In Re Danaher Corporation Shareholder Derivative Litigation

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
IN RE DANAHER CORPORATION Case No. 1:20-cv-02445-TNM
SHAREHOLDER DERIVATIVE (Consolidated with Case No. 1:20-cv-
LITIGATION 02846-TNM)
MEMORANDUM OPINION
It is black letter law that a board of directors manages a corporation’s affairs. Derivative
suits—when shareholders sue on a corporation’s behalf for wrong done to the corporation—
therefore impinge on a board’s management prerogatives. The demand requirement balances the
interests of directors in managing the corporation and the interests of shareholders in challenging
abuses that harm it. A shareholder thus properly brings a derivative suit only when the board
wrongfully refuses to act itself after the shareholder demands that it do so or when the
shareholder is excused from making a demand because the board is too conflicted to act
appropriately.
These principles take center stage here. Plaintiffs—some shareholders of Danaher
Corporation—sue several of Danaher’s directors. They argue that the Defendants falsely
represented Danaher as a diverse corporation even though no African American serves on the
Board. Defendants move to dismiss primarily because Plaintiffs failed to either make a demand
on the Board to bring this suit or to plead with particularity that such demand would have been
futile. The Court agrees. The Board—not shareholders—controlled the decision to act, and
Plaintiffs thus had to make demand on the Board. Because they did not, the Court will dismiss
the case.
I.
Danaher “designs, manufactures and markets professional, medical, industrial and
commercial products and services, with research and development, manufacturing, sales and
distribution in 60 countries.” Verified Shareholder Derivative Compl. (“Compl.”) ⁋ 2, ECF No.
1. 1 It is incorporated in Delaware, and its principal offices are in Washington, D.C. Id. ⁋ 23.
Plaintiff shareholders—City of Pontiac General Employees’ Retirement System and
Harry Markarian (“Shareholders”)—filed this shareholder derivative action against ten members
of Danaher’s 12-member Board of Directors 2 and Nominal Defendant Danaher (collectively, the
“Directors”). Id. ⁋⁋ 22–33; Pls.’ Opp’n to Defs.’ Mot. to Dismiss (“Pls.’ Opp’n”) at 8, ECF No.
29. 3 The Complaint acknowledges that Danaher has received “multiple awards and recognitions
for diversity,” including being recognized on Forbes’ list of the Top 200 Best Employers for
Diversity in 2018 and 2019. Compl. ⁋⁋ 54–55. But the Shareholders contend that, because there
are no black directors on Danaher’s Board, the Directors have falsely represented Danaher as a
company that promotes diversity. See, e.g., id. ⁋⁋ 12–13, 53–64. Under the Shareholders’
theory, African American representation is the sine qua non of diversity; other racial, ethnic,
gender, religious, and socioeconomic backgrounds do not count.
1
By stipulation of the parties, the Court consolidated City of Pontiac General Employees’
Retirement System v. Joyce (Case No. 20-cv-02445) and Markarian v. Joyce (Case No. 20-cv-
02846). Min. Order (Oct. 26, 2020). The Shareholders designated the Complaint in Case No.
20-cv-02445 to be operative. Pls.’ Designation of Operative Compl., ECF No. 25.
2
The Directors named in the Complaint include Thomas Joyce, Walter Lohr, John Schwieters,
Linda Hefner Filler, Alan Spoon, Teri List-Stoll, Steven Rales, Mitchell Rales, Raymond
Stevens, and Elias Zerhouni. Compl. ⁋⁋ 24–33. Two other directors were on the Board when the
Shareholders sued, but the Shareholders did not name them as defendants. Id. ⁋⁋ 34–35.
3
All page citations refer to the page numbers that the CM/ECF system generates.
2
In particular, the Shareholders challenge company statements such as “We’re passionate
about recruiting, developing and retaining the most talented and diverse team possible”; “A
diverse and inclusive workforce strengthens Danaher and ensures the best team continues to
win”; and “We seek out a wide range of unique experiences, perspectives and talents, ensuring
that diverse voices and viewpoints are heard and celebrated.” Id. ⁋⁋ 54, 56 (cleaned up).
The Shareholders say that the Board does not have a “policy, formal or informal, with
respect to the identification, selection or consideration of specific African American [Board]
nominees.” Id. ⁋ 60. They cite Danaher’s proxy statements, which—among other things—say
that the Board does not have such a policy “with respect to diversity” and that it “does not make
any particular weighting of diversity or any other characteristic in evaluating nominees and
directors,” but “subjectively takes into consideration the diversity . . . of the Board when
considering director nominees.” Id. (cleaned up).
The Complaint raises three claims: (1) breach of fiduciary duty (Count I); (2) unjust
enrichment (Count II); and (3) violation of § 14(a) of the Securities Exchange Act and SEC Rule
14a-9 (Count III). Id. at 44–46. The Shareholders seek broad relief, including damages and an
order directing Danaher to replace three of its current directors with “two African Americans and
one other racial minority,” “[i]nvest $150 million in economic and social justice programs,” and
“[f]ill 15% of all new positions in the United States with African Americans.” Id. at 46–47.
Before the Court is the Directors’ motion to dismiss. It is ripe for disposition. 4
4
The Court has federal question jurisdiction over the § 14(a) claim, 28 U.S.C. § 1331, and
supplemental jurisdiction over the state law claims, id. § 1367. Although the Directors request a
hearing, see Defs.’ Mot. at 1, the Court finds one unnecessary to resolve the motion, see LCvR
7(f) (“A party may in a motion or opposition request an oral hearing, but its allowance shall be
within the discretion of the Court.”).
3
II.
The Directors move to dismiss because the Shareholders fail to properly plead demand
futility. See, e.g., Defs.’ Mem. in Supp. of Mot. to Dismiss Pls.’ Verified Shareholder Compl.
(“Defs.’ Mot.”) at 19, ECF No. 27-1. Federal Rule of Civil Procedure 23.1 governs derivative
actions. It requires that a complaint “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). While Rule 23.1 provides the pleading standard, state law
governs the substance of the demand requirement. Kamen v. Kemper Fin. Servs., Inc., 500 U.S.
90, 108–09 (1991). The parties agree that Delaware law applies. Defs.’ Mot. at 16 n.4; Pls.’
Opp’n at 15.
The Directors also move to dismiss under Federal Rule of Civil Procedure 12(b)(6). See,
e.g., Defs.’ Mot. at 20. To survive a motion to dismiss under Rule 12(b)(6), “a complaint must
contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its
face.” Hurd v. District of Columbia, 864 F.3d 671, 678 (D.C. Cir. 2017) (cleaned up). A
plaintiff must plead “factual content that allows the court to draw the reasonable inference that
the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
Given the case’s procedural posture, the Court accepts the Complaint’s factual allegations
as true and construes them in the light most favorable to the Shareholders. See L. Xia v.
Tillerson, 865 F.3d 643, 649 (D.C. Cir. 2017). The Court need not, however, credit “a legal
conclusion couched as a factual allegation.” Iqbal, 556 U.S. at 678 (cleaned up). The Court
considers “only the facts alleged in the complaint, any documents either attached to or
incorporated in the complaint and matters of which [it] may take judicial notice.” Hurd, 864
4
F.3d at 678 (cleaned up). Evaluating a motion to dismiss is “a context-specific task that requires
the reviewing court to draw on its judicial experience and common sense.” Iqbal, 556 U.S. at
679.
III.
“A cardinal precept of the General Corporation Law of the State of Delaware is that
directors, rather than shareholders, manage the business and affairs of the corporation.” Aronson
v. Lewis, 473 A.2d 805, 811 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746
A.2d 244 (Del. 2000). A stockholder bringing a derivative action “asserts a cause of action
belonging to the corporation.” Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993). So a
derivative action, “[b]y its very nature . . . impinges on the managerial freedom of directors.”
Aronson, 472 A.2d at 811.
The demand requirement flows from this concern. A shareholder can bring a derivative
suit only “where either the stockholder has demanded the directors pursue a corporate claim and
the directors have wrongfully refused to do so, or where demand is excused because the directors
are incapable of making an impartial decision regarding whether to institute such litigation.”
Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 366–67 (Del. 2006). In this way,
“the demand requirement implements the basic principle of corporate governance that the
decisions of a corporation—including the decision to initiate litigation—should be made by the
board of directors or the majority of shareholders.” Kamen, 500 U.S. at 101 (cleaned up).
The Shareholders concede that they did not make demand on Danaher’s Board, but they
argue that it would have been futile. See, e.g., Compl. ⁋ 100. There are two tests for determining
whether a complaint properly alleges demand futility. Wood v. Baum, 953 A.2d 136, 140 (Del.
2008). When a decision of the board of directors is the subject of a derivative suit—in other
5
words, when “claims involv[e] a contested transaction”—the Aronson test applies. Id. Under it,
courts consider “whether, under the particularized facts alleged, a reasonable doubt is created
that: (1) the directors are disinterested and independent and (2) the challenged transaction was
otherwise the product of a valid exercise of business judgment.” Aronson, 473 A.2d at 814. In
contrast, when there is an “absence of board action”—or, put differently, “where the subject of
the derivative suit is not a business decision of the board”—the Rales test applies. See Rales,
634 A.2d at 933–34.
The parties apparently agree that Rales applies here. See, e.g., Pls.’ Opp’n at 35; Defs.’
Reply in Supp. of Mot. to Dismiss Pls.’ Verified Shareholder Compl. (“Defs.’ Reply”) at 11,
ECF No. 30. Indeed, the Aronson test would be inappropriate because, as the Delaware Supreme
Court explained, “[t]he absence of board action . . . makes it impossible to perform the essential
inquiry contemplated by Aronson—whether the directors have acted in conformity with the
business judgment rule in approving the challenged transaction.” 5 Rales, 634 A.2d at 933.
Under Rales, demand is considered futile if a complaint alleges particularized facts that
“create a reasonable doubt that, as of the time the complaint is filed, the board of directors could
have properly exercised its independent and disinterested business judgment in responding to a
demand.” Id. at 934. Courts typically consider first “whether any directors were interested.”
McElrath v. Kalanick, 224 A.3d 982, 991 (Del. 2020). If any directors were interested, then “the
court considers whether any other directors were not independent of an interested director.” Id.5
Any daylight between the two tests here would not change the outcome. Cf. Teamsters Union
25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 67 n.131 (Del. Ch. 2015) (explaining that
“although the Rales test looks somewhat different from Aronson, in that it involves a singular
inquiry, that singular inquiry makes germane all of the concerns relevant to both the first and
second prongs of Aronson” (cleaned up)).
6
The main issue here is whether the Directors were conflicted, or “interested.” “A director
is considered interested where he or she will receive a personal financial benefit from a
transaction that is not equally shared by the stockholders” or “where a corporate decision will
have a materially detrimental impact on a director, but not on the corporation and the
stockholders.” Rales, 634 A.2d at 936. A director can also be interested if “she would face a
substantial likelihood of personal liability for the conduct alleged in the complaint.” McElrath,
224 A.3d at 991; see also Ryan v. Gifford, 918 A.2d 341, 355 (Del. Ch. 2007) (“Directors who
are sued have a disabling interest for pre-suit demand purposes when the potential for liability is
not a mere threat but instead may rise to a substantial likelihood.” (cleaned up)). The
Shareholders latch on to the latter theory. They argue that the Directors are interested (and
demand is therefore excused) because they “each face a substantial likelihood of liability.”
Compl. ⁋ 95; see also Pls.’ Opp’n at 35–37 (arguing the same).
Whether directors face a substantial likelihood of liability can depend in part on whether
a company’s charter limits director liability. “Where directors are contractually or otherwise
exculpated from liability for certain conduct, then a serious threat of liability may only be found
to exist if the plaintiff pleads a non-exculpated claim against the directors based on particularized
facts.” Wood, 953 A.2d at 141 (cleaned up). Danaher’s charter shields the Directors from duty
of care claims, but not duty of loyalty claims. See Defs.’ Mot. at 22 n.7; Pls.’ Opp’n at 34–35;
see also Stone, 911 A.2d at 367 (explaining that a provision such as Danaher’s “can exculpate
directors from monetary liability for a breach of the duty of care, but not for conduct that is not
in good faith or a breach of the duty of loyalty”). Plaintiffs allege only duty of loyalty claims.
See Pls.’ Opp’n at 34–35; Defs.’ Reply at 9.
7
When claiming that directors are interested, “a derivative complaint must plead
facts specific to each director, demonstrating that at least half of them could not have exercised
disinterested business judgment in responding to a demand.” Desimone v. Barrows, 924 A.2d
908, 943 (Del. Ch. 2007); see also In re Facebook, Inc. S’holder Derivative Priv. Litig., 367 F.
Supp. 3d 1108, 1123–24 (N.D. Cal. 2019) (quoting Desimone and explaining that “[d]emand
futility is assessed on a director-by-director basis”). The Complaint alleges that there are 11
directors on Danaher’s Board, but it also suggests that there are 12. 6 Compl. ⁋⁋ 24–35, 85.
Either way, the Shareholders must show that at least six were interested to properly plead
demand futility.
The Delaware Supreme Court has recognized that “directors are entitled to a presumption
that they were faithful to their fiduciary duties” and so, “[i]n the context of presuit demand, the
burden is upon the plaintiff in a derivative action to overcome that presumption.” Beam ex rel.
Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1048–49 (Del. 2004). The
D.C. Circuit has likewise acknowledged that “the Delaware precedents on demand futility make
clear that the bar is high, the standards are stringent, and the situations where demand will be
excused are rare.” Pirelli Armstrong Tire Corp. Retiree Med. Benefits Tr. ex rel. Fed. Nat.
Mortg. Ass’n v. Raines, 534 F.3d 779, 782–83 (D.C. Cir. 2008) (Kavanaugh, J.), abrogated on
other grounds by Lightfoot v. Cendant Mortg. Corp., 137 S. Ct. 553 (2017).
With these principles in mind, the Court turns to the Shareholders’ claims. The Court
considers whether the Shareholders have adequately shown demand futility as required by Rule
6
The Directors say that 12 directors were on the Board when the Shareholders sued; but as they
acknowledge, any difference is immaterial. See Defs.’ Mot. at 17–18 & n.6.
8
23.1 for each of their claims: (A) breach of fiduciary duty; (B) unjust enrichment; and (C) a
violation of § 14(a) of the Exchange Act and SEC Rule 14a-9. See Compl. ⁋⁋ 101–14.
A.
In Count I, the Shareholders assert that “Defendants violated and breached their fiduciary
duties of loyalty, good faith, due care, oversight, and candor.” Id. ⁋ 103. The parties’ briefing
clarifies that the Shareholders press only a violation of the duty of loyalty. See, e.g., Pls.’ Opp’n
at 34–35 (stating that the Complaint “pleads only non-exculpable claims” for the breach of the
duty of loyalty). More specifically, the Shareholders contend that the Directors breached the
duty of loyalty because they “misrepresented and omitted the material facts regarding Danaher’s
commitment to diversity at all levels of [its] business” and “publicly feigned support for diversity
to garner diversity awards, but failed to disclose that ethnic diversity ends at the doorstep to
Danaher’s Board.” Id. at 21, 36; see also Compl. ⁋⁋ 101–05.
The Shareholders point to diversity-related statements on the company’s website, in its
annual report, and in its 2018 corporate sustainability report, including:
• We’re passionate about recruiting, developing and retaining the most talented
and diverse team possible.
• Our efforts around diversity and inclusion are among the important drivers of
associate engagement, and we have made good progress on these fronts: over
the last five years, our associate engagement score is up more than 2,000 basis
points.
• We have made tremendous progress toward this goal [of a better stronger
Danaher] and are honored to be recognized as one of the Top 200 Best
Employers for Diversity by Forbes. We are committed to improving on these
initiatives and metrics over time so that we can continue to build an inclusive
and fulfilling workplace for our associates.
• Our Associate Resource Groups (ARGs) create opportunities for
underrepresented individuals including women and people of color to connect
personally and collaborate professionally – all in the spirit of achieving their
highest potential. And we are honored to have been named to Forbes’ list of
Best Employers for Women (2019) and Best Employers for Diversity (2018 &
2019).
9
• A diverse and inclusive workforce strengthens Danaher and ensures the best
team continues to win. We are working to support an inclusive culture in which
every associate feels they belong . . . .
• We seek out a wide range of unique experiences, perspectives and talents,
ensuring that diverse voices and viewpoints are heard and celebrated.
Compl. ⁋⁋ 54, 56 (cleaned up).
The parties disagree over what standard applies to the duty of loyalty claim. The
Directors argue that the crux of the Shareholders’ claim is that the Directors failed to exercise
proper oversight in preventing the company from issuing false statements and thus the standard
of In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996)
applies. See Defs.’ Mot. at 20–21; see also Stone, 911 A.2d at 370 (“Caremark articulates the
necessary conditions predicate for director oversight liability”). This is a plausible reading of the
Complaint. See, e.g., Compl. ⁋ 103 (alleging breach of various duties, including “oversight”).
The Shareholders counter that this case is not about employee oversight liability, but
“rather it is built on Defendants’ personal acts and omissions.” Pls.’ Opp’n at 20 (cleaned up).
They cite authorities suggesting that their fiduciary duty claim is more properly analyzed as
alleging violations of the obligation of the Board to communicate honestly with shareholders.
See, e.g., id. at 16–17 & nn.12–13. They may be right. The problem, though, is that the
Shareholders have not shown a substantial likelihood of personal liability under either standard.
Under the Caremark framework, the Shareholders must show that either “(a) the directors
utterly failed to implement any reporting or information system or controls; or (b) having
implemented such a system or controls, consciously failed to monitor or oversee its operations
thus disabling themselves from being informed of risks or problems requiring their attention.”
Stone, 911 A.2d at 370. “In either case, imposition of liability requires a showing that the
directors knew that they were not discharging their fiduciary obligations.” Id. Caremark claims
10
are “rooted in concepts of bad faith; indeed, a showing of bad faith is a necessary condition to
director oversight liability.” City of Birmingham Ret. & Relief Sys. v. Good, 177 A.3d 47, 55
(Del. 2017) (cleaned up); see also id. (“Because of the difficulties in proving bad faith director
action, a Caremark claim is possibly the most difficult theory in corporation law upon which a
plaintiff might hope to win a judgment.” (cleaned up)).
Plaintiffs cite the fiduciary duty of directors “to deal with their stockholders honestly.”
Malone v. Brincat, 722 A.2d 5, 10 (Del. 1998); Pls.’ Opp’n at 16–17 & nn.12–13. “When a
Delaware corporation communicates with its shareholders, even in the absence of a request for
shareholder action, shareholders are entitled to honest communication from directors, given with
complete candor and in good faith.” In re INFOUSA, Inc. S’holders Litig., 953 A.2d 963, 990
(Del. Ch. 2007). In other words, “directors have a fiduciary duty to shareholders to exercise due
care, good faith and loyalty.” Malone, 722 A.2d at 10. Directors violate this duty when, even
with no shareholder action, they “deliberately misinform[] shareholders about the business of the
corporation, either directly or by a public statement.” Id. at 14; see also Dohmen v. Goodman,
234 A.3d 1161, 1168–69 (Del. 2020) (“[T]o state a claim for breach of fiduciary duty in this
context, the directors must have knowingly disclosed false information. By requiring scienter,
we have sought to distinguish innocent or negligent disclosure violations from those involving an
intent to mislead stockholders.” (cleaned up)).
Under either standard, then, the Shareholders must show that the Directors face a
substantial likelihood of personal liability for knowingly violating their fiduciary duty. Despite
their differences, the parties seem to agree on this. See Pls.’ Opp’n at 23, 25–26, 35–36; Defs.’
Reply at 12. But the Shareholders have not shown demand futility because they have not alleged
with particularity that the challenged statements are false. Even if the Shareholders had made
11
that showing, they also have not alleged specific facts connecting the Directors to the statements
or facts showing that the Directors acted intentionally.
1.
For starters, the Shareholders have not properly alleged that any of the cited statements
were false. While the Shareholders do not address the alleged falsity of each statement in detail,
they argue that the statements together are false or misleading because there are no African
American directors on Danaher’s Board. See, e.g., Compl. ⁋⁋ 53, 55; Pls.’ Opp’n at 26
(explaining that the statements were “materially false and misleading when made” because “the
Danaher Board had zero black directors, and has not had a black director since at least 2015”).
This argument fails for the simple reason that most of the statements at issue do not apply to the
Board or imply that the Board is diverse. Instead, the statements refer to “associate
engagement,” a “workplace for our associates,” “Associate Resource Groups,” and “[a] diverse
and inclusive workforce.” Compl. ⁋⁋ 54, 56 (cleaned up and emphasis added). If a basketball
coach says that his players “are in top physical condition,” the coach is not also suggesting that
he is in great shape.
Just so here. Statements about the diversity of Danaher’s workforce say nothing about
the diversity of the Board. Indeed, an affirmation of one thing—here, the employees’
diversity—often implies the negation of another—the employers’ diversity. See Antonin Scalia
& Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 428 (2012) (defining “[t]he
the linguistic canon expressio unius est exclusio alterius” as “[t]he expression of one thing is the
exclusion of another”); id. at 107 (explaining that “[w]e encounter the [expressio unius] device—
and recognize it—frequently in our daily lives,” such as “[w]hen a car dealer promises a low
12
financing rate to ‘purchasers with good credit,’ [and] it is entirely clear that this rate is not
available to purchasers with spotty credit”).
More, the Complaint itself admits there was no such misrepresentation. The proxy
statements cited by the Shareholders convey that the Board has no strict diversity requirements.
See Compl. ⁋ 60. The proxy statements explain that the Board “believes that [it], taken as a
whole, should embody a diverse set of skills, knowledge, experiences and backgrounds
appropriate in light of the Company’s needs.” Id. (quoting 2016–2020 proxy statements). But
they clarify that “[t]he Board does not have a formal or informal policy with respect to
diversity”; that “[t]he Board does not make any particular weighting of diversity or any other
characteristic in evaluating nominees and directors”; and that, instead, the Board “takes into
consideration the diversity (with respect to race, gender and national origin) of the Board when
considering director nominees.” Id. (cleaned up) (quoting 2016–2020 proxy statements). The
Shareholders thus bemoan that the “Company’s Proxy Statements convey an explicit absence of
intention to build a diverse Board.” Id. (emphasis added). How could anyone be misled given
these “explicit” statements?
The Shareholders fare no better as to statements that could be read as applying to the
Board as well as the workforce—for example, that the company “seek[s] out a wide range of
unique experiences, perspectives and talents, ensuring that diverse voices and viewpoints are
heard and celebrated.” Id. ⁋ 56 (cleaned up). That there are no African Americans on Danaher’s
Board does not inherently mean that the Board is not diverse. The Board could be racially
diverse in other ways. And there are other types of diversity besides racial diversity. While the
13
Court must accept the Shareholders’ well-pled allegations as true, the Court rejects their cramped
and archaic understanding of diversity. 7
2.
More still, even if the Complaint properly alleged false statements, it lacks well-pled
allegations that each Defendant was involved with the statements or acted with scienter. See
Desimone, 924 A.2d at 943 (“a derivative complaint must plead facts specific to each director”).
The Shareholders allege that the Directors “intentionally or recklessly caused the Company to
disseminate to Danaher shareholders materially misleading and inaccurate information.” Compl.
⁋ 104. But these allegations are inadequate. “Pleading that the director defendants ‘caused’ or
‘caused or allowed’ the Company to issue certain statements is not” particularized enough to
excuse demand. In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 133 n.88 (Del.
Ch. 2009); see also In re Yahoo! Inc. S’holder Derivative Litig., 153 F. Supp. 3d 1107, 1120
(N.D. Cal. 2015) (allegations “that the Yahoo Directors ‘signed’ or were involved in ‘reviewing’
the disclosures at issue” were “[c]onclusory” and “do not excuse demand under Delaware law”).
For scienter, “[a] determination of whether the alleged misleading statements or
omissions were made with knowledge or in bad faith requires an analysis of the state of mind of
the individual director defendants.” In re Citigroup, 964 A.2d at 134. The Shareholders contend
that the Directors knew the statements were false because of their “intentional, knowing and
persistent failure to nominate any black director candidates to Danaher’s Board.” Pls.’ Opp’n at
7
Most of the statements the Shareholders cite are also of the type that—at least in other
contexts—courts consider not actionable. Take the statement “[w]e’re passionate about
recruiting, developing and retaining the most talented and diverse team possible.” Compl. ⁋ 54
(cleaned up). Because it is not “capable of objective verification,” it is hard to see how it can be
false or misleading. In re Harman Int’l Indus., Inc. Sec. Litig., 791 F.3d 90, 109 (D.C. Cir. 2015)
(cleaned up) (analyzing securities claims).
14
28. But that the Directors did not nominate any African Americans to the Board does not mean
that the alleged statements were false. And even if they were, such accusations against the
Directors as a group do not satisfy the demand futility requirement. See, e.g., Hack v. Wright,
396 F. Supp. 3d 720, 741 (S.D. Tex. 2019) (“[G]roup allegations are insufficient to excuse
demand. Under Delaware law, a plaintiff must plead with particularity the reasons for excusing
demand as to each director individually.”); In re Citigroup, 964 A.2d at 134 (explaining that
“broad group allegations about the director defendants” were insufficient because “[a]
determination of whether the alleged misleading statements or omissions were made with
knowledge or in bad faith requires an analysis of the state of mind of the individual director
defendants”). Without specific allegations for each Director, the Court cannot find that they face
a substantial likelihood of liability. See In re Citigroup, 964 A.2d at 134.
3.
The Shareholders also seem to suggest that the Directors have failed to maximize
shareholder wealth. See, e.g., Pls.’ Opp’n at 13–15. They rely heavily on studies showing that
companies with more diversity generally (and more diverse boards) earn higher profits. See,
e.g., Compl. ⁋⁋ 46–51. The Court construes the Shareholders’ filings as arguing that the false
statements have injured shareholder wealth, not that the failure to maximize shareholder wealth
is a separate alleged breach. See, e.g., Pls.’ Opp’n at 10–11 (“Rather than promote shareholder
wealth, defendants are injuring it” through “unlawful misrepresentations and omissions”).
If the Shareholders did intend to raise such a standalone breach claim, it would fail.
True, a director’s fiduciary duty can encompass earning profit. See, e.g., In re Trados Inc.
S’holder Litig., 73 A.3d 17, 20 (Del. Ch. 2013) (“Directors of a Delaware corporation owe
fiduciary duties to the corporation and its stockholders which require that they strive prudently
15
and in good faith to maximize the value of the corporation for the benefit of its residual
claimants.”); Pls.’ Opp’n at 9, 15–16, 36. But the Court agrees with the Directors that “neither
the duty of care nor the duty of loyalty binds directors to any single course of profit-maximizing
action.” Defs.’ Reply at 19. The Shareholders cite no authority to the contrary. In fact,
Delaware law grants directors substantial leeway to make business decisions and act in a
corporation’s best interest. See, e.g., Brehm, 746 A.2d at 264 (“Irrationality is the outer limit of
the business judgment rule.” (cleaned up)); Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del.
1971) (“A board of directors enjoys a presumption of sound business judgment, and its decisions
will not be disturbed if they can be attributed to any rational business purpose. A court under
such circumstances will not substitute its own notions of what is or is not sound business
judgment.”).
The Shareholders’ assertion that profit maximization is a corporation’s only purpose, see
Pls.’ Opp’n at 9–10, is also surprising, given their prayer for relief. To be sure, until recently,
profit maximization was widely recognized as the sole goal of corporations. See Milton
Friedman, A Friedman Doctrine – The Social Responsibility of Business is to Increase its Profits,
N.Y. Times, Sept. 13, 1970, at SM17; but see Business Roundtable Redefines the Purpose of a
Corporation to Promote ‘An Economy That Serves All Americans’, Business Roundtable (Aug.
19, 2019), https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-
corporation-to-promote-an-economy-that-serves-all-americans. But among other things, the
Shareholders ask that the Court order Danaher to “[i]nvest $150 million in economic and social
justice programs for the African American community designed to address historical racial
disparities” and “[f]inance 100 education scholarships valued at $100,000 each for K-12 African
American students annually at partner schools located in the communities in which the Company
16
does business and/or maintains its headquarters.” Compl. at 47. Plaintiffs must think just the
opposite—that corporations need to promote certain values, despite the costs.
In sum, the Shareholders have failed to plead that the Directors face a substantial
likelihood of liability for breach of fiduciary duty. Pre-suit demand is therefore not futile as to
this claim.
B.
The Shareholders also argue that they did not have to make demand because the Directors
face liability for unjust enrichment, their second claim. See Pls.’ Opp’n at 36. Their Complaint
alleges that “Defendants were unjustly enriched by their receipt of compensation while breaching
their fiduciary duties owed to Danaher.” Compl. ⁋ 107.
The Directors argue that, under Delaware law, if demand is not futile as to the
Shareholders’ fiduciary duty claim, it is not futile as to their unjust enrichment claim either. See
Defs.’ Mot. at 29. The Shareholders do not provide contrary authority. See Pls.’ Opp’n at 29–
30, 35–37. So the Shareholders’ unjust enrichment claim will be dismissed under Rule 23.1 too.
Accord Hack, 396 F. Supp. 3d at 744–45 (finding demand not excused for an unjust enrichment
claim “for the same reasons” that demand was not excused as to a fiduciary duty claim because
plaintiff provided no authority to counter defendants’ citations suggesting that “claims for unjust
enrichment and gross mismanagement are considered duplicative of claims for breach of
fiduciary duty”); Calma on Behalf of Citrix Sys., Inc. v. Templeton, 114 A.3d 563, 592 (Del. Ch.
2015) (finding an unjust enrichment claim “duplicative of” a fiduciary duty claim at the motion-
to-dismiss stage because “there is no alleged unjust enrichment separate or distinct from the
alleged breach of fiduciary duty: if Defendants did not breach their fiduciary duties . . . then
Defendants could not have been unjustly enriched”); Hughes v. Xiaoming Hu, No. CV 2019-
17
0112-JTL, 2020 WL 1987029, at *18 (Del. Ch. Apr. 27, 2020) (finding that the demand futility
analysis for an unjust enrichment claim “necessarily treads the same path as” the futility analysis
for a breach of fiduciary duty claim).
In any event, the Shareholders’ unjust enrichment claim would likely independently fail.
See Defs.’ Mot. at 29–30. To make out such a claim, a plaintiff must allege facts showing “(1)
an enrichment, (2) an impoverishment, (3) a relation between the enrichment and
impoverishment, (4) the absence of justification, and (5) the absence of a remedy provided by
law.” Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010). The Shareholders argue that the
Directors were unjustly enriched by receiving compensation, but they do not explain how the
compensation is tied to the alleged misconduct or whether the Directors performed compensable
services for Danaher. See Pls.’ Opp’n at 29–30, 36. They have thus failed to sufficiently allege
a “relation between” the Directors’ compensation and their allegedly wrongful acts. Nemec, 991
A.2d at 1130; cf. Taylor v. Kissner, 893 F. Supp. 2d 659, 673–74 (D. Del. 2012) (rejecting theory
“that paying the salaries and standard fees of officers and directors who commit breaches of
fiduciary duty constitutes” waste and unjust enrichment because the plaintiff “has not properly
alleged any breach of fiduciary duty or any other theory providing a factual basis to conclude
that the compensation received by each Defendant was paid without justification”).
C.
Finally, the Shareholders argue that they need not make a demand because the Directors
face a substantial likelihood of liability as to their claim brought under § 14(a) of the Exchange
Act. Section 14(a) makes it “unlawful for any person . . . to solicit any proxy” in violation of
SEC rules. 15 U.S.C. § 78n(a). Exchange Act Rule 14a-9 then states that
[n]o solicitation subject to this regulation shall be made by means of any proxy
statement . . . containing any statement which, at the time and in the light of the
18
circumstances under which it is made, is false or misleading with respect to any
material fact, or which omits to state any material fact necessary in order to make
the statements therein not false or misleading.
17 C.F.R. § 240.14a-9(a).
“It is well settled that a private plaintiff bringing a claim under § 14(a) or Rule 14a–9
must allege that (1) a proxy statement contained a material misrepresentation or omission which
(2) caused the plaintiff injury and (3) that the proxy solicitation was an essential link in the
accomplishment of the transaction.” SEC v. Brown, 740 F. Supp. 2d 148, 166 (D.D.C. 2010)
(cleaned up). The Shareholders challenge these assertions in Danaher’s 2016–2020 proxy
statements:
• Reflecting our continued commitment to diversity and inclusion, we’ve trained
more than 3,000 managers globally on how to build inclusive and diverse teams
and leaders . . . .
• The Board does not have a formal or informal policy with respect to diversity
but believes that the Board, taken as a whole, should embody a diverse set of
skills, knowledge, experiences and backgrounds appropriate in light of the
Company’s needs, and in this regard also subjectively takes into consideration
the diversity (with respect to race, gender and national origin) of the Board
when considering director nominees. The Board does not make any particular
weighting of diversity or any other characteristic in evaluating nominees and
directors.
• As part of its process for identifying and evaluating directors and director
nominees and ensuring an appropriate range of backgrounds and expertise, our
Board actively considers Board refreshment. Supported by the Nominating and
Governance Committee, the Board seeks to thoughtfully balance the knowledge
and experience that comes from longer-term Board service with the fresh ideas,
energy and new domain expertise that can come from adding new directors. 8
8
The Directors argue that the Shareholders’ challenges to all but one of the proxy statements are
time barred. Defs.’ Mot. at 36. The Court need not address this challenge because the
Shareholders’ § 14(a) claim—as to all proxy statements—fails for other reasons. But the
Directors are likely right. The parties agree that a one-year statute of limitations and three-year
statute of repose applies to § 14(a) claims. See id.; Pls.’ Opp’n at 34. The Directors point out
that the Shareholders would have been aware of facts underlying their § 14(a) claim when the
proxy statements were filed, which would mean that the Shareholders could only challenge the
2020 proxy statement. Defs.’ Mot. at 36. Indeed, the Shareholders themselves argue that the
lack of African Americans on the Board was an obvious problem of which the Directors must
have been aware. See, e.g., Pls.’ Opp’n at 23 (stating that the Directors “knew their diversity
statements were materially false because when made Danaher’s Board did not include a single
19
See Compl. ⁋⁋ 54, 60–61 (cleaned up). They claim that the proxy statements “omitted material
facts”—specifically, that “Defendants were causing Danaher to exclude African American
candidates from the pool of candidates for nomination to the Danaher Board and/or the senior
executive leadership team, and that Defendants were not committed to true diversity throughout
Danaher’s ranks, including in the boardroom.” Id. ⁋ 111.
The Directors argue that the Shareholders have failed to plead with particularity that the
proxy statements challenged were “an essential link in the accomplishment of the transaction.”
Mills v. Elec. Auto-Lite Co., 396 U.S. 375, 385 (1970); Defs.’ Mot. at 30–32. The Court agrees.
The Shareholders contend that the proxy statements “were an essential link in Danaher
shareholders following the Company’s recommendation to re-elect Defendants to the Danaher
Board and approve the executive pay packages.” Compl. ⁋ 113. This harmed Danaher, the
Shareholders contend, because shareholders were “unaware of the defendants’ disdain for ethnic
board diversity,” and “[s]ignificantly lower profitability and dimmer prospects are the realities
for less diverse firms.” Pls.’ Opp’n at 31–32.
But “[c]ourts have . . . regularly dismissed Section 14(a) claims based on the election of
directors because the losses are indirect.” In re The Home Depot, Inc. S’holder Derivative Litig.,
223 F. Supp. 3d 1317, 1331 (N.D. Ga. 2016). Consider General Electric Company v. Cathcart,
in which the plaintiff argued that “the misleading proxy statements served as ‘an essential link’
in the transactions which caused General Electric to lose money; the proxy statements allowed
the [directors] to retain their positions on the board, thus ensuring that they could continue to
mismanage the company.” 980 F.2d 927, 933 (3d Cir. 1992). The Third Circuit explained that
male or female director who is black”). Presumably, it would have been obvious to the
Shareholders, too.
20
“this is precisely the sort of claim that courts have repeatedly found insufficient to satisfy the
transaction causation requirement.” Id.The court reasoned that “the mere fact that omissions in proxy materials, by permitting
directors to win re-election, indirectly lead to financial loss through mismanagement will not
create a sufficient nexus with the alleged monetary loss.” Id. “Rather,” the court explained,
“damages are recoverable under Section 14(a) only when the votes for a specific corporate
transaction requiring shareholder authorization, such as a corporate merger, are obtained by a
false proxy statement, and that transaction was the direct cause of the pecuniary injury for which
recovery is sought.” Id.; see also Edward J. Goodman Life Income Tr. v. Jabil Cir., Inc., 594
F.3d 783, 797 (11th Cir. 2010) (following Cathcart and dismissing proxy solicitation claims
because “the damages suffered by the shareholders were caused not by the policies that they
approved via proxy, but by management’s failure to follow those policies”).
So too here. The Shareholders’ causation theory is as follows: the misleading proxy
statements caused the election of the Directors, who then failed to nominate an African
American director, which harmed the company because companies with less diverse boards are
less profitable. See, e.g., Pls.’ Opp’n at 30–34. Under the Shareholders’ theory, the election
itself did not harm the company—the Directors’ failure to nominate an African American
director did. The proxy statements thus could not have been an “an essential link in the
accomplishment of the transaction” that caused harm. Mills, 396 U.S. at 385.
The Shareholders’ only response is that they have alleged what the plaintiff in Cathcart
did not—“that the director elections facilitated by the misleading proxies are the loss causing
transaction.” Pls.’ Opp’n at 33–34. But the Court finds this argument untenable, especially
given that the Shareholders agree with the Directors that “the essential link requirement is
21
established when the proxy statement at issue directly authorizes the loss-generating corporate
action.” Id. at 30 (cleaned up and emphasis added). The proxy statements at issue did not
directly cause the non-nomination of a black director. 9
The Shareholders’ cases are also distinguishable because the alleged harm to the
company in these cases was more directly tied to the election of directors. Take In re Zoran
Corporation Derivative Litigation, which concerned alleged backdating of stock options. 511 F.
Supp. 2d 986, 995 (N.D. Cal. 2007). While the plaintiff there essentially argued “that the
directors used the proxy solicitations to maintain their positions on Zoran’s board,” shareholders
in that case also “authorized the stock-option plans under which the allegedly-backdated options
were granted.” Id. at 1016. Thus, “[w]ith each election, the board could continue to grant
backdated stock options to itself and Zoran executives.” Id.; see also In re Maxim Integrated
Prod., Inc., Deriv. Lit., 574 F. Supp. 2d 1046, 1066 (N.D. Cal. 2008) (explaining that the
complaint alleged that defendants “issued proxy statements requesting votes for their election as
directors and for approval of various Stock Plans”). Even if these cases do provide some support
for the Shareholders’ theory, see, e.g., In re Fossil, Inc., 713 F. Supp. 2d 644, 655 (N.D. Tex.
2010) (finding sufficient plaintiffs’ allegation, among others, that “the actions of the defendants
were the proximate cause of the backdating, and the harm that befell Fossil from its directors
would not have occurred but for the directors’ ability to maintain their positions on the Board by
9
If the Shareholders argue that the election of the Directors was the challenged transaction
because the Directors themselves are not diverse enough, that theory also fails. To begin, the
Shareholders did not clearly present this theory in the Complaint; and they cannot amend their
Complaint through an opposition brief. Kingman Park Civic Ass’n v. Gray, 27 F. Supp. 3d 142,
160 n.7 (D.D.C. 2014) (“It is well settled law that a plaintiff cannot amend his or her complaint
by the briefs in opposition to a motion to dismiss.”). It is also unclear how the challenged proxy
statements would have misled shareholders into electing non-diverse directors when shareholders
could evaluate for themselves the Directors’ diversity. See Defs.’ Reply at 23–24.
22
false and misleading proxies” (cleaned up)), the Court finds the Directors’ authority more
persuasive.
The Shareholders also face other problems. For example, they have not alleged
particularized facts showing that the challenged statements were false or misleading. While the
Shareholders claim that the Directors omitted that they “were causing Danaher to exclude
African American candidates” and that they “were not committed to true diversity throughout
Danaher’s ranks,” Compl. ⁋ 111, these allegations are insufficient. These are merely
“conclusion[s] unsupported by particularized facts.” Klein v. Ellison, No. 20-CV-04439-JSC,
2021 WL 2075591, at *4 (N.D. Cal. May 24, 2021) (finding conclusory an argument that “the
Board has never in good faith actively sought minority candidates” (cleaned up)); see also
Ocegueda on behalf of Facebook v. Zuckerberg, No. 20-CV-04444-LB, 2021 WL 1056611, at *7
(N.D. Cal. Mar. 19, 2021) (finding plaintiff’s arguments that a board omitted facts that it “was
not committed to diversity, never wanted minority candidates, and wanted minorities to be seen
and not heard” were “not facts” but “conclusions”). 10
The Complaint thus fails to allege particularized facts showing that the Directors face a
substantial threat of personal liability as to their § 14(a) claim. The Shareholders have therefore
failed to sufficiently allege demand futility.
10
Because the Court finds the Shareholders’ allegations deficient on other grounds, it need not
address the Directors’ argument that the Shareholders have failed to plead the Directors’
culpability with particularity. Defs.’ Mot. at 34–36. The Directors argue, and the Shareholders
do not appear to dispute, that the heightened standard from the Private Securities Litigation
Reform Act (“PSLRA”) would apply. See id. at 35; Pls.’ Opp’n at 30–34 (not addressing the
PSLRA). Even under a negligence standard—which both parties agree (at least for resolving this
motion) would govern, Defs.’ Mot. at 34–35; Pls.’ Opp’n at 31 n.30—it is not clear the
Shareholders have met their burden, cf. In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d
1248, 1267 (N.D. Cal. 2000) (“[A] Section 14(a) plaintiff must plead with particularity facts that
give rise to a strong inference of negligence.”).
23
IV.
In conclusion, the Shareholders have not alleged demand futility with particularity. They
have not shown that the Directors are interested—that is, face a substantial likelihood of personal
liability—as to any of their three claims. The Shareholders were thus required to make demand
on Danaher’s Board, but they did not. 11 Courts facing similar shareholder derivative actions
have reached like conclusions. See Klein, 2021 WL 2075591, at *1 (addressing plaintiffs’
argument that “Oracle has failed to meaningfully diversify its Board of Directors, and has
discriminatory hiring and promotional practices” and finding that they “have not sufficiently
pleaded demand futility”); Ocegueda, 2021 WL 1056611, at *1 (considering plaintiff’s challenge
to “Facebook’s alleged lack of diversity (on its board and executive team, and in its workplace)”
and determining that she did “not plausibly plead futility”). This Complaint cannot survive.
11
Because the Court dismisses the Complaint for failure to plead demand futility, it need not
consider whether the Shareholders’ Complaint fails to state a claim under Rule 12(b)(6). See,
e.g., Hutton v. McDaniel, 264 F. Supp. 3d 996, 1025 (D. Ariz. 2017) (denying as moot
defendants’ 12(b)(6) motion because the Court found “that demand was required”); In re
Polycom, Inc., 78 F. Supp. 3d 1006, 1021 (N.D. Cal. 2015) (same). But as another court has
pointed out, where plaintiffs seem to “repeat[] verbatim the underlying claim . . . that forms the
basis of their demand futility claim,” the demand futility analysis would “appl[y] with equal
force” in the Rule 12(b)(6) context. In re Yahoo!, 153 F. Supp. 3d at 1126. That would be the
case here. Because the Shareholders “failed to show” a substantial likelihood of liability to
excuse demand as to each of their three claims, the Court would likely “conclude[] that [they]
fail to state a claim” “for many of the same reasons.” Id.
24
For these reasons, Defendants’ Motion to Dismiss will be granted in part, and Plaintiffs’
Complaint will be dismissed. 12 A separate Order will issue.
2021.06.28
11:53:15 -04'00'
Dated: June 28, 2021 TREVOR N. McFADDEN, U.S.D.J.
12
The Directors argue for dismissal with prejudice. See Defs.’ Mot. at 38. But the Court finds
that a dismissal without prejudice is more appropriate, given the high standard for the alternative.
See Firestone v. Firestone, 76 F.3d 1205, 1209 (D.C. Cir. 1996) (“A dismissal with prejudice is
warranted only when a trial court determines that the allegation of other facts consistent with the
challenged pleading could not possibly cure the deficiency.” (cleaned up)); Rollins v. Wackenhut
Servs., Inc., 703 F.3d 122, 131 (D.C. Cir. 2012) (explaining that “the standard for dismissing a
complaint with prejudice is high” and that it “is the exception, not the rule, in federal practice”
(cleaned up)).
25