, Robert Wohleber (through the August 10, 2006 "Merger"), and Gregory Pilcher (through August 10, 2006) (collectively, the "KMG Officers") are liable as controlling persons both of Tronox and of the Tronox Officers.*fn2 KMG and Wohleber now move to dismiss Count IV for the period after the March 31, 2006 "Spin-Off"*fn3 ; Corbett and Pilcher move to dismiss Count IV in full; and Anadarko moves to dismiss Count IV and to strike those allegations pertaining to respondeat superior liability. For the following reasons, KMG's motion to dismiss is denied; Anadarko's motion to dismiss is denied in part and granted in part; and the KMG Officers' motion to dismiss is denied in part and granted in part.

II. APPLICABLE LAW

A. Control Person Liability Under Section 20(a) of the Exchange Act

"To establish a prima facie case of control person liability, a plaintiff must show (1) a primary violation by the controlled person, (2) control of the primary violator by the defendant, and (3) that the defendant was, in some meaningful sense, a culpable participant in the controlled person's fraud."*fn4

"[C]ontrol over a primary violator may be established by showing that [the controller] possessed 'the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.'"*fn5 "Actual control is essential to control person liability."*fn6 Moreover, "the Section 20(a) defendant must . . . have actual control over the transaction in question."*fn7 However, "[f]or purposes of Section 20(a) liability, actual control requires only the ability to direct the actions of the controlled person, and not the active exercise thereof."*fn8 "Allegations of influence are not the same as the power to direct the management and policies of the primary violator."*fn9 "Status of defendants as directors, 'standing alone, is insufficient to establish their control.'"*fn10

"Allegations of control are not averments of fraud and therefore need not be pleaded with particularity."*fn11 Thus, "'[a]t the pleading stage, the extent to which the control must be alleged will be governed by Rule 8's pleading standard.'"*fn12 "In the Second Circuit, 'the control person provisions are broadly construed as they were meant to expand the scope of liability under the securities laws.'"*fn13 "Whether a person is a 'controlling person' is a fact-intensive inquiry, and generally should not be resolved on a motion to dismiss."*fn14

B. Respondeat Superior Liability*fn15

"Respondeat superior imposes liability upon a principal for the torts of [its] agent committed within the scope of their agency relationship."*fn16 A principal-agent relationship "is created when [1] one party consents to have another act on its behalf, [2] with the principal controlling and directing the acts of the agent."*fn17 "Under the rubric of agency liability, there are two main theories -- actual authority and apparent authority. . . . Actual authority is that authority which a principal expressly or implicitly grants to an agent. . . . Apparent authority is that authority which, though not actually granted, the principal knowingly or negligently permits an agent to exercise, or which he holds him out as possessing."*fn18

"Under the agency theory, the issue of liability rests on the amount of control the parent corporation exercises over the actions of the subsidiary. . . . The parent corporation will be held liable for the activities of the subsidiary only if the parent dominates those activities."*fn19 "[W]hile one corporation whose shares are owned by a second corporation does not, by that fact alone, become the agent of the second company, a corporation -- completely independent of a second corporation -- may assume the role of the second corporation's agent in the course of one or more specific transactions."*fn20 "Circumstantial evidence of a principal-agent relationship includes the exclusive dedication of a subsidiary to assisting the parent company,payment of the subsidiary's expenses by the parent company, and requests for approval of the parent company for important decisions by the subsidiary."*fn21 "The level of control necessary to form a principal-agent relationship between a parent company and subsidiary defies resolution by mechanical formula[e], for the inquiry is inherently fact-specific."*fn22

C. Successor-in-Interest Liability

"[A] corporation acquiring the assets of another does not succeed to the liabilities of the successor corporation except where (1) the successor expressly or impliedly assumed the liability; (2) there was a de facto merger of the successor and predecessor; (3) the successor was a mere continuation of the predecessor; or (4) the transaction was fraudulent."*fn23 The fraud exception applies only where "the transaction is fraudulent and intended to provide an escape from liability."*fn24

Federal Rule of Civil Procedure 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity."*fn25

III. DISCUSSION

A. KMG: Control Person Liability After March 31, 2006

In Tronox I, I dismissed plaintiffs' claim that "KMG (and, by extension, KMG's officers) retained control of Tronox after March 31, 2006."*fn26

Plaintiffs had argued that, despite the fact that Tronox became an independent company on April 1, 2006, "KMG retained control after March 31, 2006 by virtue of the Master Separation Agreement ["MSA"]."*fn27 This argument, I found, "fail[ed] as a result of plaintiffs' own allegations."*fn28 In particular, plaintiffs had alleged that a condition in the MSA -- under which KMG was only responsible for partially reimbursing Tronox for environmental costs after Tronox had already "paid above the amount reserved for specified sites"*fn29 -- rendered the indemnification illusory because "the Chemical Business [did] not have sufficient cash flow to spend the reserved amounts and thus qualify for indemnification."*fn30 Reasoning that "it is not plausible to think that Tronox was controlled by an indemnification it could not receive," I held that "this condition in the [MSA] cannot form the basis for plaintiffs' allegation of control."*fn31 However, I granted plaintiffs leave to ...


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