Opinion
19-CV-5875 (GHW) (BCM)
03-26-2021
MISTY PICKETT and CHANTELLE KREUTTER, derivatively on behalf of TELADOC HEALTH, INC., Plaintiffs, v. JASON GOREVIC, et al., Defendants, and TELADOC HEALTH, INC., Nominal Defendant.
REPORT AND RECOMMENDATION TO THE HON. GREGORY H. WOODS
BARBARA MOSES, UNITED STATES MAGISTRATE JUDGE
Before me for report and recommendation is a motion (Dkt. No. 73) by nominal defendant Teladoc Health, Inc. (Teladoc or the Company) and individual defendants Jason Gorevic, Adam C. Vandervoort, David B. Snow, Jr., Arneek Multani, Thomas G. McKinley, William H. Frist, Michael Goldstein, Helen Darling, David Shedlarz, Kenneth H. Paulus, Brian McAndrews, Mark D. Smith, Mark Hirschhorn, James Outland, Martin R. Felsenthal, Dana G. Mead, Jr., and Thomas Mawhinney (collectively the Individual Defendants), to dismiss what plaintiffs call the Verified Stockholder Derivative Complaint and defendants call the Joint Amended Complaint (JAC) (Dkt. No. 72) filed by plaintiffs Misty Pickett and Chantelle Kreutter. Defendants move pursuant to Fed.R.Civ.P. 23.1 to dismiss the JAC in its entirety on the ground that under the law of Delaware, where Teladoc is incorporated, the decision whether to pursue this lawsuit belongs to its Board of Directors (Board) and that, as conceded in the JAC, plaintiffs failed to make a demand on the Board prior to filing suit. Plaintiffs oppose the motion, arguing that they have adequately pled particularized facts demonstrating that demand on the Board would be futile and is therefore excused.
Although the word "amended" does not appear in its title, the Verified Stockholder Derivative Complaint is the third complaint filed in this case and is filed jointly by plaintiffs Pickett and Kreutter. Consequently, I adopt defendants' nomenclature and refer to the pleading as the JAC.
For the reasons set forth below, I conclude that plaintiffs have not adequately pled demand futility. I therefore recommend, respectfully, that defendants' motion be granted.
I. BACKGROUND
A. Overview
This case is one of two related lawsuits in this District arising out of an "extramarital sexual relationship" that began in 2014 between defendant Hirschhorn - who was then Teladoc's Executive Vice President (EVP) and Chief Financial Officer (CFO) - and "a low-level Company employee," Charece Griffin, in Teladoc's Lewisville, Texas office. JAC ¶¶ 3, 60. In September 2016, Hirschhorn was promoted to Chief Operating Officer (COO). Id. ¶ 81. By then, plaintiffs allege, the "improper relationship" had become widely-known in Lewisville, which led to "claims of favoritism" and "improper trading allegations" by other employees, and prompted Griffin's supervisor, Amy McKay, to send a "whistleblower" report to the Company's Human Resources (HR) and Legal Departments. Id. ¶¶ 62-63, 65.
In November and December 2016, the matter was discussed by the Teladoc Board during two special meetings attended by outside counsel. Id. ¶¶ 83-88. Thereafter, the Company entered into a settlement agreement with Griffin on confidential terms, id. ¶¶ 75-77, while amending Hirschhorn's employment contract to suspend his scheduled share vesting for one year and condition future bonuses on compliance with the Company's employee policies. Id. ¶¶ 97, 157. Additionally, Hirschhorn was denied a bonus for 2016. Id. ¶ 30. However, the Board allowed him to "remain in his role" as CFO and COO, and awarded him bonuses for 2017 and 2018, thereby - according to plaintiffs - "plac[ing] a ticking time-bomb under Teladoc's reputation, stamp[ing] out employee morale, and set[ting] the wrong tone at the top." Id. ¶ 92.
Approximately one year later, in December 2017, Griffin "resigned quietly" from Teladoc. JAC ¶ 123. Hirschhorn remained at the Company until December 2018, when the Southern Investigative Research Foundation published a report (the SIRF Report) revealing that he "had an affair with a subordinate and that the Individual Defendants were well aware of his wrongful conduct but essentially did nothing about it." JAC ¶¶ 7, 153. Over the next few days, the price of Teladoc's stock (NYSE: TDOC) dropped 12%. Id. ¶¶ 8, 158. Later that month, after another Board meeting, the Company entered into a separation agreement with Hirschhorn that allowed him to collect a year's severance and his 2018 bonus. Id. ¶¶ 103-04.
Reiner v. Teladoc Health, Inc., No. 18-CV-11603 (GHW) (BCM), asserts putative class claims under § 10(b) of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78j(b), and related provisions of the federal securities laws against Teladoc, Hirschhorn, and Teladoc's Chief Executive Officer (CEO) Gorevic. In their Second Amended Complaint (the Reiner SAC), the Reiner plaintiffs alleged that they overpaid for their Teladoc stock because these defendants made misleading public statements that (1) "touted Teladoc's Code of Business Conduct and Ethics (CBCE), which supposedly applied to all employees, including senior executives, while concealing the facts about Hirschhorn's misconduct and the Company's anemic response," and (2) "acknowledged [the Company's] dependence on its senior management team while omitting . . . significant personnel issues arising from Hirschhorn's misconduct, including that he could be terminated or resign, and that significant employment-related litigation could ensue." Reiner v. Teladoc Health, Inc., 2020 WL 6343217, at *1 (S.D.N.Y. Sept. 4, 2020) (Reiner R&R) (internal quotations and citations omitted), report and recommendation adopted as modified, 2020 WL 7028638 (S.D.N.Y. Nov. 30, 2020) (Reiner). On November 30, 2020, United States District Judge Gregory H. Woods dismissed the Reiner SAC pursuant to Fed.R.Civ.P. 12(b)(6) because "the statements regarding the Company's code of conduct were 'inactionable puffery' and . . . the key personnel disclosures were not misleading." Reiner, 2020 WL 7028638, at *2.
Plaintiffs were granted leave to amend, which they did on December 30, 2020. On February 12, 2021, the Reiner defendants moved to dismiss plaintiffs' Third Amended Complaint (the Reiner TAC) pursuant to Rule 12(b)(6). That motion is not yet fully briefed.
In this action, two shareholders sue derivatively on behalf of Teladoc, naming 17 of its present or former directors and officers as Individual Defendants, including 11 of the 12 members of the Board as of the date suit was filed. Plaintiffs allege that the Individual Defendants injured the Company by: (1) issuing misleading proxy statements in 2017 and 2018, in violation of § 14(a) of the Exchange Act, 15 U.S.C. § 78n(a)(1), see JAC ¶¶ 211-216; (2) breaching their fiduciary duties in various ways, id. ¶¶ 217-25; (3) wasting corporate assets, id. ¶¶ 226-31; and (4) unjustly enriching themselves. Id. ¶¶ 232-37.
B. Procedural Background
Chantelle Kreutter was a Teladoc stockholder "at the time of the wrongdoing complained of" and "has continuously been a stockholder since that time." JAC ¶ 16. She filed this action on June 21, 2019, alleging derivative claims for violation of § 14(a) of the Exchange Act, breach of fiduciary duty, unjust enrichment, "abuse of control," gross mismanagement, and waste of corporate assets. Compl. (Dkt. No. 1) ¶¶ 192-239. On September 13, 2019, Judge Woods referred the case to me for general pretrial management and report and recommendation on dispositive motions. (Dkt. No. 32.) On September 16, 2020, I granted plaintiff Kreutter leave to file an amended complaint (Dkt. No. 33), which she did on October 16, 2019. (Dkt. No. 34.)
On December 13, 2019, defendants filed a motion to dismiss the First Amended Complaint on the grounds that plaintiff Kreutter failed to make a demand on the Board before initiating this lawsuit and failed adequately to plead demand futility. (Dkt. No. 39.) While that motion was pending, plaintiff Misty Pickett - another Teladoc shareholder, see JAC ¶ 15 - filed a motion to intervene and for a temporary "stay of consideration" of the motion to dismiss (Dkt. No. 53), arguing in her accompanying brief that her own "forthcoming complaint," which would be "informed by board-level books and records" obtained pursuant to 8 Del. Code § 220 (the § 220 Documents), would better address the arguments raised in the motion to dismiss. Memo. in Supp. of Pickett Mtn. (Dkt. No. 53-1) at 4, 19.
Section 220 grants robust inspection rights to stockholders of record in Delaware corporations, permitting them to inspect the corporation's stock ledger, list of shareholders, and other "books and records" for "any proper purpose." 8 Del. Code § 220(b).
By stipulation dated May 27, 2020, Pickett and Kreutter agreed to pursue the action jointly through a single complaint. (Dkt. No. 70.) They filed the JAC on June 4, 2020, asserting derivative claims for violation of § 14(a) of the Exchange Act, breach of fiduciary duty, waste of corporate assets, and unjust enrichment. JAC ¶¶ 3-10, 211-37. As noted above, the 17 Individual Defendants include 11 of the 12 directors who were serving on the Board when the derivative suit was filed (the Current Director Defendants). Id. ¶ 192. The JAC makes frequent references to the SIRF Report, other press reports concerning Teladoc, and the § 220 Documents, which are "expressly incorporated by reference herein." Id. at 1.
The 11 Current Director Defendants are Gorevic (who is also the Company's CEO) and 10 outside directors: Snow, Multani, McKinley, Frist, Goldstein, Darling, Shedlarz, Paulus, McAndrews, and Smith. JAC ¶ 192. The 12th Teladoc director at the time this action was commenced, Catherine A. Jacobson, did not join the Board until 2020 and is not named as a defendant in this action. Id.
C. The Motion to Dismiss
On July 6, 2020, defendants filed their renewed motion to dismiss, supported by the Declaration of Audra J. Soloway (Soloway Decl.) (Dkt. No. 75), which attaches 24 exhibits, including many of the press reports and § 220 Documents referenced in the JAC, as well as relevant filings that Teladoc made with the Securities and Exchange Commission (SEC). In their accompanying brief (Def. Mem.) (Dkt. No. 74), defendants again argue that plaintiffs failed adequately to plead demand futility. According to defendants, all 12 directors to whom plaintiffs' demand would have been addressed are "disinterested and independent." Def. Mem. at 9-11. Moreover, defendants argue, none of these directors faces a substantial likelihood of personal liability as to any of the claims alleged in the JAC. Id. at 12-25.
Plaintiffs filed their opposition brief (Pl. Mem.) (Dkt. No. 78) on August 19, 2020, supported by the Declaration of Shane P. Sanders (Sanders Decl.) (Dkt. No. 79), attaching five exhibits, and augmented by a supplemental letter, dated September 10, 2020 (Dkt. No. 80), concerning a recent Delaware case. Plaintiffs argue that demand would be futile because the Current Director Defendants failed to "make a good faith effort to oversee the company's operations" so as to detect and redress misconduct like Hirschhorn's, and therefore face a substantial likelihood of Caremark liability, see Pl. Mem. at 10-16; because they approved Hirschhorn's amended employment agreement and separation agreement, which were "so onesided" that they could not have been valid exercises of business judgment (and were "utterly uninformed" when they did so), and therefore face a substantial likelihood of liability for breach of fiduciary duty and/or waste, see id. at 16-22; because most of them face additional liability for making or approving misleading statements in Teladoc's SEC filings, including the same statements about the CBCE that were found non-actionable in Reiner, see id. at 22-24; because three of them (Gorevic, Goldstein, and Multani), face a substantial likelihood of liability for their "insider trading," see id. at 24; and because four of them (Gorevic, McKinley, Multani, and Snow) "lack independence" due to their "interlocking business relationships." See id. at 24-25.
See In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996).
In their reply brief (Def. Reply Mem.) (Dkt. No. 81), filed on September 16, 2020, defendants argue that plaintiffs' Caremark claim fails because Teladoc had an oversight system in place and because the Board, assisted by outside counsel, investigated and disciplined Hirschhorn, albeit not as severely as plaintiffs believe it should have. Id. at 2-5. For similar reasons, defendants argue, the Current Director Defendants cannot face personal liability for approving Hirschhorn's 2016 and 2018 contracts, particularly in light of the Company's "exculpation provision" limiting the directors' potential personal liability to "breaches of the duty of loyalty." Id. at 6-9. Plaintiffs' false-statement claims fail as well, according to defendants, largely because no actionable false statements have been alleged, id. at 9-10, and their remaining allegations as to the Current Director Defendants would be insufficient to establish demand futility even if well pled, because they do not target a majority of the directors to whom any demand would have been presented. Id. at 10.
D. Factual Allegations
Teladoc is a "multinational telemedicine healthcare company" that was founded in 2002 and went public in 2015. JAC ¶ 2. Teladoc is incorporated in Delaware, headquartered in New York, and has over 2, 400 full-time employees. Id. ¶ 17. The Individual Defendants are all present or former directors or officers of the Company. Id. ¶¶ 18-35. Teladoc has adopted an exculpation provision, pursuant to 8 Del. Code § 102(b)(7), that shields its directors from personal liability for breach of fiduciary duty "to the fullest extent permitted" by Delaware law. Teladoc Cert. of Incorp. (Soloway Decl. Ex. 12) at ECF page 10.
The well-pleaded factual allegations set forth in the JAC are deemed true for purposes of this motion, Halpert Enterprises, Inc. v. Harrison, 362 F.Supp.2d 426, 430 (S.D.NY. 2005), together with all "reasonable inferences in plaintiff's favor," Canty v. Day, 13 F.Supp.3d 333, 344 (S.D.N.Y. 2014), aff'd, 599 Fed.Appx. 20 (2d Cir. 2015), but only if those inferences "logically flow from particularized facts alleged by the plaintiff." Id. (quoting Wood v. Baum, 953 A.2d 136, 140 (Del. 2008)). Conclusory allegations "are not considered." In re ITT Corp. Deriv. Litig., 653 F.Supp.2d 453, 457 (S.D.N.Y. 2009); see also Halpert Enterprises, 362 F.Supp.2d at 429-30 ("A plaintiff may not simply rely on conclusory allegations."). In addition to the well-pleaded allegations in the operative complaint, the Court may consider documents expressly or implicitly incorporated by reference into the pleading, as well as "public disclosure documents required by law to be, and that have been, filed with the SEC, and documents that the plaintiffs either possessed or knew about and upon which they relied in bringing the suit." Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000) (internal citations omitted).
1. The Hirschhorn-Griffin Relationship and Teladoc's Response
Beginning "in around 2014," defendant Hirschhorn, then Teladoc's EVP and CFO, "embarked on an extramarital sexual relationship with a low-level Company employee," Griffin, who worked in the Company's Lewisville, Texas office. JAC ¶ 60. Hirschhorn "pursued the relationship until the end of 2016." Id. During this period, Hirschhorn supplied Griffin with (unspecified) "insider sales tips," while Griffin received (unspecified) promotions over more qualified candidates. Id. The affair was "widely known" in the Lewisville office, because Griffin "openly discussed" it and Hirschhorn himself did nothing to conceal it, "going so far as to send flowers to Griffin's desk." Id. ¶¶ 60, 62. The "open relationship" led to "disruptive conflict and hostility" in Lewisville, including "claims of favoritism." Id. Moreover, Griffin "openly bragged to her colleagues" that she and Hirschhorn "liked to trade Teladoc's stock together." Id. ¶ 63. In one instance she told a coworker that Hirschhorn "would inform her when there were good opportunities to sell shares that she received through a stock grant," adding that Hirschhorn was "pretty good" at pinpointing such opportunities. Id.
Griffin's colleagues reported the "improper relationship" to McKay, who drafted an eight-page report (the McKay Report) detailing the affair (which she was "long aware of") and the "improper trading allegations," and sent it to Teladoc's HR and Legal departments "[b]y September 2016," whereupon it "would have made its way" to defendant Vandervoort, who was Teladoc's Chief Legal Officer (CLO) and Secretary. JAC ¶¶ 65-66, 81. Based on the fact that the McKay Report was not produced among the § 220 Documents, plaintiffs allege that it was never provided to the Board. Id. ¶¶ 4, 66 & n. 2.
The Reiner SAC alleged that the McKay Report was sent "[b]y October 2016," Reiner R&R, 2020 WL 6343217, at *3 (emphasis added), as did the SIRF Report (Soloway Decl. Ex. 2) and prior pleadings in this action. See, e.g., Compl. ¶ 8. If so, it arrived after Hirschhorn was promoted to COO on September 23, 2016. JAC ¶ 73. Plaintiffs in this action acknowledge that they have not seen the McKay Report, id. ¶ 66 n.2, and do not specify the date on which it was sent. They assert, however, that it is "reasonable to infer" that either the McKay Report "or similar reports of misconduct" were received by HR and Legal "no later than September 2016," id. ¶ 73, and consequently that Vandervoort and other members of the Company's senior management "were put on notice of defendant Hirschhorn's inappropriate conduct before September 23, 2016." Id. The somewhat convoluted inferential process by which plaintiffs arrive at this conclusion, see id. ¶¶ 67-73, is discussed infra at n. 10.
Beginning in October 2016, McKay and other employees in the Lewisville office received anonymous harassing emails sent to their corporate email addresses. JAC ¶¶ 67-71 & Exs. A-B. Two employees - McKay and Susan Stogner - reported the emails to HR, which advised them to file police reports, which they did on October 25 (Stogner) and October 30 (McKay), 2016. Id. McKay told the police that the emails began on October 2, and that she suspected that Griffin was the sender, because Griffin "used to work for her" but had become "very angry" since she was transferred to another department. Id. ¶ 72 & Ex. B, at ECF pages 5-6. McKay added that Griffin had "several incidents" involving HR, and also "alluded to an incident that she [McKay] has had with HR," but did not disclose the details. Id.
Stogner, who received a harassing email on October 9, did not identify Griffin by name, but told the police that there was "an employee that formerly worked in her department that is possibly doing this." JAC ¶ 68 & Ex. A, at ECF page 5. Stogner added that she "feels that her company knows who the sender is, but that the sender is 'sleeping with' one of the supervisors, so the company is just going to 'sweep this under the rug.'" Id. ¶ 69 & Ex. A, at ECF page 5.
The emails themselves - some of which are reproduced in the police reports - varied in tone and content. One accused Stogner of "talking to a competitor" and "giv[ing] them recruits." JAC ¶ 69 & Ex. A, at ECF page 7. One described McKay as duplicitous, saying that she "doesn't have any friends and shell [sic] turn on you in a heart beat." Id. Ex. B, at ECF page 5. A third email advised McKay that she "need[ed] to get [those] extensions tightened up in the back you can totally tell whats [sic] real and whats [sic] fake." Id. at ECF page 6.
On November 2, 2016, a Lewisville police detective called Griffin, who denied sending the emails, stated that her recent transfer was "actually a pay increase, and not a demotion," asserted that "she never really had any problems with Amy [McKay] except on one occasion," involving an unrealistic deadline, added that she had not sent any emails to McKay "since June/July of this year, before she was transferred," and offered to provide her computer "to clear her name." JAC ¶ 74 & Ex. B, at ECF pages 7-8. On November 7, 2016, the detective received a call from an attorney, Andrew Dunlap, who identified himself as counsel for Griffin, asked questions about the investigation, and told the detective that he "wasn't allowed to speak to his client (Charece) anymore." Id. ¶ 74. At this point, the Teladoc Board "still had not been alerted about defendant Hirschhorn's wrongdoing." Id. Dunlap is the same attorney who, according to the SIRF Report, "represented Griffin during negotiation over her exit from Teladoc Health," which took place in late 2017, a year after Teladoc entered into a confidential settlement agreement with her "around December 2016." JAC ¶¶ 75, 123; SIRF Rep. at 3-4.
No criminal charges were brought. It appears that the Lewisville police closed the investigation as "unfounded" and/or for "lack of leads." JAC Ex. A, at ECF page 9; id. Ex. B, at ECF page 8.
In the JAC, plaintiffs infer that that the McKay Report (or some other report of misconduct by Hirschhorn) was received before September 23, 2016, because (i) the harassing emails began as early as October 2, 2016; (ii) in her police report, McKay stated that Griffin had "several incidents involving HR," which in plaintiffs' view indicated that HR "had long been aware of the inappropriate relationship"; (iii) McKay also alluded to an "incident" that she herself had with HR, which according to plaintiffs was a reference to her own efforts to "raise[] her concerns about the inappropriate relationship"; (iv) in their police reports, both Stogner and McKay "link[ed] the harassing emails to their knowledge of the" relationship between Griffin and Hirschhorn and "suggest[ed]" that "the e-mails were prompted by reporting Griffin and defendant Hirschhorn to Human Resources and Griffin's subsequent transfer to another department." JAC ¶ 73. There are number of weak links in this chain of inferences, including plaintiffs' apparent assumption that Griffin's transfer (on an unknown date) was a result of the McKay Report, and - perhaps most significantly - their further assumption that Griffin was the harasser. Neither of these facts is actually pleaded, and neither, in my view, "logically flow[s]" from the facts that are pleaded. Canty, 13 F.Supp.3d at 344. Nonetheless, for purposes of the pending motion to dismiss I accept the truth of plaintiffs' allegation that reports of Hirschhorn's misconduct were received by HR and Legal "no later than September 2016." JAC ¶ 73.
2. The Code of Ethics
According to plaintiffs, Hirschhorn's actions violated the Teladoc CBCE, which, among other things, stresses the Company's reputation for integrity, professionalism, and fairness as one of its most valuable assets; prohibits all employees, officers, and directors, from committing any "illegal or unethical act"; and requires that they conduct themselves so as to avoid "even the appearance of improper behavior." JAC ¶¶ 2, 38, 64; see also CBCE (Soloway Decl. Ex. 1) ¶¶ 1-2. The CBCE reminds Teladoc personnel that the use of non-public Company information to trade in securities is illegal, and notes that all non-public information should be considered "inside" information and never used for personal gain. JAC ¶ 39; CBCE ¶ 3. The CBCE also forbids discrimination and harassment based on, inter alia, sex. JAC ¶ 41; CBCE ¶ 12. The CBCE does not contain an anti-fraternization provision or otherwise expressly prohibit consensual sexual relationships among Teladoc employees.
The CBCE states that it will be strictly enforced "throughout the Company" and that violations will be dealt with immediately, "including subjecting persons to corrective and/or disciplinary action." JAC ¶ 42; CBCE ¶ 10. Employees are to bring any concerns about violations by a senior officer to the CLO, who is to "notify the Nominating and Corporate Governance Committee of such violations. JAC ¶ 42; CBCE ¶ 10. Violations can also be reported anonymously through a Compliance & Ethics Hotline. CBCE ¶ 10. The Company "encourages" employees to report suspected violations, "intends to thoroughly investigate any good faith reports of violations," and "will not tolerate any kind of retaliation." Id. The CBCE, by its terms, applies "equally to everyone it covers." JAC ¶ 42; CBCE ¶ 10. Waivers of its provisions for executive officers or directors "may only be granted by the Board of Directors and will be promptly disclosed to the Company's shareholders." JAC ¶ 43; CBCE ¶ 11.
3. The Board's Response
On September 28, 2016, the Company announced that Hirschhorn had been appointed to the role of COO, while continuing to serve as CFO, resulting in a base salary increase from $345,050 to $370,000 and a grant of 40, 000 stock options. JAC ¶ 81. At this point, as noted above, plaintiffs allege that the McKay Report had been sent to HR and Legal - meaning that CLO Vandervoort had it - but the Board had not yet "heard any mention of Hirschhorn's misconduct." JAC ¶¶ 81-82.
The first time the Teladoc Board discussed the Hirschhorn-Griffin relationship was during a special telephonic meeting on November 11, 2016. JAC ¶ 83. By then, plaintiffs allege, "at least a month and a half had gone by since defendant Vandervoort had received the [McKay] Report," the Company "was already facing a lawsuit with Griffin stemming from Hirschhorn's conduct," and employees in Lewisville were "being targeted for their knowledge of his wrongdoing." Id. ¶ 82. The meeting was attended by CLO Vandervoort, CEO Gorevic, and outside directors Snow, Multani, McKinley, Frist, Goldstein, Darling, Shedlarz, Outland, Felsenthal, Mead, and Mawhinney, as well as counsel from Proskauer Rose LLP (Proskauer) and Sullivan & Cromwell LLP (S&C), "both counsel to the Company." Id. ¶ 83.
The reference to a "lawsuit with Griffin" is based on the fact that by November 7 Griffin had retained attorney Dunlap, who later negotiated a confidential settlement for her. See JAC ¶¶ 74-75; SIRF Rep. at 3-4. No lawsuit was ever filed on Griffin's behalf. SIRF Rep. at 4. Although plaintiffs presume that Griffin's potential claims "against the Company" included "allegations against defendant Hirschhorn," JAC ¶¶ 84, 88, neither the SIRF Report nor the JAC identifies the substance of any of her claims. Nor do they describe the terms of her settlement, except that she received an unspecified payment "around December 2016." Id. ¶ 75. According to the SIRF Report (and plaintiffs), Griffin remained at Teladoc for another year before "resign[ing] quietly in late 2017." Id. ¶ 123; SIRF Rep. at 3.
The minutes of the meeting are terse, stating only that it lasted an hour and a half, during which time the Board "discussed a confidential matter with the Company's attorneys and received legal advice regarding same." JAC ¶ 83; see also 11/11/16 Minutes (Soloway Decl. Ex. 3) at 1. Because the minutes do not mention the McKay Report (and it was not produced among the § 220 Documents), plaintiffs conclude that it was not provided to the Board, and that the purpose of the meeting was to discuss Griffin's (unspecified) "allegations against defendant Hirschhorn" rather than the allegations in the McKay Report. JAC ¶¶ 83-84. Because Proskauer (the same firm that later handled with settlement with Griffin) and S&C (where Vandervoort previously practiced) were in attendance as counsel to the Company, plaintiffs conclude that Vandervoort (and "potentially Gorevic") must have "already retained outside counsel for the purpose of coming up with a legal strategy in response to Griffin's claims," id. ¶ 85, and that the Board itself "did not consider . . . which outside counsel to hire" but "deferr[ed]" to Vandervoort and Gorevic "to handle allegations into one of their own." Id. ¶ 86.
The Board met again on December 3, 2016, for approximately two hours, with Vandervoort, Proskauer, and S&C in attendance. JAC ¶ 87. The minutes of the December 3 meeting are also terse, stating only that the Board discussed a "confidential" matter and received advice about it from the Company's attorneys. Id.; see also 12/3/16 Minutes (Soloway Decl. Ex. 4) at 1. Plaintiffs allege, again, that the purpose of the meeting was to discuss Griffin's potential claims, not McKay's, and that any investigation conducted by outside counsel was designed to "deal with Griffin" (and only "incidentally included a probe into whether her allegations were supported") rather than "to investigate defendant Hirschhorn's conduct." JAC ¶ 88.
Regardless of the genesis of the investigation, "there is no dispute that outside counsel substantiated Griffin's allegations concerning the improper relationship." JAC ¶ 90. Rather than commission a "further investigation," or terminate Hirschhorn's employment, the Individual Defendants "allowed [him] to remain in his role" as CFO/COO. Id. ¶ 92. Thereafter, on December 14 and 15, 2016, the Nominating and Corporate Governance Committee (then composed of defendants Snow, Frist, and Goldstein, see id. ¶¶ 20, 23, 24), followed by the full Board, named Hisrchhorn (and Vandervoort) "designated officers" and proxies for the Company's solicitation of votes at the next Annual Meeting. Id. ¶¶ 94-95.
On December 27, 2016, the Company entered into an Amended Executive Employment Agreement (Am. Empl. Ag.) (Soloway Decl. Ex. 7) with Hirschhorn, conditioning his annual bonus on "complying with the Company's published employee policies." JAC ¶ 97. The contract, publicly disclosed on SEC Form 8-K, also clarified that the amount of any bonus "shall be at the sole and absolute discretion of the Board," and delayed vesting of his equity shares for one year. Am. Empl. Ag. §§ 1.1, 1.2(b), 2. Hirschhorn did not receive any cash bonus, stock awards, or non-equity incentive plan compensation for 2016. JAC ¶ 30. That decision was formalized at a February 23, 2017 meeting of the Compensation Committee (comprised of defendants Gorevic, McKinley, Multani, Shedlarz, and Snow, advised by CLO Vandervort and compensation consultants from Radway). 2/23/17 Minutes (Soloway Decl. Ex. 8). The committee noted that Hirschhorn's "target" and "calculated" bonuses were $240,500 and $192,400, respectively, but unanimously recommended zero. Id. at ECF page 9.
4. The McKay Termination and Other Workplace Issues
In October 2017, more than a year after Hirschhorn was promoted, "the Company's management fired McKay." JAC ¶ 118. According to the SIRF Report, she had spent months "bitterly complaining and arguing with the HR and Legal departments" over the decision not to terminate Hirschhorn. Id. ¶ 123. After McKay's termination, 20% of her unit resigned within two weeks "and as much as 30% ultimately departed." Id. ¶ 118; SIRF Rep. at 3.
McKay's responsibilities included overseeing Teladoc's physician credentialing unit. JAC ¶ 124. Until 2019, Teladoc's annual reports boasted that it was accredited by the National Committee for Quality Assurance (NCQA), a nonprofit organization that verifies adherence to national healthcare standards. Id. ¶¶ 119-20, 125. On May 15, 2019, the Company's NCQA credentialing status was downgraded to "Under Corrective Action," and was not restored until February 4, 2020. Id. ¶ 127. Plaintiffs attribute the 2019 downgrade to McKay's 2017 departure and other "major disruptions in Teladoc's credentialing unit," all of which, they allege, were caused, in turn, by Hirschhorn's improper relationship with Griffin in 2014-16. Id. ¶ 124.
In Reiner, plaintiffs explain that McKay was replaced by Suzanne Leary, who "lacked any qualification to manage McKay's department." Reiner SAC ¶ 49. Leary and her team "did not know how to credential doctors" and "resorted to falsifying documents." Id. ¶ 50. After another employee reported the falsification, NCQA investigators "began a lengthy audit," which resulted in the downgrade. Id. ¶ 51.
The JAC describes two other workplace issues at Teladoc, unrelated to Hirschhorn. On July 11, 2019, former Teladoc employee Monika Roots, M.D. filed an action against the Company for breach of contract, conversion, and tortious interference with the physician-patient relationship. JAC ¶ 112. Her complaint alleged that she entered into a settlement agreement with Teladoc in June 2018, id. ¶ 113, but that in April 2019 Teladoc made a "baseless" claim that she violated the agreement by improperly sharing confidential information, terminated her position as an independent contractor, and "seized" her stock options. Id. ¶ 114. In describing the lawsuit, plaintiffs highlight Roots' allegation that the 2018 settlement was entered into after she complained that she had been subjected to gender-based harassment, marginalization, and unfair treatment, and that she was demoted when she "rais[ed] concerns" to HR. Id. ¶ 113. The 2019 Roots lawsuit was dismissed, by stipulation, on May 14, 2020. Soloway Decl. Ex. 14.
In January 2019, a Teladoc employee in Lewisville wrote an anonymous review on Glassdoor.com, calling its management unethical and incompetent. JAC ¶ 116. In April and September, 2019, two other employees wrote similarly disparaging reviews. Id. ¶¶116-17.
5. The SIRF Report and Response
On December 5, 2018, the SIRF Report was published, detailing Hirschhorn's affair and highlighting the "unique optics" and "troubling 'power dynamics'" flowing from his position as a high-level executive and Griffin's position as his indirect subordinate, whose income "topp[ed] out at about $125, 00," and who received "a series of promotions" during the relationship that "stunned her former colleagues" and struck them as "massively unfair." JAC ¶ 154 (quoting SIRF Rep. at 1-2). The SIRF Report also covered the open nature of the relationship, Griffin's comments about stock trading, the McKay Report, Teladoc's "inadequate response," and the "retaliation McKay faced." Id. ¶¶ 155-57.
Following the SIRF Report, the price of Teladoc's stock fell 12%, or $7.47 per share, closing at $52.34 per share on December 10, 2018. JAC ¶ 158. On the day of the SIRF Report, Teladoc issued a press release asserting that it contained several factual inaccuracies. Id. ¶ 159. Teladoc stated that when it learned of the allegations against Hirschhorn it "engaged an outside law firm to investigate the claims"; that the investigation "found violations solely of our workplace relationship policy"; and that the Board took "swift and appropriate disciplinary action." Id. ¶ 160. In conversations with analysts, Gorevic later stated that the investigation found no evidence of insider trading or "undue promotion, compensation, or discrimination." Id. ¶ 162. Further, Gorevic stated, the allegations regarding Hirschhorn did not surface until after he was promoted. Id. Plaintiffs allege that some of these statements were false. Id. ¶¶ 160-64.
6. The Separation Agreement
On December 11, 2018, six days after the SIRF Report was published, the Board held a lengthy meeting attended by Gorevic, Snow, Darling, Frist, Goldstein, McAndrews, McKinley, Multani, Paulus, Shedlarz, and Smith. JAC ¶ 102. Non-director members of management present for portions of the meeting included Vandervoort, Chief Human Resources Officer Michelle Bucaria, and Hirschhorn himself. Also present were representatives of Brunswick Group, a consulting firm, and attorneys from Proskauer, S&C, Latham & Watkins LLP (L&W), and Jackson Walker LLP (JW). The minutes of the meeting (12/11/18 Minutes) (Soloway Decl. Ex. 5) describe S&C as "counsel to the Board," while the other firms appeared as "counsel to the Company." During the meeting, Vandervoort and outside counsel "reviewed the 2016 investigation of allegations made by counsel for Ms. Charece Griffin . . . and answered questions from the Board." JAC ¶ 102; 12/11/18 Minutes at 1. Management, counsel, and consultants then "reviewed for the Board" the SIRF Report and related developments. 12/11/2018 Minutes at 1, after which the Board went into executive session with its counsel only. Id. at 2. No further details are provided regarding the substance of the (presumably privileged) discussions. The meeting, which convened at 8:30 a.m., was adjourned at approximately 3:00 p.m. Id. at 1-2.
On December 16, 2018, the Company entered into a Separation and Release of Claims Agreement (Sep. Ag.) (Soloway Decl. Ex. 11) with Hirschhorn, pursuant to which Hirschhorn was deemed to have resigned for "Good Reason," as that term was used in his Amended Employment Agreement. JAC ¶ 104; Sep. Ag. ¶ 3. This entitled him to a severance payment equal to his base salary ($425,500) over the next 12 months, with benefits, plus "his bonus for 2018, as well as a discretionary bonus set at 100% achievement [sic], [and] all unvested equity awards." JAC ¶ 104. Teladoc issued a press release the next day announcing Hirschhorn's resignation, effective January 1, 2019, id. ¶ 105, wishing him well, and noting that it had "initiated a formal search process to fill the roles of Chief Operating Officer and Chief Financial Officer." See Teladoc Form 8-K (Dec. 20, 2018), Ex. 99.1. The Separation Agreement states that Hirschhorn's post-termination payments and benefits were in consideration for his waiver and release of any claims against the Company. Id. ¶ 108; Sep. Ag. ¶¶ 2-4.
7. Proxy Statements and Other SEC Filings
From March 3, 2016 to December 5, 2018, the Individual Defendants "issued a series of improper statements" contained in the Company's Annual Reports on Form 10-K and Proxy Statements on Schedule 14A. JAC ¶¶ 131-51. These are, for the most part, the same statements - touting the CBCE and discussing the importance of its key personnel - held not to be actionable in Reiner, 2020 WL 7028638, at *2. Compare JAC ¶¶ 131-51 with Reiner SAC ¶¶ 57-80.
The only statements challenged in this case but not discussed in Reiner are: (1) the statement in the CBCE that "[a]ny waivers of this Code for executive officers or directors may only be granted by the Board of Directors and will be promptly disclosed to the Company's shareholders," JAC ¶ 43; (2) the statement in Teladoc's 2015 Registration Statement on Form S-1 that the Company will post on its website all "amendments to, or waivers from, any provision of the [CBCE]," id. ¶ 59; (3) the statement in the 2016 Proxy Statement that "[w]e intend to post any amendment to, or waiver from, [the CBCE] (to the extent applicable to our chief executive officers, principal financial officer or principal accounting officer) on our website," id. ¶ 137; and (4) the statements in the 2017 and 2018 Proxy Statements that "[w]e intend to satisfy the disclosure requirements under [the Exchange Act] regarding any amendment to, or waiver from a material provision of our [CBCE] involving our principal executive, financial or accounting officer or controller by posting such information on our website." Id. ¶¶ 144, 150. Additionally, in Reiner, certain statements that are alleged to be actionable in this case were discussed but the Court "did not consider them" because "they were not adequately pleaded as the basis" for the Reiner plaintiffs' claims. Reiner, 2020 WL 7028638, at *3.
Plaintiffs here, like the Reiner plaintiffs, contend that these statements were misleading because the Company was not in fact acting ethically; because Hirschhorn violated the CBCE and injured the Company's business by having an affair with Griffin, engaging in "insider trading" with her, causing her to receive promotions for which she was not qualified, and obliging Teladoc to pay a settlement to her; and because the Board was failing in its oversight duties by failing to enforce the CBCE and permitting retaliation against whistleblowers. JAC ¶ 152. With respect to the statements not challenged in Reiner, plaintiffs here contend that they were misleading because Hirschhorn's punishment in 2016 was so mild as to constitute, in effect, a waiver from the CBCE that was not thereafter disclosed. Id. ¶¶ 152(f), 170, 174, 194, 213. As to the Proxy Statements, however, plaintiffs make a point of noting that their § 14(a) claims "are based solely on negligence" and that no reckless or knowing conduct is alleged. Id. ¶ 166.
II. ANALYSIS
A. Legal Standards 1.Rule 23.1
Ordinarily, it is up to a corporation's directors to determine whether and when the corporation files a lawsuit. In re Citigroup Inc. S'holder Deriv. Litig., 964 A.2d 106, 120 (Del. Ch. 2009). See also Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) ("By its very nature the derivative action impinges on the managerial freedom of directors."), overruled on other grounds, Brehm v. Eisner, 746 A.2d 244 (Del. 2000). Thus, in addition to the general pleading standards set forth in the Fed.R.Civ.P. 8(a) and 9(b), Fed.R.Civ.P. 23.1 imposes additional requirements upon shareholders who seek to sue derivatively on the corporation's behalf. A derivative complaint must state, with particularity, "any effort by the plaintiff to obtain the desired action from the directors or comparable authority," and "the reasons for not obtaining the action or not making the effort." Fed.R.Civ.P. 23.1(b)(3)(A)-(B). Here, no demand was made; consequently, plaintiffs must plead, with particularity, why demand was excused.
The standard is exacting. Derivative plaintiffs must plead "demand futility with specific facts," and "may not simply rely on conclusory allegations." Kautz v. Sugarman, 2011 WL 1330676, at *3 (S.D.N.Y. Mar. 31, 2011) (quoting Halpert Enterprises, 362 F.Supp.2d at 429-30), aff'd 456 Fed.Appx. 16 (2d Cir. 2011). The Rule 23.1 standard is even "higher than the normal standard applicable to the analysis of a pleading challenged under Rule 12(b)(6)." In re Am. Int'l Grp., Inc. Deriv. Litig., 700 F.Supp.2d 419, 430 (S.D.N.Y. 2010) (AIG) (quoting Kernaghan v. Franklin, 2008 WL 4450268, at *3 (S.D.N.Y. Sept. 29, 2008)), aff'd, 415 Fed.Appx. 285 (2d Cir. 2011). As Judge Forrest explained in Canty, 13 F.Supp.3d at 345 (quoting Pirelli Armstrong Tire Corp. Retiree Med. Benefits Trust v. Raines, 534 F.3d 779, 782-83 (D.C. Cir. 2008), abrogated on other grounds, Lightfoot v. Cendant Mortg. Corp., 137 S.Ct. 553 (2017)), "the bar is high, the standards are stringent, and the situations where demand will be excused are rare."
2. Demand Futility
Although Rule 23.1 creates a federal pleading standard, the underlying demand requirement is governed by state substantive law, RCM Sec. Fund, Inc. v. Stanton, 928 F.2d 1318, 1330 (2d Cir. 1991), in this case the law of Delaware. Under Delaware law, two overlapping tests have traditionally governed whether demand on a corporation's board is excused as futile: the Aronson test, applied when a derivative plaintiff "challenges conscious board conduct," such as approving a specific transaction, Staehr v. Mack, 2011 WL 1330856, at *4 (S.D.N.Y. Mar. 31, 2011) (citing Aronson, 473 A.2d at 813); and the Rales test, applied when a plaintiff accuses the board of "failing to act." Fink v. Weill, 2005 WL 2298224, at *3 (S.D.N.Y. Sept. 19, 2005) (citing Rales v. Blasband, 634 A.2d 927 (Del. 1993)).
The Aronson test, as traditionally conceived, requires the plaintiff to "plead particularized facts that create a reasonable doubt that 1) the directors are disinterested and independent, or [that] 2) the challenged transaction was a valid exercise of business judgment." In re Morgan Stanley Deriv. Litig., 542 F.Supp.2d 317, 321-22 (S.D.N.Y. 2008)) (quoting Seminaris v. Landa, 662 A.2d 1350, 1354 (Del. Ch. 1995)). By contrast, Rales - applied when there is no specific transaction at issue - eliminates the second prong of the Aronson test and "focuses solely on whether the pleadings create a reasonable doubt that a majority of directors are disinterested and independent." Morgan Stanley, 542 F.Supp.2d at 322. As the Delaware courts have recognized, "[t]he tests articulated in Aronson and Rales are 'complementary versions of the same inquiry, '" which "asks whether the board is capable of exercising its business judgment in considering a demand." Ellis v. Gonzalez, 2018 WL 3360816, at *5 (Del. Ch. July 10, 2018) (quoting In re China Agritech, Inc. S'holder Deriv. Litig., 2013 WL 2181514, at *16 (Del. Ch. May 21, 2013), and collecting cases), aff'd sub nom. Ellis on Behalf of AbbVie Inc. v. Gonzalez, 205 A.3d 821 (Del. 2019).
Where (as here) "the board consists of an even number of members," demand is excused under both Aronson and Rales when "half of the board is properly alleged to be interested or lacking independence." In re IAC/InterActiveCorp Sec. Litig., 478 F.Supp.2d 574, 599 (S.D.N.Y. Mar. 21, 2007); see also Campbell v. Weihe Yu, 25 F.Supp.3d 472, 48-81 (S.D.N.Y. 2014) (analyzing whether the directors are disinterested and independent under both the first Aronson prong and the Rales test simultaneously, using the same standards, and noting that "[w]here a board has an even number of the directors," plaintiffs must show that half "do not pass the applicable Aronson or Rales test to excuse demand.").
"Directorial interest exists where a director will receive a personal financial benefit from a transaction that is not equally shared by the stockholders or the corporation." Louisiana Municipal Police Employees Ret. Sys. v. Pandit, 2009 WL 2902587, at *6 (S.D.N.Y. Sept. 10, 2009). Interestedness can also be established based on "financial ties, familial affinity, a particularly close or intimate personal or business affinity or because of evidence that in the past the relationship caused the director to act nonindependently vis à vis an interested director." IAC, 478 F.Supp.2d at 600 (quoting Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1051 (Del. 2004)). However, the underlying relationship must be "so substantial that 'the non-interested director would be more willing to risk his or her reputation than risk the relationship with interested director.'" Id. (quoting Stewart, 845 A.2d at 1052).
Interestedness "also exists where a corporate decision will potentially have a materially detrimental impact on a director, but not on the corporation or the stockholders," such as where the lawsuit, if pursued, would expose that director to a substantial likelihood of personal liability. Pandit, 2009 WL 2902587, at *6. "In the face of such adverse potential personal consequences, the director cannot be expected to exercise independent business judgment." Id. However, merely naming a director as a defendant in a derivative complaint does not render her "interested" for demand futility purposes. Fink, 2005 WL 2298224, at *4; Scopas Tech. Co. v. Lord, 1984 WL 8266, at *4 (Del. Ch. Nov. 20, 1984). "[T]he director can only be considered 'interested' if the potential personal liability rises to 'a substantial likelihood;' it is not sufficient that 'a mere threat' of personal liability is alleged." Pandit, 2009 WL 2902587, at *6 (quoting Rales, 634 A.2d at 933).
Where (as here) the corporation has adopted an exculpation provision pursuant to 8 Del. Code § 102(b)(7), its directors are shielded from "paying monetary damages that are exclusively attributable to a violation of the duty of care," leaving them potentially liable only for "a violation of the duty of loyalty or the duty of good faith." In re Cornerstone Therapeutics Inc, Stockholder Litig., 115 A.3d 1173, 1186 (Del. 2015) (quoting Emerald Partners v. Berlin, 787 A.2d 85, 92) (Del. 2001)). Thus, in order to establish that corporate directors face a substantial likelihood of personal liability (whether under the first prong of Aronson or under Rales), the derivative plaintiff must plead particularized facts showing that they breached "a non-exculpated duty." Jeter v. RevolutionWear, Inc., 2016 WL 3947951, at *12 (Del. Ch. July 19, 2016); see also Lenois v. Lawal, 2017 WL 5289611, at *2 (Del. Ch. Nov. 7, 2017) ("where directors are protected by an exculpatory charter provision . . . a plaintiff must allege that a majority of the board faces a substantial likelihood of liability for non-exculpated claims"), appeal dismissed, 231 A.3d 396 (Del. 2020); Rahbari v. Oros, 732 F.Supp.2d 367, 379 (S.D.N.Y. 2010) ("plaintiff must allege with particularity that [the director] defendants failed to act in good faith or otherwise breached their duty of loyalty"). A claim of negligence or gross negligence will not suffice. See Ryan v. Armstrong, 2017 WL 2062902, at *2 (Del. Ch. May 15, 2017) ("Considering the exculpatory clause here, even gross negligence on the directors' parts is insufficient to an award of damages: to recover, the Plaintiff must demonstrate disloyalty."), aff'd 176 A.3d 1274 (Del. 2017).
Under the second prong of Aronson, a derivative plaintiff challenging a specific transaction (such as, in this case, Hirschhorn's Amended Employment Agreement and Separation Agreement) may establish demand futility by raising a reasonable doubt as to whether the challenged transaction was a "valid exercise of business judgment." Morgan Stanley, 542 F.Supp.2d at 321-22. Even before Cornerstone, this standard was difficult to meet, because it required a plaintiff to "plead particularized facts sufficient to raise (1) a reason to doubt that the action was taken honestly and in good faith or (2) a reason to doubt that the board was adequately informed in making the decision." In re Goldman Sachs Mortg. Servicing S'holder Deriv. Litig., 42 F.Supp.3d 473, 486 (S.D.N.Y. 2012) (quoting In re J.P. Morgan Chase & Co. S'holder Litig., 906 A.2d 808, 824 (Del. Ch. 2005), aff'd, 906 A.2d 766 (Del. 2006)).
Since Cornerstone, however, the Delaware courts have increasingly recognized that the existence of an exculpation provision under § 102(b)(7) heightens the showing that a derivative plaintiff must meet to establish demand futility under both Aronson prongs. "In order for demand to be excused under the second prong of Aronson where, as here, the Defendants are exculpated from liability for the duty of care, the Plaintiff must plead facts raising an inference that the action complained of was taken in bad faith." Ryan, 2017 WL 2062902, at *17. This in turn requires a showing that the challenged transaction was "so egregious on its face that board approval cannot meet the test of business judgment." Chester Cty. Employees' Ret. Fund v. New Residential Inv. Corp., 2016 WL 5865004, at *9 (Del. Ch. Oct. 7, 2016) (quoting Aronson, 273 A.2d at 815), aff'd, 186 A.3d 798 (Del. 2018), or that its terms are "inexplicable other than as bad faith." Ryan, 2017 WL 2062902, at *18. Accord United Food & Com. Workers Union v. Zuckerberg, 2020 WL 6266162, at *15 (Del. Ch. Oct. 26, 2020) ("the second prong of Aronson remains viable only in the unlikely event that a corporation lacks a Section 102(b)(7) provision, or to the extent that the particularized factual allegations portray a transaction that is so extreme as to suggest bad faith"); Gottlieb v. Duskin, 2020 WL 6821613, at *8 (Del. Ch. Nov. 20, 2020) (quoting Ryan, 2017 WL 2062902, at *18) (plaintiff "has failed to satisfy the second prong of Aronson" because "the facts as pled" do not support an inference that the actions taken by the directors "are inexplicable other than as bad faith").
B. Application
"Demand futility is assessed claim by claim." Sandys v. Pincus, 2016 WL 769999, at *6 (Del. Ch. Feb. 29, 2016), rev'd on other grounds, 152 A.3d 124 (Del. 2016); accord MCG Capital Corp. v. Maginn, 2010 WL 1782271, at *18 (Del. Ch. May 5, 2010). Here, although plaintiffs have set out four counts in the JAC, they overlap substantially, with much of the challenged conduct reappearing in multiple counts under multiple labels. For clarity, I separately consider each category of challenged conduct, regardless of the label under which it is pleaded. As to each, I conclude that plaintiffs have failed to plead particularized facts that would excuse their failure to make a pre-suit demand on the Board.
For example, plaintiffs' claim that defendants made misleading statements in the Company's proxy statements first appears in Count I, which charges that certain Individual Defendants "negligently issued" those proxy statements in violation of § 14(a) of the Exchange Act, and reappears in Count II, which alleges that all of the Individual Defendants breached their fiduciary duties to Teladoc by, among other things, "making or allowing the Company to make improper statements in its public filings, including its Proxy Statements." JAC ¶¶ 213, 220, 222. Plaintiffs' claim that Teladoc's directors acted improperly in approving Hirschhorn's Amended Employment Agreement and Separation Agreement first appears in Count II, where that conduct is characterized as a breach of fiduciary duty, and reappears in Count III, where the same conduct is characterized as a waste of corporate assets. Id. ¶¶ 220, 221, 229. Similarly, the so-called Insider Selling Defendants (Gorevic, Goldstein, and Multani) are alleged to have violated their fiduciary duties (Count II) and unjustly enriched themselves (Count IV) by selling Teladoc stock while in possession of nonpublic information about Hirschhorn's misconduct and the Company's anemic response. Id. ¶¶ 223, 235.
1. The Amended Employment Agreement and the Separation Agreement
With respect to Hirschhorn's 2016 Amended Employment Agreement and 2018 Separation Agreement, plaintiffs argue that demand on the Board was excused because the Current Director Defendants who approved them face a substantial risk of personal liability for having done so, and because the contracts themselves were so egregiously one-sided, and entered into with so little investigation and deliberation, that there is reason to doubt whether they were valid exercises of business judgment. Pl. Mem. at 16-22.
Defendants Gorevic, Snow, Multani, McKinley, Frist, Goldstein, Darling, and Shedlarz were on the Teladoc Board when the Company entered into the Amended Employment Agreement with Hirschhorn. JAC ¶¶ 18-26. By the time the Company entered into the Separation Agreement, defendants Paulus, McAndrews, and Smith had joined the Board. Id. ¶¶ 27-29.
These intertwined arguments place an exacting pleading burden upon plaintiffs, particularly in light of the Company's exculpatory clause. Because Teladoc's directors are shielded from personal liability for breach of the duty of care, plaintiffs cannot show that they face a substantial likelihood of liability with respect to the Hirschhorn contracts unless plaintiffs have "allege[d] with particularity that [they] failed to act in good faith or otherwise breached their duty of loyalty" when approving them. Rahbari, 732 F.Supp.2d at 379. Similarly, in order to establish demand futility under the second Aronson prong, plaintiffs must show that the challenged transactions were "so extreme as to suggest bad faith." Zuckerberg, 2020 WL 6266162, at *15. "For both prongs, exculpation dominates the analysis." Id.
(a) The 2016 Amended Employment Agreement
"It is the essence of the business judgment rule that a court will not apply 20/20 hindsight to second guess a board's decision, except 'in rare cases [where] a transaction may be so egregious on its face that board approval cannot meet the test of business judgment.'" In re Walt Disney Co. Deriv. Litig., 731 A.2d 342, 362 (Del. Ch. 1998) (Disney I) (quoting Aronson, 473 A.2d at 815), aff'd in part and reversed in part sub nom. Brehm, 746 A.2d 244. The challenged agreements must be "so one sided that no business person of ordinary, sound judgment could conclude that the company has received adequate consideration." Id. at 362 (quoting Glazer v. Zapata Corp., 658 A.2d 176, 183 (Del. Ch. 1993)). The standard is equally high regardless of whether the claim is pled as breach of fiduciary duty or as waste. White v. Panic, 783 A.2d 543, 554 n.36 (Del. 2001) ("To prevail on a waste claim or a bad faith claim, the plaintiff must overcome the general presumption of good faith by showing that the board's decision was so egregious or irrational that it could not have been based upon a valid assessment of the corporation's best interests.") (emphasis added). Because Teladoc's directors are exculpated, plaintiffs must also "demonstrate disloyalty," which requires a showing that the challenged transaction was on terms so unfavorable to the corporation as to be "inexplicable other than as bad faith." Ryan, 2017 WL 2062902, at *2, 18.
"[D]eference to directors' business judgment is particularly broad in matters of executive compensation." Disney I, 731 A.2d at 362; see also AIG, 700 F.Supp.2d at 443 (quoting Pirelli Armstrong, 534 F.3d at 791) ("[C]ourts rarely second-guess directors' compensation and severance decisions because the size and structure of executive compensation are inherently matters of judgment."). In Brehm, the Delaware Supreme Court reversed Disney I in part, clarifying that "there are outer limits" to the directors' discretion regarding compensation, but emphasized that those outer limits "are confined to unconscionable cases where directors irrationally squander or give away corporate assets." 746 A.2d at 263. Short of "unconscionable cases," Delaware law demands that the courts, which are "ill-fitted to attempt to weigh the 'adequacy' of consideration," refrain from second-guessing the wisdom of executive compensation contracts, even if, in retrospect, they appear disadvantageous. Feuer on behalf of CBS Corp. v. Redstone, 2018 WL 1870074, at *10 (Del. Ch. Apr. 19, 2018) (quoting Brehm, 746 A.2d at 263).
Feuer, which involved a challenge to the compensation paid to Sumner Redstone, the Executive Chairman of CBS, is one of the rare cases in which a Delaware court found a compensation package too one-sided to afford the directors who approved it the benefit of the business judgment rule. CBS paid Redstone approximately $13 million in cash compensation (including a $9 million "performance bonus") after May 2014, when, at age 91, he became so mentally and physically incapacitated that he could not participate in board meetings beyond saying, "Hello Everyone" by telephone. 2018 WL 1870074, at *1, 4. In 2015 he lost the ability to do even that, id. at *5, and in 2016 - the year he was appointed Emeritus Chairman at a salary of $1 million - he was unable to attend the CBS annual meeting and was reportedly found to lack mental capacity after examination by a geriatric psychiatrist. Id. at *6-7. Faced with this "extreme factual scenario," id. at *11, the court agreed that "no person of ordinary, sound business judgment" would deem Redstone's services during this period "worth the millions of dollars in salary that the Company was paying him," and therefore that the CBS directors faced a substantial risk of liability for "waste and/or bad faith," excusing demand. Id. at *13.
Neither the terms of the Amended Employment Agreement nor the compensation paid to Hirschhorn thereunder comes close to those "outer limits." Although plaintiffs argue that Teladoc could not possibly have received "adequate consideration" for the compensation it paid to Hirschhorn after his promotion to COO, Pl. Mem. at 16-17, their critique of his job performance appears to begin and end with the facts concerning his affair with Griffin (including his failure to disclose those facts in Teladoc's 10-Ks and Proxy Statements). They do not suggest that any other aspect of his performance as EVP, CFO, and COO of Teladoc was deficient. To the contrary: as they acknowledge, Hirschhorn was responsible for "managing the crucial relationships, bankers and brokerage firm research analysts" that helped Teladoc raise "nearly $1.3 billion in capital" from March 2015 through December 2018, which "enabled over $625 million worth of . . . acquisitions" and drove "rapid revenue growth." SIRF Rep. at 1. Nor do plaintiffs suggest that that Hirschhorn's compensation package was outsized in comparison to executives at his level at peer firms or otherwise objectively unreasonable. This case is thus fundamentally unlike Feuer and In re Walt Disney Co. Deriv. Litig., 825 A.2d 275 (Del. Ch. 2003) (Disney II) (both cited by plaintiffs in connection with the Amended Employment Agreement, see Pl. Mem. at 18), which involved absurdly generous compensation packages bestowed on incompetent or unqualified executives.
Hirschhorn earned a total of $1,208,113 in 2016, including $350,435 in salary, $819,776 in stock options, and $37,902 in "other compensation" (such as health insurance). JAC ¶ 30. He was the only senior Teladoc officer that year to receive no cash bonus and no non-equity incentive plan compensation. See 2017 Proxy Statement (Soloway Decl. Ex. 9) at 49. That same year, by way of comparison, CEO Gorevic earned a total of $3,606,561. Id.; see also JAC ¶ 18.
In Disney II, the board approved the hiring of Michael Ovitz, a long-time personal friend of CEO Michael Eisner who "had never been an executive for a publicly owned entertainment company," to serve as Disney's President under a contract containing "non-fault" resignation provisions which, when triggered, made the contract "most valuable to Ovitz the sooner he left Disney," and paid him an estimated $140 million when he left Disney after approximately 14 months' service. 825 A.2d at 279, 282-83 & 289 n.32.
Read fairly, the gravamen of plaintiffs' claim as to the Amended Employment Agreement is not that the Board overpaid for Hirschhorn's services; rather, they complain that the Board did not fire him - or, at a minimum, discipline him more publicly and painfully - for engaging in an inappropriate sexual relationship that required the Company to (i) pay an (unspecified) settlement to Griffin in 2016, and (ii) defend a class action filed two years later. See, e.g., Pl. Mem. at 18 ("The Board could have mitigated this risk exposure and eliminated any further expense by terminating Hirschhorn for cause."). Here too, however, plaintiffs' thesis - that any response short of firing Hirschhorn constituted bad faith, see JAC ¶ 93 (alleging that by "allowing defendant Hirschhorn to remain in his executive roles," the Board "consciously acted against Teladoc's best interest") - is unsupported by Delaware law.
Because the JAC does not allege the amount of the Griffin settlement, nor the "precise conduct alleged" by Griffin that led to the settlement, the mere fact of the settlement does not reasonably imply that Hirschhorn committed any tortious conduct. Panic, 783 A.2d at 552-53 (holding that the directors' prior agreement to settle eight "harassment lawsuits" lodged against the corporation and its president did not raise any reasonable inference "that the board knew that [the president] had actually engaged in in misconduct," and consequently did not excuse demand).
The protection of the business judgment rule extends in full measure to the often-difficult question of whether and when to fire an executive who has committed misconduct. See, e.g., In re Am. Apparel, Inc., 2015 WL 12724070, at *18-20 (C.D. Cal. Apr. 28, 2015) (demand not excused where board failed for years to fire or discipline CEO Charney, despite a string of sexual misconduct scandals and harassment lawsuits that led one board member to complain that "he can't keep it in his pants"), aff'd, 696 Fed.Appx. 848 (9th Cir. 2017); Panic, 783 A.2d at 552-55 (demand not excused where board settled eight harassment lawsuits brought against corporation and president without firing president or requiring him to contribute to the settlements). The courts recognize that firing a senior executive is not costless; consequently, even where the board has grounds to terminate, it is not required to do so. See Am. Apparel, 2015 WL 12724070, at *18-20 (given "the immense complexity involved in making the decision to fire Charney," including the fact that "significant financing was contingent on the Company retaining him as CEO," the board's "delay in suspending and ultimately terminating Charney" did not demonstrate "a conscious disregard for [their] duties" or excuse demand) (emphasis in the original); AIG, 700 F.Supp.2d at 445-46 (demand not excused after board paid lavish "retention bonuses" to employees whom the Company "intended to terminate," because they were "responsible for the Company's collapse," where "the challenging environment in the financial markets" required that the Company "retain personnel in the near-term to navigate those challenges").
Moreover, while Hirschhorn "may have been insufficiently punished, in plaintiffs' eyes," Reiner R&R, 2020 WL 6343217, at *11, he was not "entirely unpunished." Id. To begin with, it is simply not the case that the Amended Employment Agreement, entered into on December 27, 2016, JAC ¶ 97, " promoted Hirschhorn to COO." Pl. Mem. at 19 (emphasis in the original). He was promoted three months earlier, on September 23, 2016, JAC ¶ 73, and his new title (which came with a $25,000 raise and 40, 000 stock options) was publicly announced on September 28, 2016. Id. ¶ 81. Whether or not Vandervoort received the McKay Report in September, see id. ¶¶ 66, 73, plaintiffs clearly allege that the Hirschhorn-Griffin issue did not come before the Board until November 11, 2016. Id. ¶¶ 5, 74, 82-83.
Plaintiffs are correct that the clause conditioning Hirschhorn's future bonuses on his compliance with the Company's "published employee policies" was fairly toothless, since he "was never exempted from such policies." Pl. Mem. at 19-20. However, the delayed vesting of his equity shares for came with real financial risk, and the denial of any cash bonus or non-equity incentive plan compensation cost Hirschhorn what would likely have been $432,900 (his $240,500 "target" and his $192,400 "calculated" bonus for 2016). 2/23/17 Minutes, at ECF page 9.
Plaintiffs complain that the Amended Employment Agreement gave Hirschhorn a "clean slate for purposes of future bonuses." Pl. Mem. at 19. It is true that the Board did not prospectively bar Hirschhorn from earning bonuses in future years, so long as he complied with the Company's employee policies. It is not clear, however (and plaintiffs nowhere explain) on what basis the Board could or should have done so. In 2017, Hirschhorn's total compensation was $3,271,044, which included $370,000 in base salary, $263,492 in cash bonus, $584,685 in stock awards, $1,813,127 in option awards, $203,704 in non-equity incentive plan compensation, and $46,036 in "other compensation." 2018 Proxy Statement (Soloway Decl. Ex. 10) at 40. Part of his bonus was based on his "outstanding performance in connection with the acquisition of Best Doctors." Id. at 37. By way of comparison, Gorevic earned $7,104,422 in 2017. Id.
Stripped of its conclusory rhetoric, the complaint accuses Hirschhorn of conducting a single "extramarital sexual relationship," JAC ¶¶ 3, 60, 75, over the course of two and a half years, id. ¶ 62, which was "widely known" and led to complaints of favoritism and insider trading, disrupting morale in the Lewisville office and creating an "appearance of improper behavior" in violation of Teladoc's CBCE. Id. ¶¶ 2, 38, 59, 62. Under Delaware law, the Board's decision to discipline its COO for this misconduct by delaying certain financial benefits and denying him a $400,000-plus bonus - rather than firing him outright - was not so "egregious on its face that board approval cannot meet the test of business judgment.'" Disney I, 731 A.2d at 362 (quoting Aronson, 473 A.2d at 815), nor so inherently "extreme as to suggest bad faith." Zuckerberg, 2020 WL 6266162, at *15. See also Am. Apparel, 2015 WL 12724070, at *20 (although plaintiffs disputed both "the nature of [the executive's] misconduct and the appropriate response," these differences were "insufficient to establish that the Director Defendants acted in bad faith").
To the extent plaintiffs accuse Hirschhorn and Griffin of actually engaging in insider trading together, see JAC ¶¶ 4, 60, 152(c), these allegations are wholly conclusory and thus may not considered by the Court. Halpert Enterprises, 362 F.Supp.2d at 430-31; ITT Corp., 653 F.Supp.2d at 457 (S.D.N.Y. 2009). The "particularized facts" set forth in the JAC cannot be fairly read to make out the charge. Plaintiffs nowhere allege, for example, that Hirschhorn disclosed or used any "material, nonpublic information" - the sine qua non of the offense, see United States v. O'Hagan, 521 U.S. 642, 652 (1997) - when giving Griffin investment advice.
The JAC frequently describes the Hirschhorn-Griffin relationship as "improper" or "inappropriate," see id. ¶¶ 65, 67, 72-73, 78, 84, 90, 124, 128, 170, 174, 193-94, 199, but nowhere alleges that it was nonconsensual or that Hirschhorn engaged in "predatory" conduct, cf. Pl. Mem. at 1, 2, 3, or sexual harassment. The fact that one of the Proskauer attorneys attending the Teladoc Board meetings in November and December 2016 had "extensive experience . . . defending employers against claims alleging all forms of discrimination, [including] sexual harassment ," Pl. Mem. at 5 n. 9 (emphasis in the brief), does not, of course, raise a reasonable inference that Hirschhorn was accused of harassment, much less that he committed it.
(b) The 2018 Separation Agreement
The same is true with respect to the 2018 Separation Agreement. "Just as in the case of setting executive compensation," it is well-settled under Delaware law that directors may, "within the bounds of proper business judgment," negotiate a quiet exit, complete with severance payments, for a senior executive who arguably could be fired "for cause," thereby avoiding "an embarrassing legal battle" and additional bad publicity. Shabbouei v. Potdevin, 2020 WL 1609177, at *12 (Del. Ch. Apr. 2, 2020) (lululemon) (demand not excused where, after verifying reports of "pervasive" sexual misconduct by CEO Potdevin, the board of lululemon athletica "decided to settle with Potdevin rather than fire him 'for cause, '" ultimately agreeing to pay him $5 million in severance under a contract which not only included a release and a non-solicitation covenant but, more importantly, "liberated the Company from Potdevin's troublesome tenure" without litigation). Additional examples abound, many of them - like lululemon - involving substantially worse misconduct and/or more generous exit terms than is alleged here.
The lululemon court summarized Potdevin's "troublesome tenure" as follows: "Potdevin 'created a toxic culture at lululemon and engaged in a pattern and practice of harassment and sexual favoritism while CEO.' He openly expressed 'patriarchal beliefs of male superiority,' 'filled the Company's high-level executive positions with men' and 'turned lululemon's executive team into a boy's club.' It is alleged [that] Potdevin's 'boys club' would frequently gather either at 'his house or hotel rooms for alcoholic beverages and illicit drugs.' In addition to favoring his 'boys club,' Potdevin allegedly gave preferential treatment to his girlfriend, Linde, a lululemon designer. This dynamic was not only offensive to more senior and qualified designers, it also empowered other senior male executives to pursue inappropriate personal relationships with junior female employees. Potdevin's behavior prompted several 'talented and high-ranked employees' to leave the Company in protest. It also led to 'a number of employee complaints to the Company's whistleblower hotline.'" 2020 WL 1609177, at *3 (internal citations omitted).
See, e.g., Am. Apparel, 2015 WL 12724070, at *5-7 (demand not excused where, after years of "serious" sexual misconduct by CEO Charney, leading to numerous lawsuits and an adverse EEOC finding, American Apparel board first asked CEO to resign in exchange for $1 million-per-year consulting contract, then announced he would be terminated, and then - after grappling with the "serious financial results" of that decision in light of a loan requiring that Charney remain CEO - negotiated a Support Agreement under which Charney's business partner Standard provided funds to pay off the defaulted loan, in exchange for the right to replace three of the company's directors, and Charney remained as a "paid consultant"); AIG, 700 F.Supp.2d at 445-46 (demand not excused where, after company recognized "multi-billion dollar losses" from subsidiary AIGFP, board negotiated termination of AIGFP president Cassano "without cause," theoretically providing Cassano with "an astonishing $43 million," $9 million of which was actually paid); Zucker v. Andreessen, 2012 WL 2366448, at *2-3 (Del. Ch. June 21, 2012) (demand not excused where, after Hewlett Packard board substantiated allegations that CEO Hurd falsified expense reports, and after Hurd settled related sexual harassment claims confidentially, board entered into Severance Agreement giving Hurd more than $40 million in cash and other benefits which it was under "no contractual obligation to pay"). See also Panic, 783 A.2d at 548 (demand not excused where, rather than fire president Panic for repeated episodes of sexual misconduct resulting in costly litigation, board lent him $3.5 million in corporate funds to settle a "paternity suit").
Hirschhorn's Separation Agreement, prompted by the publication of the SIRF Report and the filing of what became Reiner, designated his departure as a resignation with "Good Reason" as of January 1, 2019, which under his 2016 contract entitled him to be paid a year's severance ($425,500, with benefits), keep his earned but unpaid 2018 bonus, and retain his unvested equity awards. JAC ¶¶ 104; see also Sep. Ag. ¶ 3. According to plaintiffs, having determined to part ways with Hirschhorn, the Board could and should have deemed his resignation "without Good Reason," which would have penalized him economically to the same extent as if he were fired "for cause." JAC ¶¶ 103, 106, 110. What plaintiffs miss, in this regard, is that Hirschhorn had no obligation to resign voluntarily, much less to concede that he was doing so "without Good Reason" and thereby forfeit substantial financial benefits. In order to ensure his departure, the Company had to: (i) fire him "without cause" (which would have been equally expensive, see Amend. Emp. Ag. ¶ 5(b)(i)) and would likely have put Teladoc in a bad light), (ii) attempt to fire him "for cause" (which plaintiffs appear to concede it could not do), or (iii) negotiate a mutually-agreeable exit that "liberated" Teladoc and Hirschhorn from one another, lululemon, 2020 WL 1609177, at *12, as efficiently as possible. Under Delaware law, the third option is commonly employed and, unless the challenged transaction was on terms so unfavorable to the corporation as to be "inexplicable other than as bad faith," Ryan, 2017 WL 2062902, at *18, it does not constitute a breach of the duty of loyalty, nor waste, and therefore does not excuse demand.
Plaintiffs' motion papers (though not the JAC) value Hirschhorn's exit package, including the accelerated vesting of his equity awards, at $5.1 million. Pl. Mem. at 2; Sanders Decl. Ex. 4.
The conduct alleged in the SIRF Report was, for the most part, old news, for which Hirschhorn had already been disciplined in 2016. Indeed, plaintiffs affirmatively allege that by entering into the Amended Employment Agreement in 2016, Teladoc "forfeited the opportunity to terminate defendant Hirschhorn for cause" two years later. JAC ¶ 103; Pl. Mem. at 19.
The terms of Hirschhorn's Separation Agreement are not inexplicable other than as bad faith. Like the departing executives in lululemon and Zucker, Hirschhorn signed a release in favor of the Company, and bound himself to confidentiality, cooperation, and non-disparagement provisions. Sep. Ag. §§ 2-4, 7-9. Plaintiffs argue that "[t]his consideration is illusory" because Hirschhorn "had no claims against the Company." JAC ¶ 108. Under Delaware law, however, such a release has value even if the released claims would not have been meritorious. See lululemon, 2020 WL 1609177, at *9, 13 & n.111 (release by departing executive was a "corporate benefit" even though nothing in the record "suggest[ed] [that] Potdevin had any valid claims to bring against the Company."). As the Chancery Court explained in Zucker:
Contrary to plaintiffs' allegation, JAC ¶ 108, the Separation Agreement does not contain a reciprocal release from Teladoc to Hirschhorn. "[W]here 'a plaintiff alleges a claim based on a written instrument,' if 'the documents contradict the allegations of a plaintiff's complaint, the documents control and the [c]ourt need not accept as true allegations in the complaint.'" 2002 Lawrence R. Buchalter Alaska Trust v. Philadelphia Financial Life Assur. Co., 96 F.Supp.3d 182, 199 (S.D.N.Y. 2015) (quoting Bill Diodato Photography LLC v. Avon Prods., Inc., 2012 WL 4335164, at *3 (S.D.N.Y. Sept. 21, 2012) and collecting cases).
Creative counsel advocating on [CEO] Hurd's behalf could have claimed that he, in fact, was entitled to severance under HP's general executive officer severance plan notwithstanding the expense report violations. The Board ultimately might have prevailed on that claim, but the Company would need to incur considerable costs of time, resources, and negative publicity in the interim. Instead, Hurd's general release avoided those possible costs. That is, even if the release was worth relatively little, Plaintiff overstates his case to say it was worthless.2012 WL 2366448, at *8 (citations omitted). Even more fundamentally, there is value in a settlement that avoids "an embarrassing legal battle" with a former senior executive, lululemon, 2020 WL 1609177, at *12, and - equally significant here - makes it easier to recruit that executive's successor. See Zucker, 2012 WL 2366448, at *9 (denying "any severance" to a departing executive "could have undermined [the company's] efforts to attract outside executive talent"). Thus, applying Delaware law, I cannot say that the Board's decision to permit Hirschhorn to resign under the terms of the Separation Agreement was so "egregious on its face" as to take it out of the business judgment rule, Disney I, 731 A.2d at 362, nor so inherently "extreme as to suggest bad faith." Zuckerberg, 2020 WL 6266162, at *15.
(c) Board Process
As to both the Amended Employment Agreement and the Separation Agreement, plaintiffs also argue that they were not valid exercises of business judgment because the Board acted "without considering all reasonably available information." Pl. Mem. at 16 (citing McPadden v. Sidhu, 964 A.2d 1262, 1273 (Del. Ch. 2008)). McPadden, however, excused demand futility under the second prong of Aronson on a theory no longer accepted by the Delaware courts: that the plaintiff had pled "particularized facts demonstrating that material and reasonably available information was not considered by the board and that such lack of consideration constituted gross negligence." Id. at 1271 (emphasis added).
Since Cornerstone, the Delaware courts have been clear that, in an exculpated case, a derivative plaintiff cannot "plead demand futility by pleading a breach of the Board's duty of care." lululemon, 2020 WL 1609177, at *10 (Del. Ch. Apr. 2, 2020). While the second Aronson prong "'analyzes both care and loyalty issues,' when the board operates under an exculpatory charter provision . . . demand is only excused by well pleading that a majority of the Board acted in breach of the duty of loyalty, that is, the challenged decision must be 'so egregious on its face that board approval cannot meet the test of business judgment.'" Id. (citations omitted); see also McElrath on behalf of Uber Techs., Inc. v. Kalanick, 2019 WL 1430210, at *16 (Del. Ch. Apr. 1, 2019) (Uber) (demand not excused, even though the defendant directors "approved a questionable transaction without fully informing themselves," because "[e]ven grossly negligent board action does not imply a non-exculpated breach"), aff'd sub nom. McElrath v. Kalanick, 224 A.3d 982 (Del. 2020); Lenois, 2017 WL 5289611, at *12-14 ("that the board committed exculpated duty of care violations alone, will not affect the board's right to control a company's litigation"); In re NYMEX S'holder Litig., 2009 WL 3206051, at *7 (Del. Ch. Sept. 30, 2009) ("claims of flawed process are properly brought as duty of care, not loyalty, claims and, as discussed, those claims are barred by the exculpatory clause of NYMEX's Certificate of Incorporation"). Since neither the 2016 Amended Employment Agreement nor the 2018 Separation Agreement was so egregious, extreme, or one-sided as to be inexplicable other than as bad faith, plaintiffs cannot bootstrap their way into demand futility by charging that the Teladoc Board should have read more documents, consulted with more or different lawyers, or conducted a further or deeper investigation before entering into those contracts.
To be sure, both plaintiffs and defendants spill much ink on this issue. First, although plaintiffs acknowledge that the Company retained counsel to perform an investigation - which "substantiated" the "improper relationship" between Hirschhorn and Griffin, JAC ¶¶ 84-85, 90, 92 - they complain that the lawyers were selected by Vandervoort ("and potentially Gorevic") rather than by the Board itself; that the investigation was prompted by Griffin's (unspecified) allegations rather than by the McKay Report; and that it was not "broad and thorough" enough to determine whether Hirschhorn "had engaged in any other wrongdoing." Id. ¶¶ 85, 87, 90, 164-65; see also Pl. Mem. at 7-8. However, plaintiffs fail to explain why it was "unreasonable" for Vandervoort, who was not was not himself the subject of the investigation, to perform one of standard functions of any CLO: retaining well-qualified counsel to perform an investigation and advise the Company and the Board. The fact that the 2016 investigation concerned "allegations made by counsel for Ms. Charece Griffin," 12/11/18 Minutes at 1, does not mean that counsel did not also consider, or investigate, related allegations made by McKay. Moreover, plaintiffs herein appear to know very little about the substance of Griffin's allegations, and concede that they have never seen either the McKay Report or any written report of the Teladoc investigation. See JAC ¶¶ 66 n.2 & 88-89. The particularized allegations in the JAC therefore do not substantiate plaintiffs' conclusions about the deficient scope of that investigation, much less the claim (made only in their brief) that the Board "consciously ignored the extent of [Hirschhorn's] wrongdoing." Pl. Mem. at 17.
Reaching for straws, plaintiffs suggest that S&C had a conflict because Vandervoort previously practiced at that firm, JAC ¶ 66, and because 15 years earlier, in 2001, S&C served as counsel to defendant Goldman Sachs in a lawsuit in which Hirschhorn (then employed by a company called Deltathree.com) was also named as a defendant, but never appeared. Pl. Mem. at 5 n.10. Plaintiffs do not explain why either of these facts would render S&C unable to adequately advise the Board with respect to Hirschhorn's misconduct at Teladoc in 2016, and I perceive no such impediment. Proskauer was also conflicted, according to plaintiffs - because in 2000, when Hirschhorn was CFO of SkyAuction.com, the firm issued an opinion letter in connection with SkyAuction's initial public offering. Id. Once again, plaintiffs fail to explain, and I cannot intuit, why that engagement rendered Proskauer conflicted as to its work for Teladoc 16 years later.
The Reiner plaintiffs allege that the investigation concerned, and substantiated, McKay's allegations. See Reiner SAC ¶¶ 9, 42 (alleging that McKay "learned in November 2016 that the Company had retained an outside law firm to conduct an investigation of her allegations, which were ultimately shown to be accurate") (emphasis added).
Next, plaintiffs charge that in November and December 2016 the Teladoc directors, like the directors in Disney II:
(i) did not raise questions or engage in any discussion concerning Hirschhorn's continued employment, despite the obvious risks; (ii) did not receive any reports or presentations; (iii) received no expert guidance; (iv) approved Hirschhorn's continued employment by inviting him to a Board meeting while the terms of the 2016 Agreement were still being negotiated; (v) allowed management to negotiate the final terms; and (vi) never reviewed any draft of the 2016 Agreement.
Pl. Mem. at 18. Similarly, according to plaintiffs, during their meeting on December 11, 2018, the directors "never even discussed the terms of [Hirschhorn's] departure," and "refused to explore alternative payouts beyond a resignation for 'Good Reason.'" Id. at 20.
These assertions are also made, for the most part, only in plaintiffs' motion papers, and cannot be reasonably inferred from the facts stated in or incorporated into the underlying JAC. As noted above, Teladoc's minutes (presumably for privilege reasons) do not describe the substance of the discussions that took place with counsel during the meetings. They do show, however, that the directors met with the CLO and two law firms for an hour and a half on November 11, 2016, and another two hours on December 3, 2016, id., which by definition means they received "expert guidance." Moreover, given the purpose of the meetings, plaintiffs' assertions that the directors did not "raise questions or engage in any discussion concerning Hirschhorn's continued employment," or "receive any reports or presentations" during their discussions with counsel, are decidedly unreasonable inferences.
The Compensation Committee received additional guidance at its February 23, 2017 meeting, when it voted to give Hirschhorn no bonus for 2016. That meeting was attended by representatives of the compensation consulting firm Radford, see 2/23/17 Minutes at 1, retained by the Committee "to provide executive and director compensation consulting services and provide recommendations for compensation." Soloway Decl. Ex. 10, at 33.
Plaintiffs' contention that the Teladoc directors "approved Hirschhorn's continued employment by inviting him to a board meeting while the terms of his 2016 Agreement were still being negotiated," Pl. Mem. at 20, is similarly ungrounded in the record. Hirschhorn was invited to the December 15, 2016 regular meeting of the Board, at which he and Vandervoort were designated to serve as proxies at the next Annual Meeting. JAC ¶¶ 94-95. However, under Hirschhorn's existing employment contract, dated June 17, 2015 (Soloway Decl. Ex. 7), his continued employment did not require "approval." Nothing in the JAC or the § 220 Documents specifies when (or by whom) Hirschhorn's Amended Employment Agreement was negotiated.
The minutes of the December 11, 2018 meeting are also lean, disclosing only that the Board met for 6-1/2 hours with (among others) the CLO, the head of HR, an outside advisor, and four law firms, including S&C, which was acting as "counsel to the Board." During the meeting, the CLO and outside counsel "reviewed the 2016 investigation," "answered questions for the Board," and discussed the SIRF Report, after which the Board went into executive session with counsel. Given the setting, the context, and the guest list, plaintiffs' assertion (made only in their brief) that the Board did not discuss the terms of Hirschhorn's departure (including "alternative payouts") is, in my view, another unreasonable inference.
In Disney II, by way of contrast, the directors obtained no expert advice from any source (and met for less than an hour) before approving the hiring of Ovitz as president and leaving the final negotiation of his employment contract to CEO Eisner, his "close friend for over 25 years." 825 A.2d at 280-81, 288. When Eisner determined to give Ovitz a "non-fault" termination 14 months later - which ultimately cost Disney an estimated $140 million in cash and stock - neither the compensation committee nor the board was "consulted." Id. at 284. Although formal board approval "appeared necessary for a non-fault termination," no board member "even asked for a meeting" to discuss the decision. Id. at 288-89. On these extreme facts - including the directors' failure to meet or even seek a meeting regarding the termination of the company's president - the Disney II court held that the complaint "sufficiently alleges a breach of the directors' obligation to act honestly and in good faith in the corporation's best interests," excusing demand. Id. at 289.
Finally, plaintiffs complain that the Board was too slow to act in 2016, see JAC ¶ 87 ("Despite the importance of the allegations against one of the Company's top executives, it took almost a month for the Board to meet again"), and too quick to act in 2018, see Pl. Mem. at 20 (arguing that the Board acted with inadequate deliberation by "executing the [Separation Agreement] just five days after the December 11, 2018 meeting discussing the SIRF Report for the first time") (emphasis in the original). As the lululemon court noted, when faced with a similar argument, plaintiffs face "the fruitless task of maintaining credibility when arguing that the Board was too slow to respond to Incident 1, but too fast in its response to Incident 2." 2020 WL 1609177, at *11. Moreover, plaintiffs nowhere suggest that another few days or weeks would have enabled Teladoc to negotiate more favorable exit terms with Hirschhorn, repair its "reputation, goodwill, and standing," JAC ¶ 1, or obtain any other benefit.
In lululemon, plaintiffs charged that after doing nothing about the CEO's sexual misconduct for many months, the Board "rushed to negotiate and sign the Separation Agreement [with the CEO] after conducting cursory informal meetings (without minutes)." 2020 WL 1609177, at *10.
The particularized facts alleged by plaintiffs show that Teladoc's directors learned about the Hirschhorn-Griffin affair in November 2016, after Hirschhorn had become COO. They promptly met (twice) with outside counsel, who conducted an investigation which confirmed the "improper relationship." On the recommendation of the Compensation Committee, advised by a compensation consultant, the Board then denied Hirschhorn any cash bonus for 2016. Additionally, it amended his contract to delay the vesting of his equity shares for one year and condition future bonuses on compliance with the Company's employee policies. In 2018, upon publication of the SIRF Report, the directors met again with outside counsel (and the Company's HR Chief), reviewed the 2016 investigation, and offered Hirschhorn a separation agreement which "secured [his] departure without litigation or excessive negative publicity," lululemon, 2020 WL 1609177, at *8, on the same economic terms as if the Company had dismissed him.
No doubt "the Board's process was not perfect." NYMEX, 2009 WL 3206051. But Delaware law does not demand perfection. Indeed, the business judgment rule calls for deference to the board's decisions regarding, among other things, "how much information it need[s]" before approving a transaction and "how to structure its meetings." lululemon, 2020 WL 1609177, at *10. In order to establish demand futility under the second prong of Aronson, plaintiffs must allege particularized facts showing "disregard so profound that it raises an inference of scienter." Uber, 2019 WL 1430210, at *16. Failing to meet at all (or even ask for a meeting) before the CEO terminates the president at a cost of $140 million was held, in Disney II, to meet that standard. 825 A.2d at 289. Approving a "questionable transaction" without "fully informing themselves" does not. Uber, 2019 WL 1430210, at *16. No such disregard is demonstrated by, or may reasonably be inferred from, the particularized facts alleged here. Consequently, plaintiffs have failed to establish demand futility, under any theory, as to the Amended Employment Agreement or the Separation Agreement.
In Uber, the directors approved a disastrous $680 million acquisition of Otto, a company formed by a former Google employee, Levandowski. Shortly after the acquisition closed, it was discovered that Levandowski had downloaded Google trade secrets before he left his employment there. This led to a lawsuit by Google which Uber ultimately paid $245 million to settle, as well as a criminal investigation. 2019 WL 1430210, at *6. In the inevitable derivative suit, plaintiff alleged that Uber's directors approved the transaction too quickly, in reliance on the recommendation of its CEO - who had a history of skirting the law - and that in the process they failed to review or even ask for the preliminary or final report by Stroz, the forensic consulting firm tasked with conducting due diligence on Levandowski. Had they done so, they would have learned that Levandowski and his team retained "hundreds of thousands of files, documents, and emails" from Google; that Levandowski had been less than honest about the extent of the data when interviewed by Stroz; and that he appeared to be in the process of deleting data during his interview with Stroz. Id. at *5. Notwithstanding these facts, the court concluded that the derivative plaintiff "ultimately fail[ed] to plead that the directors did more than violate a duty of care, which here is an exculpated claim." Id. at *12.
2. Oversight Liability
In an effort to widen their lens beyond Hirschhorn's improper sexual relationship and the Board's response, plaintiffs argue that the Current Director Defendants face a substantial likelihood of Caremark liability because they failed to "make a good faith effort to oversee the Company's operations," thereby "consciously disregarding their duty to protect and act in the Company's best interests." Pl. Mem. at 10-11. As a result of the oversight failures, plaintiffs contend, the Board "permitted and failed to rectify a corporate culture that was antithetical to Teladoc's Code" and rife with "widespread harassment and retaliation" taking place "right under the directors' noses." Pl. Mem. at 10-11, 14-15 & nn.26-29.
A Caremark claim is "possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment." Caremark, 698 A.2d at 967. The "essence" of the claim is "a breach of the duty of loyalty arising from a director's bad-faith failure to exercise oversight over the company." Rich ex rel. Fuqi Intern., Inc. v. Yu Kwai Chong, 66 A.3d 963, 980 (Del. Ch. 2013). Such a claim is "preconditioned on a finding of bad faith." Id. at 981; accord Am. Apparel, 2015 WL 12724070, at *16. Thus, in order to establish a substantial likelihood of Caremark liability, a plaintiff must show that "(a) the directors utterly failed to implement any reporting 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 ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006) (emphasis in the original). "In either case, imposition of liability requires a showing that the directors knew that they were not discharging their fiduciary obligations." Id.; see also In re SAIC Inc. Deriv. Litig., 948 F.Supp.2d 366, 381 (S.D.N.Y. 2013) (quoting Guttman v. Huang, 823 A.2d 492, 506 (Del. Ch. 2003)) (Caremark liability is premised "on a showing that the directors were conscious of the fact that they were not doing their jobs" and "[e]ven a showing of gross negligence by a majority of the Board will not suffice."), aff'd sub nom., Welch v. Havenstein, 553 Fed.Appx. 54 (2d Cir. 2014).
Here, plaintiffs implicitly acknowledge that "a system" was in place, however flawed, and therefore focus on the second Caremark prong. See also lululemon, 2020 WL 1609177, at *7 (where a company established an ethics code and a whistleblower hotline available to employees, and then detected misbehavior through those systems, "it is not conceivable that the Board 'utterly failed' to establish a relevant information and reporting system").
See JAC ¶ 111 (the Board's "internal controls were inadequate"); id. ¶ 193 (the Current Director Defendants "allow[ed] the Company to operate with inadequate internal controls"); Pl. Mem. at 14 (arguing that "Hirschhorn's misconduct warned the Board that its system of reporting and compliance was not working properly . . ."). The CBCE - which included directions for reporting potential conflicts of interest and suspected violations - was part of that system, as was the Nominating and Corporate Governance Committee (to which certain violations were to be reported), the HR department, and the CBCE "hotline." See JAC ¶¶ 4, 40, 42, 72; CBCE ¶ 10. Indeed, in their pleading, plaintiffs rely on "the reporting protocols of the Code" for their allegation that the McKay Report, once sent to HR and Legal, "would have made its way to Teladoc's Chief Legal Officer and Secretary, defendant Vandervoort." Id. ¶ 66.
To support their contention that the Current Director Defendants "consciously failed" to monitor or oversee Teladoc's operations, plaintiffs assert that:
(i) Hirschhorn was able to freely engage in a relationship with a subordinate which, despite being well known at Teladoc, lasted for over two years before the Board learned of it; (ii) the foundational McKay Report never escalated to the Board level; (iii) when Griffin's legal and factual allegations belatedly alerted the Board to Hirschhorn's misconduct, the Board refused to launch an investigation and did nothing aside from passively attending two management-dominated telephonic meetings; (iv) the Board took no remedial action despite internal control deficiencies that permitted Hirschhorn's enduring misconduct and abdicated its oversight role; and (v) the Board tolerated and failed to rectify a corporate culture that was antithetical to Teladoc's Code.
Pl. Mem. at 11. None of these contentions, singly or together, satisfies the stringent standard under Caremark.
(a) Board's Knowledge of Inappropriate Relationship and McKay Report
"[E]ven 'directors' good faith exercise of oversight responsibility may not invariably prevent employees from violating criminal laws, or from causing the corporation to incur significant financial liability, or both.'" SAIC, 948 F.Supp.2d at 381 (quoting Stone, 911 A.2d at 373). Thus, plaintiffs' allegation that the Board did not learn of the Hirschhorn-Griffin relationship quickly enough, in part because the McKay Report was not immediately forwarded to the Board, does not assist them in demonstrating the bad faith necessary to sustain a Caremark claim. "Delaware courts routinely reject the conclusory allegation that because illegal behavior occurred, internal controls must have been deficient, and the board must have known so," Desimone v. Barrows, 924 A.2d 908, 940 (Del. Ch. 2007), especially where, as here, the directors have "no motivation to injure the firm." SAIC, 948 F.Supp.2d at 381 (quoting Desimone, 924 A.2d at 935).
In SAIC, the company entered into a contract with New York City to develop and implement a workforce management system called CityTime, in relation to which two of its senior executives, Denault and Bell, engaged in an elaborate scheme to defraud the City, involving millions of dollars in kickbacks from 2003 through 2010, and ultimately resulting in criminal charges against both executives and the company, costing SAIC over $500 million. 948 F.Supp.2d at 372. The criminal scheme persisted for a period of seven years. As part of its deferred prosecution agreement, SAIC issued a statement of responsibility (SOR), admitting:
that "[i]n 2005, a whistleblower within SAIC had filed an anonymous ethics complaint" regarding the scheme, that "SAIC failed to properly investigate the complaint and did not notify the City that a complaint had been made," and that "the complaint also was not brought to the attention of SAIC's Board of Directors." SAIC "accept[ed] responsibility for the illegal conduct alleged against Denault and admitted by Bell during the course of the CityTime project," "acknowledge[ed] that the conduct and managerial failures described herein contributed to the ability of Denault and Bell to commit the alleged crimes against the City," and admitted that "the City was defrauded by SAIC as a result."948 F.Supp.2d at 373.
Judge Oetken dismissed the complaint pursuant to Rule 23.1, holding that these facts were not enough to establish a substantial likelihood of Caremark liability. 948 F.Supp. at 391. He explained that, while the magnitude and duration of the illegal activity "may be probative of whether the Board knew or should have known about a violation of the law," those factors "would rarely suffice in their own right to satisfy Rule 23.1's requirement in this context that plaintiffs allege with particularity actual or constructive board knowledge." Id. at 387 (emphasis added). Moreover, the "red flags" alleged by the SAIC plaintiffs, including the failure (acknowledged in the SOR) to properly investigate the 2005 whistleblower complaint, "indicate[d] managerial failure rather than Board malfeasance," and thus did not support an inference that the company's directors, as opposed to its managers, were or should have been aware of the scheme before December 2010 (when the U.S. Attorney for the Southern District of New York unveiled the first set of criminal charges). Id. at 383; see also Horman v. Abney, 2017 WL 242571, at *10 (Del. Ch. Jan. 19, 2017) ("[a]t best, the Complaint might support an inference that employees charged with responsibility . . . failed to report issues to the Board. This is not enough to sustain a Caremark claim.").
Plaintiffs cite Marchland v. Barnhill, 212 A.3d 805, 821-22 (Del. 2019) for the proposition that a court may "infer[ ] bad faith where section 220 documents show[ ] that management received reports containing red flags but did not disclose them to the board." Pl. Mem. at 12 n.21. Marchland grew out of a listeria outbreak, caused by the failure of ice cream manufacturer Blue Bell to contain the pathogen's spread in its plants, which killed three people and ultimately required Blue Bell to recall its products and shut down its plants. 212 A.2d at 807. The Delaware Supreme Court held that plaintiffs had adequately pled a Caremark claim on the theory that the board had no systems in place to monitor "a compliance issue intrinsically critical to the company's business," that is, the safety of its only product. Id. at 822. Blue Bell did not even have a board committee "that addressed food safety issues," much less a "regular process or protocol" that required management to keep the board apprised of such issues. Id. In Marchland, therefore, the court relied on the multiple red flags (including increasingly frequent positive listeria tests in the company's plants over more than a year) as support for plaintiffs' contention that "the directors utterly failed to implement any reporting information system or controls," Stone, 911 A.2d at 370, which is not the claim that plaintiffs make (or could make) here. Plaintiffs also point to Teamsters Loc. 443 Health Servs. & Ins. Plan v. Chou, 2020 WL 5028065 (Del. Ch. Aug. 24, 2020), which - like Marchland premised Caremark liability on a "mission critical compliance risk," id. at *18; in that case, the safety of the corporation's pre-filled oncology syringes, meant for cancer patients, which were contaminated as a result of a criminal adulteration scheme that also led to criminal charges, a corporate guilty plea, and a $625 million civil settlement. Id. at *7-8. Moreover, in Chou, the "red flags" identified by the plaintiff (including the filing of a qui tam action and the service of a subpoena and an FDA search warrant) were known to the board, which "consciously ignored" them. Id. at *17.
In this case, the undiscovered misconduct by the Company's CFO was both depressingly common (across all industries) and significantly less consequential (to the Company and its shareholders) than the criminal schemes and public health risks at issue in SAIC, Marchland, or Chou. This matters, because the Delaware courts have been "careful to distinguish between failing to fulfill one's oversight obligations with respect to fraudulent or criminal conduct as opposed to monitoring the business risk of the enterprise." Reiter on Behalf of Cap. One Fin. Corp. v. Fairbank, 2016 WL 6081823, at *8 (Del. Ch. Oct. 18, 2016). Here, the underlying incident presented a classic case of business rather than criminal risk. Moreover, by plaintiffs' own repeated admission, the misconduct was not reported to the Board until November 2016, see JAC ¶ 82, at which point the directors promptly met in special session - twice - to address it. The first two factors listed by plaintiffs therefore do not begin to make out a Caremark claim.
(b) Investigation and Remedial Action
Plaintiffs' next contentions - that the Board "refused to launch an investigation," "did nothing aside from passively attending two management-dominated telephonic meetings," and "took no remedial action" - are inconsistent with the particularized factual allegations in their pleading. Plaintiffs affirmatively allege (and the § 220 Documents show) that the Company retained outside counsel to advise the Board, see JAC ¶¶ 83, 85, 86-88; that counsel attended both special meetings of the Board in 2016, id. ¶¶ 83, 87; that the only non-director member of management present was CLO Vandervoort; and that counsel conducted "an investigation into whether Griffin's alleged relationship with Hirschhorn could be substantiated." Id. ¶ 85; see also id. ¶ 88 (counsel conducted "a probe into whether [Griffin's] allegations were supported"); id. ¶ 90 ("there is no dispute that outside counsel substantiated Griffin's allegations concerning the improper relationship to the Board"). To be sure, plaintiffs allege that the investigation was not sufficiently "broad and thorough," id. ¶ 85, and complain that the directors did not conduct any "further" investigation into, inter alia, "insider trading." Id. ¶ 90. But there is no basis in the JAC, or the § 220 Documents incorporated therein, for plaintiffs to claim flatly, as they do in their brief, that "there was no investigation into Hirschhorn and his improprieties." Pl. Mem. at 7.Nor does the JAC allege that Teladoc's directors "refused to launch" an investigation. Id. at 11.
The fact that no written investigatory report was produced among the § 220 Documents was of course known to plaintiffs when they filed the JAC. This fact, along with the absence of any copy of the McKay Report, signaled that neither document was forwarded to the Board and enabled plaintiffs to characterize the investigation as responsive to Griffin, rather than to McKay, and therefore inadequate. The absence of a written report, however, does not mean that no investigation took place or that no oral report was made to the Board. See Belendiuk v. Carrion, 2014 WL 3589500, at *6 (Del. Ch. July 22, 2014) (there is "no 'prescribed procedure' for how a committee should conduct its investigation, and there are circumstances where a committee and the board can reach a conclusion based on oral reports"). Even more fundamentally, on a pleading motion, plaintiffs are bound by their own allegations, and cannot avoid dismissal by recharacterizing those allegations in their motion papers. See Lloyd v. Ocean Township Council, 2019 WL 4143325, at *6 (D.N.J. Aug. 31, 2019) ("[p]laintiffs may not amend their pleadings through arguments found in their Opposition Brief"); Vaughn v. Strickland, 2013 WL 3481413, at *6 (S.D.N.Y. July 11, 2013) (quoting Green v. Niles, 2012 WL 987473, at *5 (S.D.N.Y. Mar. 23, 2012)) (even in a pro se case, the court need not "accept as true allegations that conflict with a plaintiff's prior allegations").
The same is true for plaintiff's assertion that the directors "took no remedial action." Pl. Mem. at 11. The JAC affirmatively alleges that they "caused Teladoc to enter into an Amended Executive Employment Agreement with defendant Hirschhorn." JAC ¶ 97; see also Pl. Mem. at 6 ("the Board caused Teladoc to enter into the 2016 Agreement"). Further, the minutes of the February 23, 2017 Compensation Committee meeting, incorporated into the JAC, show that defendants Gorevic, McKinley, Multani, Sherdlarz, and Snow voted unanimously to deny Hirschhorn any cash bonus for 2016. 2/23/2017 Minutes. Thus, the gravamen of the charge set forth in plaintiffs' operative pleading is not that the Teladoc Board did "nothing," but that what it did was "inadequate." JAC ¶¶ 157.
This distinction is fatal to plaintiff's would-be Caremark claim. In the absence of particularized, non-conclusory allegations that the Current Director Defendants acted "with a conscious, bad faith state of mind" to ignore Hirschhorn's improprieties (and here there are none), "[t]hat the Board could have been more effective in its response . . . would not expose its members to liability." lululemon, 2020 WL 1609177, at *7. Thus, a Caremark claim generally "cannot be squared with an allegation the Board responded to red flags." In re GoPro, Inc., 2020 WL 2036602, at *13 (Del. Ch. Apr. 28, 2020) (emphasis added). See also Oklahoma Firefighters Pension & Ret. Sys. v. Corbat, 2017 WL 6452240, at *17 (Del. Ch. Dec. 18, 2017) (allegations that "the board's response was ineffective" showed that "[p]laintiffs here simply seek to second-guess . . . the manner of the board's response to the red flags, which fails to state a Caremark claim"). Here, as in Corbat, plaintiffs' second-guessing of the Board's response to Hirschhorn's misconduct, which they deem inadequate, is simply not the stuff of which a Caremark claim can be made.
Cf. John Swann Holding Corp. v. Simmons, 62 F.Supp.3d 304, 305-11 (S.D.N.Y. 2014) (holding that plaintiff adequately pled a Caremark claim where the complaint alleged that CEO Simmons siphoned cash from CCI, some of which he spent on or loaned to his girlfriend; that the other two members of the CCI board, including the girlfriend's mother, knew of and in some instances facilitated the misuse of funds; that the directors caused CCI to breach numerous contractual obligations owed to investors and vendors; that when a significant business partner asked the company to honor its agreement to issue him stock and elect him to the board, the directors responded by seeking to entrench themselves, proposing a new shareholder agreement to "insulate Simmons from removal as an officer and director and to increase his control over corporate decisions"; and that the directors ignored even the most basic corporate duties such as maintaining financial records or filing tax returns "since CCI's inception").
(c) Misconduct Following Response to Inappropriate Relationship
Plaintiffs' final Caremark contention is that the Hirschhorn-Griffin relationship should have alerted the Board that its internal controls were deficient but, rather than fixing them, the directors abdicated their oversight duties, and thereby "tolerated and failed to rectify" a toxic "corporate culture" that was "antithetical to Teladoc's Code." Pl. Mem. at 11. Under this theory, the discovery of the Hirschhorn-Griffin relationship was itself a "red flag" which should have triggered a broader investigation of the Company's controls, which in turn would have resulted in (unspecified) reforms, which could then have prevented the email harassment of employees in Texas, the McKay termination, the falsification of credentialing documents under her successor, the NCQA downgrade, the short-lived Roots lawsuit, and the unflattering employee reviews posted by three of Teladoc's 2, 400 employees on Glassdoor.com. See JAC ¶¶ 111-130 (alleging that the Board "was alerted that its internal controls were inadequate when allegations of defendant Hirschhorn's affair were confirmed," but nonetheless "allowed management to create a culture at Teladoc that was antithetical to the Code," as evidenced by the emails, the termination, the downgrade, the lawsuit, and the reviews).
Not only was the Roots lawsuit settled; the allegations in her complaint concerning gender-based harassment, marginalization, and retaliation (which plaintiffs highlight here as evidence of "widespread harassment and retaliation," see Pl. Mem. at 14 n. 26) purport to be a description of earlier claims that Dr. Roots previously raised - and settled - out of court. JAC ¶ 113. Such an allegation-within-an-allegation-within-an-allegation does not raise a "reasonable inference" that any harassment or retaliation actually occurred. Panic, 783 A.2d at 552-53.
This portion of the JAC, which reads as if plaintiffs' counsel scoured the internet for unflattering news about Teladoc and then pasted each hit into their pleading, is notable for the diversity of the incidents - none of them criminal or mission-critical - that it attempts to blame on the Board's failure to fire Hirschhorn in 2016. Under Delaware law, however, a Caremark claim based on a board's failure to respond to "red flags" will fail unless "[t]he subsequent complained-of 'corporate trauma' [is] sufficiently similar to the misconduct implied by the 'red flags' such that the board's bad faith, 'conscious inaction' proximately caused that trauma." Melbourne Mun. Firefighters' Pension Tr. Fund on Behalf of Qualcomm, Inc. v. Jacobs (Qualcomm), 2016 WL 4076369, at *8 (Del. Ch. Aug. 1, 2016) (internal footnotes and citations omitted), aff'd, 158 A.3d 449 (Del. 2017); see also SAIC, 948 F.Supp.2d at 387 (rejecting as "too attenuated" plaintiffs' contention that "knowledge of wrongdoing in other transactions should have put the Board on a heightened state of alert" with respect to all wrongdoing in all transactions, including CityTime); In re Dow Chem. Co. Derivative Litig., 2010 WL 66769, at *13 (Del. Ch. Jan. 11, 2010) (holding that knowledge of past bribery by Dow personnel in India, in relation to a pesticide project, was an insufficient predicate for a claim that "the board should have suspected similar conduct by different members of management, in a different country, in an unrelated transaction," and rejecting argument as "simply too attenuated to support a Caremark claim"). Here, even if the discovery of Hirschhorn's misconduct were a "red flag" for Caremark purposes, the later incidents (none of which involved inappropriate sexual relationships, undeserved promotions, alleged insider trading, or Mark Hirschhorn) would be "too attenuated" to constitute actionable subsequent "corporate trauma" traceable to that failure. Qualcomm, 2016 WL 4076369, at *8. Attributing each incident to a bad corporate "culture," JAC ¶¶ 111, 113, 117, 118, 161, 219, merely underscores their fundamentally disparate nature.
Plaintiffs also fail to explain, even in general terms, what the Board could or should have done to avoid any of these incidents - other than firing Hirschhorn in 2016, which might have satisfied McKay and set a better "tone at the top," JAC ¶¶ 92, 123, but of course would not "reform" Teladoc's internal controls. See JAC ¶¶ 18-34 (alleging in boilerplate fashion that each Individual Defendant "failed to ensure that Teladoc had adequate internal controls, risk management procedures, and other policies to ensure its fiduciaries were complying with the Code and prevent misconduct and retaliation in the workplace"). The inability to explain what was wrong with Teladoc's controls - or how to improve them so as to prevent employees from sending harassing emails, falsifying credentialing documents, filing lawsuits, and posting negative reviews on the internet - reveals that plaintiffs' purported Caremark claim is in reality a collection of negative anecdotes in search of a unifying legal theory. See In re Refco, Inc. Sec. Litig., 503 F.Supp.2d 611, 653 (S.D.N.Y. 2007) (rejecting a Caremark claim because although plaintiffs identified "significant deficiencies" in Refco's audit procedures and potential corrections to those deficiencies, they did "not explain how correction of [those] deficiencies would have resulted in discovery" of the fraudulent activity that formed the basis of the complaint).
Also missing from the JAC - and fatal to any Caremark claim - are any particularized allegations "that 'the directors were conscious of the fact that they were not doing their jobs.'" In re LendingClub Corp. Deriv. Litig., 2019 WL 5678578, at *11 (Del. Ch. Oct. 31, 2019) (quoting Guttman, 823 A.2d at 506). In order to establish a breach of the duty of good faith, rather than simply the duty of care, "[p]laintiffs must plead specific facts from which the Court can infer not simply a failure to act but a failure to act in bad faith." In re Johnson & Johnson Deriv. Litig., 865 F.Supp.2d 545, 559 (D.N.J. 2011) (emphasis in the original). Here, as to the Current Director Defendants, plaintiffs present only labels. See JAC ¶¶ 18-34 (alleging in boilerplate fashion that each Individual Defendant acted "knowingly, in bad faith, or in conscious disregard for his [or her] duties"). In the absence of any particularized factual allegations showing that these directors were not merely negligent, or even grossly negligent, but "acted with intentional dereliction of duty," Pl. Mem. at 9, I conclude that plaintiffs have not established that any Current Director Defendant faces a substantial likelihood of personal liability under Caremark. Demand is therefore not excused on this basis.
3. The SEC Filings and Teladoc's Other Public Statements
According to plaintiffs, "[d]emand is also excused because a majority of the [Current Director Defendants] face a substantial likelihood of liability for making false and misleading statements in the Company's SEC filings." Pl. Mem. at 22. In the JAC, plaintiffs challenge Teladoc's SEC filings under two different theories. Count I alleges that ten of the Current Director Defendants (Gorevic, Snow, Multani, McKinley, Frist, Goldstein, Darling, Shedlarz, Paulus, and McAndrews) "negligently" issued or participated in the issuance of Teladoc's 2017 and 2018 Proxy Statements, which contained materially misleading statements, in violation of § 14(a) of the Exchange Act. JAC ¶¶ 211-216. Because this is an exculpated claim, these directors do not face personal liability under § 14(a); consequently, demand is not excused as to Count I. See City of Detroit Police v. Hamrock, 2021 WL 877720, at *5 (D. Del. Mar. 9, 2021) (exculpated directors do not face personal liability as to § 14(a) claim "grounded solely in negligence"); In re TrueCar, Inc. S'holder Deriv. Litig., 2020 WL 5816761, at *21 (Del. Ch. Sept. 30, 2020) (exculpated directors do not face personal liability as to federal securities claims based on negligence or strict liability).
Count II alleges that eight of the Current Director Defendants (Gorevic, Snow, Multani, McKinley, Frist, Goldstein, Darling, and Shedlarz, see Pl. Mem. at 22) breached their fiduciary duty of loyalty under state law by (among other things) "making or allowing the Company to make improper statements in its public filings." JAC ¶ 221. Specifically, plaintiffs claim that these defendants made "improper statements" concerning "Teladoc's management and the Individual Defendants' ethics and compliance with the Code." Id. ¶ 195. Under Delaware law, directors who "deliberately misinform[ ] shareholders about the business of the corporation" or "knowingly disseminat[e] materially false information" to them may be liable for breach of fiduciary duty. Malone v. Brincat, 722 A.2d 5, 14 (Del. 1998). To state a Malone claim, the plaintiff must allege particularized facts showing that the directors "knowingly" disseminated "materially false" information and thus were "deliberately" misinforming shareholders. Id. at 5, 14. Because this is a potentially non-exculpated claim, I must consider whether a majority of the Current Director Defendants face a substantial risk of personal liability for the allegedly false or misleading statements contained in Teladoc's "2016 and 2017 Forms 10-K and in the 2017 and 2018 Proxies." Pl. Mem. at 22; see also JAC ¶¶ 132-151 (listing allegedly false or misleading statements in those filings).
Gorevic, Snow, Multani, McKinley, Frist, Goldstein, Darling, and Shedlarz signed Teladoc's 2016, and 2017 10-Ks (as well as the 2015 10-K). JAC ¶¶ 132, 138, 145. According to the JAC, the 2017 Proxy Statement was prepared by Vandervoort and Hirshhorn, id. ¶¶ 94-95, and reviewed and approved by the Board. Id. ¶ 143. However, "the Board never received, reviewed, or approved the 2018 Proxy." Id. ¶ 150 n.7.
As noted above, the allegedly false or misleading statements at issue here are largely the same as those alleged in the Reiner SAC, which has been dismissed for failure to state a claim upon which relief can be granted. Compare JAC ¶¶ 131-51 with Reiner R&R, 2020 WL 6343217, at *5. As Judge Woods explained, most of the challenged statements "in and about the CBCE" were "precisely the type of standard and vague assurances that the courts routinely find too insubstantial to be the basis of a securities fraud claim, because no reasonable investor could have relied on them." Reiner, 2020 WL 7028638, at *4 (quoting Reiner R&R, 2020 WL 6343217, at *9) (internal quotation marks and citations omitted). Moreover, the CBCE "explicitly uses aspirational and hortatory language, which does not invite reasonable reliance." Id. (quoting Reiner R&R, 2020 WL 6343217, at *9) (internal quotation marks and citations omitted). Further, "the alleged misconduct was not so pervasive as to plausibly demonstrate that the [C]ompany in fact, held none of its asserted aspirations." Id. (quoting Reiner R&R, 2020 WL 6343217, at *10) (internal quotation marks and citations omitted). For all of these reasons, Judge Woods concluded, Teladoc's "aspirational" statements, including those in the CBCE itself and those "touting" its general commitment to corporate ethics, were not "materially false" or "misleading" Id. Judge Wood reached the same conclusion as to the CBCE's arguably non-aspirational statements (that it applied to all of Teladoc's employees, officers, and directors, directors, and employees, each of whom was required to report suspected or actual violations) because they could not "be reasonably understood as a guarantee that every employee, officer, and director complied with the CBCE at all times." Id. Therefore, he explained, those statements were not rendered false or misleading by the fact, as alleged in the Reiner SAC (and here), that Hirschhorn's conduct violated the CBCE. Id.
There are only minor differences between the misconduct alleged in the Reiner SAC and the misconduct alleged in the JAC. For example, the Reiner SAC alleged that a second employee (in addition to McKay) was fired in 2018 in retaliation for his or her whistleblowing activities in regard to Hirschhorn in 2016. See Reiner SAC ¶ 45. That allegation does not appear in the JAC. Instead, the JAC alleges that Teladoc was sued by Dr. Roots, and was the subject of three negative employee reviews on the internet, all in 2019. These additional allegations do not describe "pervasive misconduct" of the sort that might call into question Teladoc's asserted commitment to ethical conduct.
As to the statements alleged and found non-actionable in Reiner, the Current Director Defendants cannot face a substantial risk of personal liability under Malone. See In re Trulia, Inc. Stockholder Litig., 129 A.3d 884, 899 (Del. Ch. 2016) ("Delaware has adopted the standard of materiality used under federal securities laws") (citing Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del.1985)); accord Pascal on behalf of Columbia Financial, Inc. v. Czerwinski, 2020 WL 7383107, at *4 (Del. Ch. Dec. 16, 2020).
Reiner does not wholly dispose of plaintiffs' Malone claim, because the JAC appears to challenge one statement made in the CBCE that was not specifically pleaded in Reiner: that Teladoc "will not tolerate any kind of any kind of retaliation." JAC ¶¶ 42, 152(g); CBCE ¶ 10. Additionally, the derivative plaintiffs allege that the Company's public statements were misleading because they failed to disclose (and because Teladoc failed to post on its website, as promised) that Hirschhorn had been granted a de facto waiver of the CBCE, in violation of its terms and "against the requirements of Item 406 of SEC Regulation S-K." JAC ¶ 152(f); see also id. ¶¶ 137, 144.
Taking the last point first: The particularized allegations of the JAC, accepted as true for purpose of the pending Rule 23.1 motion, do not show that the CBCE was "waived" for Hirschhorn. To the contrary: after his misconduct was reported to the Board, his employment contract was amended to suspend the vesting of his equity shares for a year, and he was denied any cash bonus for 2016. JAC ¶¶ 30, 97; Soloway Decl. Ex. 8. Since the CBCE was enforced - albeit not as harshly as plaintiffs think appropriate - they have no factual basis upon which to contend that Teladoc's failure to disclose a waiver rendered its public statements misleading.
Nor may they pursue Malone liability based on the statement that the Company "will not tolerate any kind of retaliation for reports or complaints regarding misconduct that were made in good faith." CBCE ¶ 10. According to plaintiffs, this statement was misleading because it was "directly at odds with the JAC's particularized allegations that Teladoc . . . allowed retaliation against employees who attempted to raise concerns of improprieties and harassment." Pl. Mem. at 23. However, the JAC alleges only one instance of such retaliation: against McKay, who was fired in October 2017 - a year or more after she penned the McKay Report - in retaliation for having "brought her concerns to Teladoc's Human Resources and Legal." JAC ¶¶ 118, 123.The same cases upon which plaintiffs reply, see Pl. Mem. at 23 n.44, make it clear that statements concerning a company's plans or intentions regarding enforcement of an ethics code - including statements that the company "will not tolerate" violations or retaliation - are "too general and aspirational to invite reasonable reliance," Constr. Laborers Pension Tr. for S. California v. CBS Corp., 433 F.Supp.3d 515, 533 (S.D.N.Y. 2020), and therefore are not rendered false or misleading by isolated or sporadic instances in which the company failed to live up to the standards it announced. See id. at 532-33 (emphasis in the original) (dismissing securities fraud claims based on statements in CBS ethics code, including that it had a "'zero tolerance' policy for sexual harassment" and "will not tolerate retaliation against any person who makes a good faith report of misconduct," where "the alleged misconduct, although reprehensible" was not "so pervasive that the Amended Complaint has plausibly alleged that CBS, in fact, held none of its asserted aspirations") (emphasis in the original).
Plaintiffs also allege that the harassing emails received by McKay and Stogner were sent (perhaps by Griffin) in retaliation for their having reported the Hirschhorn-Griffin relationship. However, the only factual allegation in the JAC concerning Teladoc's response to the emails is the allegation that, when the employees reported them to HR, they were told "to take their concerns to the police." JAC ¶ 73. The JAC does not allege that either employee linked the emails to their prior "whistleblowing" activity or otherwise suggested, to HR, that the emails were or might have been sent in "retaliation for reports or complaints regarding misconduct that were made in good faith." The particularized allegations in the JAC, therefore, do not support the conclusion that this was an instance of Teladoc "tolerating" retaliation for good faith reports of CBCE violations.
Accord Schiro v. Cemex, S.A.B. de C.V., 396 F.Supp.3d 283, 298 (S.D.N.Y. 2019) (statement that "the Company 'does not tolerate bribery in any form'" is "classic puffery" and therefore not actionable under the federal securities fraud laws); In re Sanofi Sec. Litig., 155 F.Supp.3d 386, 401 (S.D.N.Y. 2016), judgment entered, 2016 WL 145867 (S.D.N.Y. Jan. 7, 2016) (statements that company "maintain[s] an effective compliance organization" and has "very tight compliance programs" were "corporate 'puffery, '" "too general to cause a reasonable investor to rely on them" and hence were not rendered misleading by allegations that company "did tolerate unethical conduct," including an "illegal marketing scheme in its U.S. diabetes group"). Cf. In re Signet Jewelers Ltd. Sec. Litig., 2018 WL 6167889, at *5-7, 17 (S.D.N.Y. Nov. 26, 2018) (statements regarding Signet's anti-sexual harassment policies and procedures were actionable where the complaint plausibly alleged a "culture of pervasive sexual harassment," which was so "rampant" at Signet that it was the subject of a pending arbitration proceeding in which over 200 employees filed declarations "detailing their experiences" with sexual harassment at the company).
Even if the statement that Teladoc would not "tolerate" retaliation were actionable, the Current Director Defendants would not face a substantial risk of Malone liability as to that statement (or as to the other CBCE-related statements in Teladoc's 10-Ks and Proxy Statements), because plaintiffs nowhere allege, in non-conclusory terms, that those directors knew or should have known that challenged statements were false, much less that they "deliberately" misinformed stockholders, as required for Malone liability. See Rahbari, 732 F.Supp.2d at 380 ("the signing of financial reports is insufficient to create an inference that the directors had actual or constructive notice of any illegality," as required for purposes of "the demand excused analysis"); Seminaris, 662 A.2d at 1354 (even though directors signed a misleading 10-K and registration statement, court could not conclude they "faced a substantial likelihood of liability"); Citigroup, 964 A.2d at 134 (directors did not face a substantial risk of personal liability on Malone claim based on allegedly misleading disclosures concerning corporation's financial risks where the complaint did not "sufficiently allege" that they "had knowledge that any disclosures or omissions were false or misleading or that [they] acted in bad faith in not adequately informing themselves").
While the Current Director Defendants knew about Hirschhorn's improper relationship and the Company's response, there is no allegation in the JAC that they knew anything about the harassing emails, the firing of McKay, or any other instances of retaliation against employees who reported misconduct. I note, in this regard, that McKay was fired in October 2017. JAC ¶ 123. The 2016 10-K, as well as the 2017 Proxy Statement, were issued well before that.
Since plaintiffs' § 14(a) claim is exculpated, and since they have not pleaded facts giving rise to a substantial likelihood of liability under Malone for a majority of the Current Director Defendants, demand is not excused with respect to any of plaintiffs' false statement claims.
Plaintiffs allege that Gorevic also made false statements in a press release, and in statements to analysts, after the publication of the SIRF Report in December 2018. JAC ¶¶ 159-163, 195. However, none of the other Current Director Defendants is alleged to be liable for those statements. Consequently, demand is not excused as to any portion of plaintiffs' Malone claim.
4. Reiner, Insider Stock Sales and Lack of Independence
Plaintiffs' remaining demand futility arguments fail as well. In the JAC, they allege that the Current Director Defendants are not disinterested, and therefore could not dispassionately consider a pre-suit demand, because if Teladoc were to pursue any of the claims championed by plaintiffs herein, it would "compromise [the Company's] defense of the Securities Class Action." JAC ¶ 198 ("Any suit by the current directors of Teladoc to remedy these wrongs would expose defendants Gorevic and Hirschhorn, and Teladoc to liability for violations of the federal securities laws in [Reiner], and would result in civil actions being filed against one or more of the other Individual Defendants").
As plaintiffs acknowledge, however, only one of the Current Director Defendants - Gorevic - is named as a defendant in Reiner, and the plaintiffs in that action, who have now filed their Third Amended Complaint, have shown no inclination to name additional defendants, much less a majority of the Current Director Defendants. Moreover, the Reiner SAC was dismissed pursuant to Rule 12(b)(6) for failure to state a claim upon which relief can be granted, and the Reiner TAC is the subject of a similar motion. Reiner at Dkt. No. 76. Under similar circumstances, demand futility arguments based on the mere pendency of related class litigation are routinely denied. See, e.g., Behrmann v. Brandt, 2020 WL 4432536, at *6 (D. Del. July 31, 2020); Kernaghan, 2008 WL 4450268, at *7; Rattner v. Bidzos, 2003 WL 22284323, at *14 (Del. Ch. Sept. 30, 2003); Seminaris, 662 A.2d at 1355.
Cf. In re Fitbit, Inc. Stockholder Deriv. Litig., 2018 WL 6587159, at *16 (Del. Ch. Dec. 14, 2018) (directors who were named as defendants in related securities class action, which had survived a motion to dismiss and for reconsideration, were interested for purposes of demand futility); Pfeiffer v. Toll, 989 A.2d 683, 690 (Del. Ch. 2010) (demand was futile where all individual defendants, including the outside director defendants, were named as defendants in a companion federal securities action which had survived a motion to dismiss), abrogated on other grounds by Kahn v. Kolberg Kravis Roberts & Co., L.P., 23 A.3d 831 (Del. 2011).
Next, plaintiffs allege that Gorevic, Multani, and Goldstein are not disinterested because they face personal liability (on a variety of theories) for having sold their Teladoc stock while in possession of "material, nonpublic Company information regarding the Company's lack of ethics and internal controls failures." JAC ¶ 197; see also Pl. Mem. at 24. The short answer to this point is that is irrelevant for demand futility purposes, because Gorevic, Multani, and Goldstein do not comprise a majority of the Current Director Defendants.
The same is true with respect to plaintiffs' claim that Gorevic, Multani, McKinley, and Snow lack independence because Gorevic is CEO of Teladoc and wants to "maintain[ ] his executive position," and because the other three are affiliated with firms that have invested in Teladoc or (in the case of Snow) have "a long-standing business relationship with Gorevic." JAC ¶¶ 200-209. Even if plaintiffs were to prevail on both of these theories, they would have succeeded only in showing that five of the 12 members of the relevant Teladoc Board were "interested" for demand futility purposes. That is not enough.
Since plaintiffs have failed to plead particularized facts showing that demand on the Teladoc Board would be futile, I recommend, respectfully, that defendants' motion be granted.
5. Leave to Amend
I further recommend that leave to amend be denied. Plaintiffs request leave in a single footnote, Pl. Mem. at 25 n.53, which gives no hint as to what more they could say that would overcome the deficiencies described above. Moreover, this is the third complaint in this matter (albeit the first one since Pickett joined as a plaintiff) and was drafted with the benefit of a fully-briefed motion to dismiss the First Amended Complaint already pending. It was also drafted with the benefit of the § 220 Documents, which (as plaintiff Pickett explained when moving to intervene) would make her a "better-equipped plaintiff," in a position to assert the strongest possible derivative claims. Memo. in Supp. of Pickett Mtn. at 19.
Further, plaintiffs' 237 paragraph complaint "does not appear to have been abbreviated or foreshortened." Wayne County Employees' Retirement Sys. v. Dimon, 629 Fed.Appx. 14, 16 (2d Cir. 2015) (summary order) (district court did not err in denying leave to amend given "the length and fullness of [the] complaint"). Although Fed.R.Civ.P. 15(a) favors leave to amend whenever "justice so requires," it is "not a shield against dismissal to be invoked as . . . a fallback position in response to a dispositive motion." F5 Capital, a Cayman Islands Corp. v. Pappas, 2016 WL 900389, at *11 (S.D.N.Y. Feb. 17, 2016) (quoting DeBlasio v. Merrill Lynch & Co., 2009 WL 2242605, at *41 (S.D.N.Y. July 27, 2009)), aff'd 856 F.3d 61 (2d Cir. 2017), cert. denied 137 S.Ct. 473 (2017). See also In Re Ferrellgas Partners, L.P., Sec. Litig., 2018 WL 2081859, at *20 (S.D.N.Y. Mar. 30, 2019) ("the Second Circuit has consistently stated that district courts may deny leave to amend when plaintiffs request such leave in a cursory sentence on the last page of an opposition to a motion to dismiss, without any justification or accompanying suggested amended pleading"), aff'd 764 Fed.Appx. 129 (2d Cir. 2019).
Under these circumstances, I do not recommend that plaintiffs be given leave to amend.
III. CONCLUSION
For the reasons set forth above, I recommend, respectfully, that defendants' motion to dismiss the Joint Amended Complaint be GRANTED without leave to amend.
NOTICE OF PROCEDURE FOR FILING OF OBJECTIONS TO THIS REPORT AND RECOMMENDATION
The parties shall have fourteen days from this date to file written objections to this Report and Recommendation pursuant to 28 U.S.C. § 636(b)(1) and Fed.R.Civ.P. 72(b). See also Fed. R. Civ. P. 6(a) and (d). Any such objections shall be filed with the Clerk of the Court, with courtesy copies delivered to the Hon. Gregory H. Woods at 500 Pearl Street, New York, New York 10007. Any request for an extension of time to file objections must be directed to Judge Woods. Failure to file timely objections will result in a waiver of such objections and will preclude appellate review. See Thomas v. Arn, 474 U.S. 140 (1985); Frydman v. Experian Info. Sols., Inc., 743 Fed.Appx. 486, 487 (2d Cir. 2018); Wagner & Wagner, LLP v. Atkinson, Haskins, Nellis, Brittingham, Gladd & Carwile, P.C., 596 F.3d 84, 92 (2d Cir. 2010).