In re Brocade Communications Systems, Inc. Derivative Litigation

MOTION to Dismiss of Nominal Defendant Brocade Communications Systems, Inc. to the Consolidated Amended Complaint

N.D. Cal.October 27, 2005

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOM. DEFENDANT’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT 2750738_3.DOC NINA F. LOCKER, State Bar No. 123838 STEVEN D. GUGGENHEIM, State Bar No. 201386 CAZ HASHEMI, State Bar No. 210239 CAMERON P. HOFFMAN, State Bar No. 229316 WILSON SONSINI GOODRICH & ROSATI Professional Corporation 650 Page Mill Road Palo Alto, CA 94304-1050 Telephone: (650) 493-9300 Facsimile: (650) 565-5100 Email: choffman@wsgr.com Attorneys for Nominal Defendant BROCADE COMMUNICATIONS SYSTEMS, INC. UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION IN RE BROCADE COMMUNICATIONS SYSTEMS, INC. DERIVATIVE LITIGATION. This Document Relates to: ALL ACTIONS ) ) ) ) ) ) ) ) ) ) ) ) ) CASE NO.: C05-02233 CRB NOMINAL DEFENDANT BROCADE COMMUNICATIONS SYSTEMS, INC.’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT Date: December 2, 2005 Time: 10:00 a.m. Before: Hon. Charles R. Breyer Case3:05-cv-02233-CRB Document47 Filed10/27/05 Page1 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOM. DEFENDANT’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT -i- 2750738_3.DOC NOTICE OF MOTION AND MOTION Please take notice that on December 2, 2005 at 10:00 a.m., before the Honorable Charles R. Breyer of the United States District Court for the Northern District of California, 450 Golden Gate Avenue, San Francisco, California, nominal defendant Brocade Communications Systems, Inc. (“Brocade” or “the Company”) will, and hereby does, move to dismiss Plaintiff’s Consolidated Amended Complaint (the “CAC” or “Complaint”). Brocade requests that the Court dismiss the Complaint in its entirety pursuant to Rule 23.1 of the Federal Rules of Civil Procedure and Delaware law. Plaintiffs lack standing to pursue derivative claims on behalf of Brocade because they failed to make a pre-litigation demand on the Company’s Board of Directors and have not alleged particularized facts showing that demand would be futile. In addition, the Complaint does not satisfy the verification and contemporaneous ownership requirements of Federal Rule of Civil Procedure 23.1. This motion is supported by the following memorandum, the accompanying Request for Judicial Notice, the Declaration of Cameron P. Hoffman and attached exhibits, the arguments of counsel, and any other matters properly before the Court. STATEMENT OF ISSUES (Civil L.R. 7-4(a)(3)) 1. Whether Plaintiffs have alleged with particularity sufficient facts to excuse their failure to make a pre-litigation demand on Brocade’s Board of Directors, as required by Delaware substantive law and Federal Rule of Civil Procedure 23.1. 2. Whether the Complaint complies with the verification and contemporaneous ownership requirements of Federal Rule of Civil Procedure 23.1. SUMMARY OF ARGUMENT (Standing Order) This consolidated shareholder derivative action is purportedly brought on behalf Brocade, a leading provider of data storage networking products and services. The crux of the Complaint is Plaintiffs’ charge that the individual defendants breached their fiduciary duties by permitting Brocade to file erroneous financial statements. According to Plaintiffs, the individual defendants knew that Brocade “improperly recorded charges for stock based compensation expense” and yet permitted the Company to issue its financial statements. CAC ¶¶ 1, 9-19. Plaintiffs also allege Case3:05-cv-02233-CRB Document47 Filed10/27/05 Page2 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOM. DEFENDANT’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT -ii- 2750738_3.DOC insider trading against two of the Company’s officers, and assert claims against the Company’s independent auditor, KPMG, LLP (“KPMG”), for alleged negligence, malpractice, and “aiding and abetting.” Plaintiffs concede that they did not make a pre-suit demand on Brocade’s Board either with respect to the claims against the individual defendants or the claims against KPMG. By this Motion, Brocade asks this Court to dismiss the Complaint in its entirety for failure to satisfy the demand requirement. Plaintiffs do not have standing to bring these claims because they failed to serve a demand prior to commencing this action, and they have alleged no facts -- let alone particularized facts -- showing that Brocade’s Board was disabled from considering a demand. Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000) (derivative plaintiff’s complaint must comply with “stringent requirements of factual particularity” in order to demonstrate demand futility). To the contrary, Plaintiffs’ own allegations demonstrate that Brocade’s Board was perfectly capable of considering fairly any shareholder demand against the individual defendants and third party KPMG, had one been made. As Plaintiffs themselves allege, in the last year, Brocade’s Board (and specifically the Audit Committee) have engaged in two separate internal investigations into various aspects of the Company’s accounting and internal controls. CAC ¶¶ 67, 75. As Plaintiffs themselves allege, these investigations -- which were initiated by the same Board Plaintiffs contend is disabled -- have led the Company to restate its financial results not once, but twice. Id. In light of these events, which Plaintiffs themselves portray in detail, the Complaint’s boilerplate allegations of demand futility are plainly insufficient. Levine v. Smith, 591 A.2d 194, 207 (Del. 1991) (“[c]onclusory allegations of fact or law” are insufficient to demonstrate demand futility), overruled on other grounds, Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (citation omitted). The Complaint does not plead with any particularity, much less the requisite particularity, that a majority of the directors were either interested or lacked independence. Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993) (plaintiffs must plead particularized facts creating a reasonable doubt that “the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand”). The Complaint fails to identify any facts regarding specific documents, conversations, meetings or reports from which any Case3:05-cv-02233-CRB Document47 Filed10/27/05 Page3 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOM. DEFENDANT’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT -iii- 2750738_3.DOC director would have learned that the Company’s financial statements did not properly account for stock based compensation expenses. The Complaint also fails to identify a single “red flag” regarding the Company’s accounting for stock options that the directors failed to heed. Therefore, the Complaint fails to establish that any of the directors face a “substantial likelihood” of personal liability for the alleged wrongdoing and are thus interested. Aronson v. Lewis, 473 A.2d 805, 815 (Del. 1984), overruled on other grounds, Brehm v. Eisner, 746 A.2d 244 (Del. 2000). In addition, the Complaint’s boilerplate allegations regarding compensation received by the Board members and plain vanilla business relationships fail to establish that any of the directors lacked independence -- that is, that any director was so “beholden” to any other Brocade director or officer that his “discretion would be sterilized.” Rales, 634 A.2d at 936. Far from demonstrating that a Board majority had a disabling interest or lacked independence (Aronson, 473 A.2d at 809), the Complaint’s allegations make clear that Brocade’s Board was and is determined to address and correct any alleged accounting errors that may have occurred. There is, thus, no reason to conclude that the Board would have treated a shareholder demand with any less care, and Plaintiffs have proffered none. In short, Plaintiffs have alleged no facts, let alone the particularized facts essential to demonstrate demand futility, and their allegations support exactly the opposite conclusion. Accordingly, Plaintiffs lack standing to bring these claims on Brocade’s behalf and the Complaint should be dismissed. Even apart from Plaintiffs’ failure to meet the stringent pleading requirements applicable here, Plaintiffs have also failed to comply with the verification and contemporaneous ownership requirements of Federal Rule of Civil Procedure 23.1. See Fed. R. Civ. P. 23.1. Plaintiffs’ failure to satisfy these requirements is a separate and further basis upon which to dismiss the Complaint. Goldberg v. Meridor, 81 F.R.D. 105, 110 (S.D.N.Y. 1979) (lack of verification required by Rule 23.1 is grounds for dismissal); In re Sagent Tech., Inc. Deriv. Litig., 278 F. Supp. 2d 1079, 1096 (N.D. Cal. 2003) (“complaint must indicate when plaintiff[] bought stock . . . and must state that they have owned stock continuously” to satisfy Rule 23.1). For these reasons, and as set forth more fully below, Brocade respectfully requests that Plaintiffs’ Complaint be dismissed in is entirety. Case3:05-cv-02233-CRB Document47 Filed10/27/05 Page4 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOM. DEFENDANT’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT -iv- 2750738_3.DOC TABLE OF CONTENTS Page NOTICE OF MOTION AND MOTION .........................................................................................i STATEMENT OF ISSUES (Civil L.R. 7-4(a)(3)) ..........................................................................i SUMMARY OF ARGUMENT (Standing Order) ...........................................................................i MEMORANDUM OF POINTS AND AUTHORITIES ................................................................1 INTRODUCTION...........................................................................................................................1 BACKGROUND OF THE ACTION..............................................................................................1 ARGUMENT ..................................................................................................................................2 I. PLAINTIFFS BEAR THE BURDEN OF PLEADING DEMAND FUTILITY WITH PARTICULARITY..................................................................................................2 II. PLAINTIFFS HAVE NOT ALLEGED PARTICULARIZED FACTS DEMONSTRATING THAT A MAJORITY OF BROCADE’S BOARD HAS A DISABLING INTEREST WITH RESPECT TO THE CLAIMS AGAINST THE COMPANY AND ITS DIRECTORS AND OFFICERS....................................................4 A. Plaintiffs Do Not Plead That A Majority Of The Brocade Board Faces A Substantial Likelihood Of Personal Liability For Any Alleged Misrepresentations ..................................................................................................5 B. Plaintiffs Do Not Plead That A Majority Of The Brocade Board Faces A Substantial Likelihood Of Personal Liability For Any Alleged Lack Of Oversight .................................................................................................................8 C. Plaintiffs’ Other Allegations Fail to Show that A Majority of the Board Has a Disabling Interest..................................................................................................9 III. PLAINTIFFS ALSO FAIL TO ALLEGE PARTICULARIZED FACTS SHOWING THAT A MAJORITY OF THE BOARD LACKED INDEPENDENCE.....10 A. Boilerplate Allegations Regarding Defendants’ Compensation Do Not Excuse Demand.....................................................................................................11 B. Conclusory Allegations of Personal Relationships Are Insufficient To Excuse Demand.....................................................................................................12 IV. THE COMPLAINT DOES NOT COMPLY WITH FED. R. CIV. P. 23.1......................13 CONCLUSION .............................................................................................................................14 Case3:05-cv-02233-CRB Document47 Filed10/27/05 Page5 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOM. DEFENDANT’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT -v- 2750738_3.DOC TABLE OF AUTHORITIES Page(s) CASES Abramson v. Pennwood Inv. Corp., 392 F.2d 759 (2d Cir. 1968) ................................................ 14 Arnold v. Society for Sav. Bancorp, Inc., 650 A.2d 1270 (Del. 1994)............................................ 5 Aronson v. Lewis, 473 A.2d 805 (Del. 1984), overruled on other grounds, Brehm v. Eisner, 746 A.2d 244 (Del. 2000)...........................................................iii, 2, 3, 4 Ash v. McCall, No. 17132, 2000 WL 1370341 (Del. Ch. Sept. 15, 2000).................................. 4, 7 Beam v. Stewart, 845 A.2d 1040 (Del. 2004) ........................................................................... 3, 13 Blasband v. Rales, 971 F.2d 1034 (3d Cir. 1992) ......................................................................... 10 Brehm v. Eisner, 746 A.2d 244 (Del. 2000)............................................................................ ii, 3, 7 Caruana v. Saligman, [1990-1991 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 95,889 (Del. Ch. Dec. 21, 1990) ................................................................................................... 10 Citron v. Daniell, 796 F. Supp. 649 (D. Conn. 1992) ............................................................... 7, 12 Decker v. Clausen, No. 10,684-85, 1989 WL 133617 (Del. Ch. Nov. 6, 1989) ........................... 10 Goldberg v. Meridor, 81 F.R.D. 105 (S.D.N.Y. 1979) ............................................................iii, 13 Grobow v. Perot, 539 A.2d 180 (Del. 1988), overruled on other grounds, Brehm v. Eisner, 746 A.2d 244 (Del. 2000)........................................................................ 3 Guttman v. Huang, 823 A.2d 492 (Del. Ch. 2003) ................................................................ 4, 6, 7, 8, 9 Haber v. Bell, 465 A.2d 353 (Del. Ch. 1983) ................................................................................. 3 In re Abbott Labs. Deriv. Shareholders Litig., 325 F.3d 795 (7th Cir. 2003)............................. 8, 9 In re BankAmerica Sec. Litig., 636 F. Supp. 419 (C.D. Cal. 1986) ................................................ 3 In re Baxter Int’l, Inc. S’holder Litig., 654 A.2d 1268 (Del. Ch. 1995) ................................. 5, 7, 8 In re Caremark Int’l, Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996) ......................................... 8 In re Sagent Tech., Inc. Deriv. Litig., 278 F. Supp. 2d 1079 (N.D. Cal. 2003) .........iii, 5, 8, 12, 14 In re Walt Disney Co. Deriv. Litig., 731 A.2d 342 (Del. Ch. 1998), aff’d in part, rev’d in part on other grounds, Brehm v. Eisner, 746 A.2d 244 (Del. 2000) ................... 13 Kamen v. Kemper Financial Services, Inc., 500 U.S. 90 (1991) .................................................... 3 Lefort v. Black, No. C02-2465, 2003 WL 1563997 (N.D. Cal. Mar. 21, 2003) ........................... 13 Case3:05-cv-02233-CRB Document47 Filed10/27/05 Page6 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOM. DEFENDANT’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT -vi- 2750738_3.DOC Levine v. Smith, 591 A.2d 194 (Del. 1991), overruled on other grounds, Brehm v. Eisner, 746 A.2d 244 (Del. 2000).................................................................... ii, 3 Lewis v. Chiles, 719 F.2d 1044 (9th Cir. 1983) ............................................................................ 13 McCall v. Scott, 239 F.3d 808, opinion amended on other grounds, 250 F.3d 997 (6th Cir. 2001)............................................................................................... 9 Rales v. Blasband, 634 A.2d 927 (Del. 1993)........................................................................passim Rattner v. Bidzos, No. 19700, 2003 WL 22284323 (Del. Ch. Sept. 30, 2003) ......................... 9, 10 Sax v. World Wide Press, Inc., 809 F.2d 610 (9th Cir. 1987) ................................................. 13, 14 Seminaris v. Landa, 662 A.2d 1350 (Del. Ch. 1995) .................................................................... 10 Smachlo v. Birkelo, 576 F. Supp. 1439 (D. Del. 1983)................................................................. 13 Solomon v. Pathe Comm’s Corp., 672 A.2d 35 (Del. 1996) ........................................................... 3 Stepak v. Addison, 20 F.3d 398 (11th Cir. 1994) .......................................................................... 10 Sucher v. Alon, C 98-203 CRB, slip op. (N.D. Cal. July 10, 1998) ................................................ 7 Telxon Corp. v. Meyerson, 802 A.2d 257 (Del. 2002) .................................................................. 11 Walden v. Elrod, 72 F.R.D. 5 (W.D. Okla. 1976) ......................................................................... 13 Washington Bancorporation v. Washington, [1989-90 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 94,893 (D.D.C. Sept. 26, 1989) ............................................... 7 White v. Panic, 783 A.2d 543 (Del. 2001) .................................................................................... 10 White v. Panic, 793 A.2d 356 (Del. Ch. 2000), aff’d, 783 A.2d 543 (Del. 2001)................... 11, 12 STATUTES 28 U.S.C. § 1332(a)(2) .................................................................................................................. 14 Del. Code Ann. tit. 8, § 102(b)(7) ................................................................................................... 4 RULES FED. R. CIV. P. 23.1 ............................................................................................................. iii, 3, 13 Case3:05-cv-02233-CRB Document47 Filed10/27/05 Page7 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOM. DEFENDANT’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT -1- 2750738_3.DOC MEMORANDUM OF POINTS AND AUTHORITIES INTRODUCTION The requirements for pleading demand futility are well-established. Both Delaware law and Rule 23.1 require a derivative plaintiff to plead facts with particularity sufficient to demonstrate that a majority of a company’s directors are incapable of making an impartial decision regarding litigation. In this case, Plaintiffs, who concede they made no demand on Brocade’s Board, wholly fail to meet these stringent pleading requirements. No facts are alleged to demonstrate that any of the Company’s nine distinguished Board members are disabled, let alone a Board majority. BACKGROUND OF THE ACTION Brocade is a Delaware corporation headquartered in San Jose, California. CAC ¶¶ 1, 8. Brocade designs, sells and supports data storage networking products and services. Id. ¶ 8. On January 6, 2005, the Company announced that it expected to restate its financial statements for fiscal years 2002 and 2003 “to record additional stock-based compensation expense as a result of an internal review.” Id. ¶ 67; Ex. F.1 In its press release, the Company explained that it had “determined it incorrectly accounted for” certain stock option grants. CAC ¶ 67. Shortly thereafter, on January 24, 2005, Brocade announced that the Audit Committee’s internal review was complete, and that the Company would restate its financial statements for 2002 and 2003 and make adjustments to its fiscal year 2004 financial results to “record additional stock-based compensation charges.” Id. ¶ 68; Ex. G. The Company explained that the Audit Committee had concluded the Company had “incorrectly accounted” for certain stock option grants made prior to October 2002, “that there was [an] insufficient basis to rely on the Company’s process and related documentation to support recorded measurement dates used to account for certain stock options,” and that there were “improprieties” in connection with the stock option grants to a small number of employees, “which resulted in immaterial adjustments included in the restatement.” Id. 1 All references to “Ex.___” are to exhibits to the Declaration of Cameron P. Hoffman, filed concurrently herewith. Case3:05-cv-02233-CRB Document47 Filed10/27/05 Page8 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOM. DEFENDANT’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT -2- 2750738_3.DOC On May 16, 2005, Brocade announced that “[f]ollowing the completion of [the] Audit Committee review announced on January 24, 2005, additional information came to the Company’s attention” regarding charges arising from stock grants that had not previously been restated. Id. ¶¶ 2, 75; Ex. H. In its press release, the Company announced that it would again “restate its financial statements for the fiscal years ending 2002 through 2004 to record additional charges for stock-based compensation expense. Id. The Company also noted that the Audit Committee had again “commenced an independent review” of issues discovered after the completion of the first Audit Committee investigation and restatement. Id. Brocade further announced that the Department of Justice and the Securities and Exchange Commission were conducting “a joint investigation regarding the Company’s stock option granting practices.” Id. Following the May 16, 2005 release, the first of multiple federal class action lawsuits was filed against Brocade and its senior management alleging claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Not surprisingly, in the following weeks, “tag-along” shareholder derivative actions alleging breach of fiduciary duty and other state law claims were filed in state and federal court. No demand was made on Brocade’s Board. CAC ¶ 98.2 ARGUMENT I. PLAINTIFFS BEAR THE BURDEN OF PLEADING DEMAND FUTILITY WITH PARTICULARITY Derivative cases, in which a shareholder purports to bring suit in the name of the company, are subject to special procedural and substantive rules. Specifically, Delaware law requires that a plaintiff who wishes to proceed derivatively on a corporation’s behalf make a demand on the corporation’s board of directors prior to filing a lawsuit, or allege with factual particularity why such a demand is excused. Aronson v. Lewis, 473 A.2d 805, 809 (Del. 1984), 2 The state court derivative actions are pending in Santa Clara County Superior Court and were consolidated before the Honorable Jack Komar. A consolidated complaint was filed on September 19, 2005. A motion to dismiss or stay the complaint is currently being briefed. Case3:05-cv-02233-CRB Document47 Filed10/27/05 Page9 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOM. DEFENDANT’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT -3- 2750738_3.DOC overruled on other grounds, Brehm v. Eisner, 746 A.2d 244 (Del. 2000).3 The demand requirement “is not merely a technical pleading hurdle.” In re BankAmerica Sec. Litig., 636 F. Supp. 419, 420 (C.D. Cal. 1986). Rather, it “is a rule of substantive right designed to give a corporation the opportunity to rectify an alleged wrong without litigation, and to control any litigation which does arise.” Aronson, 473 A.2d at 809. To be excused from the demand requirement, it is the derivative plaintiff’s burden -- at the pleading stage -- to demonstrate that demand would be futile, i.e., that a majority of the “directors are incapable of making [an] impartial decision regarding litigation.” Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993). This pleading burden is “more onerous than that required to withstand [an ordinary] motion to dismiss.” Levine v. Smith, 591 A.2d 194, 207 (Del. 1991), overruled on other grounds, Brehm v. Eisner, 746 A.2d 244 (Del. 2000). The derivative plaintiff’s complaint must comply with “stringent requirements of factual particularity” in order to demonstrate demand futility. Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000). Indeed, “conclusory allegations of fact or law not supported by allegations of specific fact may not be taken as true.” Levine, 591 A.2d at 207 (citation omitted); see Grobow v. Perot, 539 A.2d 180, 187 n.6 (Del. 1988), overruled on other grounds, Brehm v. Eisner, 746 A.2d 244 (Del. 2000). Rather, a plaintiff must plead “particularized factual statements” akin to “ultimate facts,” “principal facts,” or “elemental facts” demonstrating that demand is excused. Brehm, 746 A.2d at 254; accord Solomon v. Pathe Comm’s Corp., 672 A.2d 35, 39 (Del. 1996).4 If a derivative plaintiff fails to carry this pleading burden, the plaintiff’s complaint must be dismissed even if the claim is otherwise meritorious. Haber v. Bell, 465 A.2d 353, 357 (Del. Ch. 1983). 3 Because Brocade is a Delaware corporation, Delaware law governs the extent of the demand requirement and the circumstances under which demand is excused. See Kamen v. Kemper Financial Services, Inc., 500 U.S. 90, 108-09 & n.10 (1991) (courts “must apply the demand futility exception as it is defined by the law of the State of incorporation”). 4 Shareholder derivative complaints in federal court must also comply with Rule 23.1 of the Federal Rules of Civil Procedure. The requirement for pleading demand futility with particularity under Rule 23.1 mirrors the requirement under Delaware law that it is the derivative plaintiff’s burden -- at the pleading stage -- to demonstrate with specificity that demand is excused. Compare Fed. R. Civ. P. 23.1 with Beam v. Stewart, 845 A.2d 1040, 1048-49 (Del. 2004); Rales, 634 A.2d at 934. Case3:05-cv-02233-CRB Document47 Filed10/27/05 Page10 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOM. DEFENDANT’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT -4- 2750738_3.DOC In this case, Plaintiffs concede that they did not make a demand upon Brocade’s Board prior to bringing this derivative lawsuit. CAC ¶ 98. Plaintiffs thus can maintain this action only if they allege particularized facts showing the futility of demand. See Rales, 634 A.2d at 934. Those facts must create a reasonable doubt that: “(1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.” Aronson, 473 A.2d at 814. Because Plaintiffs do not challenge any board action, this latter test (the so-called “second prong” of Aronson) does not apply. Rather, the Court must determine whether Plaintiffs’ failure to make a pre-suit demand is excused under the first prong of the test – director disinterest and independence. Rales, 634 A.2d at 934; see Ash v. McCall, No. 17132, 2000 WL 1370341, at *5, *10 (Del. Ch. Sept. 15, 2000) (directors’ failure to oversee company’s financial statements amounted to nonfeasance to which only the Rales test applies). As set forth more fully below, the Complaint fails to allege particularized facts creating a reasonable doubt as to the disinterest or independence of a majority of the Board at the time this suit was initiated. Accordingly, the Complaint should be dismissed. II. PLAINTIFFS HAVE NOT ALLEGED PARTICULARIZED FACTS DEMONSTRATING THAT A MAJORITY OF BROCADE’S BOARD HAS A DISABLING INTEREST WITH RESPECT TO THE CLAIMS AGAINST THE COMPANY AND ITS DIRECTORS AND OFFICERS To rebut the presumption of disinterestedness, a putative plaintiff must plead particularized facts establishing that a majority of directors face a “substantial likelihood” of personal liability for the wrongdoing alleged in the complaint. See Aronson, 473 A.2d at 815 (emphasis added); accord Guttman v. Huang, 823 A.2d 492, 500 (Del. Ch. 2003). The “mere threat of personal liability” is not sufficient. Aronson, 473 A.2d at 815; Rales, 634 A.2d at 936. In this case, Plaintiffs’ pleading burden is even higher because Brocade’s certificate of incorporation precludes claims by the Company against its directors for non-intentional conduct. See Ex. E, Article XI.5 Thus, causes of action for negligence and recklessness are barred. E.g., 5 Delaware allows corporations to eliminate directors’ personal liability for acts amounting to negligence or recklessness, so long as the acts do not constitute a breach of their duty of loyalty, intentional misconduct or a knowing violation of law. See Del. Code Ann. tit. 8, § 102(b)(7). Case3:05-cv-02233-CRB Document47 Filed10/27/05 Page11 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOM. DEFENDANT’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT -5- 2750738_3.DOC In re Sagent Tech., Inc. Deriv. Litig., 278 F. Supp. 2d 1079, 1095 n.9 (N.D. Cal. 2003) (taking judicial notice of § 102(b)(7) provision in articles of incorporation that barred certain individual liability claims); Arnold v. Society for Sav. Bancorp, Inc., 650 A.2d 1270, 1288 (Del. 1994); In re Baxter Int’l, Inc. S’holder Litig., 654 A.2d 1268, 1271 (Del. Ch. 1995). To excuse demand, therefore, Plaintiffs are required to plead particularized facts establishing that the Company’s directors face a substantial likelihood of liability for intentional, and not merely negligent, grossly negligent or even reckless, misconduct. See Baxter, 654 A.2d at 1270. Although Plaintiffs allege a variety of reasons why they claim demand should be excused, none is supported by particularized facts sufficient to meet this heightened pleading standard.6 A. Plaintiffs Do Not Plead That A Majority Of The Brocade Board Faces A Substantial Likelihood Of Personal Liability For Any Alleged Misrepresentations Plaintiffs assert that that the individual defendants “allow[ed] or “cause[d]” Brocade to misrepresent “the Company’s financial results and prospects” and “to conceal the true fact that Brocade was misrepresenting the expenses incurred . . . in granting lucrative stock based compensation” CAC ¶¶ 29, 33. Plaintiffs also allege that each director “was aware of the fact that the Company improperly recorded charges for stock-based compensation . . . . via his access to internal corporate documents, conversations and connections with other corporate officers and employees, attendance at management and Board meetings and committees thereof and via reports and other information provided to him in connection therewith.” Id. ¶¶ 11-19. However, Plaintiffs fail to identify any facts regarding specific documents, conversations, meetings or reports from which any directors would have learned that the stock option accounting was incorrect.7 Indeed, there are no particularized allegations that any director had 6 Notably, Plaintiffs make no demand futility claims based upon insider trading. See CAC ¶¶ 93-94. In other words, Plaintiffs do not allege that any of the nine directors who comprised Brocade’s Board at the time this litigation was initiated sold any stock over the entire four year putative relevant time frame. Id. (asserting insider trading allegations against non-director defendants). This is particularly noteworthy given Plaintiffs’ allegations that the director defendants “owned millions of Brocade shares” (id. ¶ 98 (f)), and it belies Plaintiffs’ boilerplate allegations that the directors “directly benefited” from the alleged wrongdoing. Id. ¶ 98(g), (k). 7 This is particularly true with respect to defendants Walker and Klayko. Plaintiffs admit Mr. (continued...) Case3:05-cv-02233-CRB Document47 Filed10/27/05 Page12 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOM. DEFENDANT’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT -6- 2750738_3.DOC knowledge of any alleged accounting error, let alone how, when or where any director supposedly learned of such error. See generally CAC.8 Plaintiffs also do not identify a single “red flag” that the directors purportedly failed to heed. Guttman, 823 A.2d at 507 (demand not excused where plaintiff failed to “plead a single fact suggesting specific red -- or even yellow -- flags were waved at the outside directors”). Significantly, Plaintiffs do not allege that anyone ever alerted the directors to problems with Brocade’s stock option accounting practices, much less any other particularized facts suggesting the directors had any reason to question the Company’s stock option accounting. To the contrary, Plaintiffs’ claim is flatly inconsistent with other facts that are alleged in the Complaint. As Plaintiffs concede, “KPMG had virtually limitless access to information concerning Brocade’s true financial condition and operating results.” CAC ¶ 104. “KPMG audited Brocade’s financial statements for a considerable period of time, had a thorough knowledge of the Company’s financial history, accounting practices, internal controls, and business operations.” Id. ¶ 108. Specifically, “KPMG conducted quarterly reviews and annual audits of each of Brocade’s . . . interim and annual financial statements filed with the SEC on Forms 10-Q and 10-K, respectively.” Id. ¶ 103. In fact, “KPMG played a pivotal role in the creation of these filings.” Id. ¶ 102. Plaintiffs specifically allege that “KPMG had the opportunity to review the Company’s policies and procedures concerning the granting of equity based compensation, (...continued from previous page) Walker joined the Board on April 27, 2005, well after all of Plaintiffs’ purportedly substantive allegations CAC ¶ 19. Yet Plaintiffs’ offer no particularized factual allegations explaining how Mr. Walker faces a significant likelihood of liability for alleged misconduct that, by Plaintiffs’ own admission, all occurred prior to his Board membership. Likewise, Mr. Klayko joined the Board in January, 2005, upon being promoted to C.E.O. after several years in Brocade’s sales organization. CAC ¶ 11. It is difficult to imagine that he could face any liability for the alleged wrongdoing, much less a significant likelihood of liability. 8 Curiously, the Complaint also alleges that the individual defendants allowed or caused “the Company to misrepresent the safety of its products,” thus subjecting the Company “to personal injury lawsuits as a result of the misrepresentations regarding the safety of its products.” CAC ¶ 29; see also id. ¶ 32. These allegations make no sense. Plaintiffs do not contend that there are any safety issues with Brocade’s products, and we cannot conceive of a scenario under which such issues would arise. These allegations, like all of Plaintiffs’ demand futility allegations, are demonstrative of Plaintiffs’ disregard for their pleading obligations. Case3:05-cv-02233-CRB Document47 Filed10/27/05 Page13 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOM. DEFENDANT’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT -7- 2750738_3.DOC including the vesting of options, with Brocade’s Board of Directors, Audit Committee, Compensation Committee, and Senior Management.” Id. ¶ 104. Notwithstanding KPMG’s access and involvement or Plaintiffs’ acknowledgment that KPMG “was required to be vigilant in auditing the impact of equity-based compensation and granting of options” (id. ¶ 106), Plaintiffs concede that KPMG unequivocally signed off on Brocade’s financial results. Id. ¶ 103; see also Exs. A at 36, B at 40, C at 43. Thus, by Plaintiffs’ own admission, the directors sought and obtained the advice of outside experts in connection with the Company’s financials and are, therefore, fully protected from personal liability for any alleged improper accounting. See Ash v. McCall, 2000 WL 1370341, at *9; Brehm, 746 A.2d at 261 (a “Board is entitled to the presumption that it exercised proper business judgment, including proper reliance on the expert”). Plaintiffs’ failure to identify any documents that any of the directors purportedly received or any conversation that any director had with any officers, employees, or outside auditors demonstrating knowledge of the accounting errors is “fatal to plaintiffs’ effort to show demand excusal.” Guttman, 823 A.2d at 504; see Sucher v. Alon, C 98-203 CRB, slip op. at 4 (N.D. Cal. July 10, 1998) (“Plaintiff’s allegations that the Audit Committee directors took no action to assure a systems of controls was in place is wholly inadequate since plaintiff does not allege any specific facts to support his conclusory claim.”); Baxter, 654 A.2d at 1270 (court cannot “conclude that there is a substantial likelihood of liability” without particularized facts showing directors “ignore[d] ‘obvious danger signs of employee wrongdoing’”) (citation omitted).9 9 Plaintiffs cannot excuse their failure to plead defendants’ knowledge by resorting to generic allegations. It insufficient to allege that defendants engaged in a “conspiracy.” CAC ¶¶ 31-36; Washington Bancorporation v. Washington, [1989-90 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 94,893, at 94,886 (D.D.C. Sept. 26, 1989) (conclusory allegation directors engaged in “scheme or conspiracy” fail to set forth “particularized factual allegations”). The allegation that three directors served on the Audit Committee, who “reviews the accounting principles and auditing practices and procedures to be used in preparing” financial statements and Brocade’s “internal controls” is also insufficient. Id. ¶¶ 98(c). Such an allegation fails to show defendants’ knowledge of accounting improprieties. See Citron v. Daniell, 796 F. Supp. 649, 652 (D. Conn. 1992) (rejecting as conclusory allegation that audit committee membership afforded opportunity to detect and correct errors); Sucher v. Alon, slip op. at 3-4 (audit committee membership insufficient to excuse demand). Case3:05-cv-02233-CRB Document47 Filed10/27/05 Page14 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOM. DEFENDANT’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT -8- 2750738_3.DOC B. Plaintiffs Do Not Plead That A Majority Of The Brocade Board Faces A Substantial Likelihood Of Personal Liability For Any Alleged Lack Of Oversight Since there are no particularized allegations showing Brocade’s directors knew about the alleged accounting errors, at bottom, the claims against the directors are grounded upon the contention that they failed to exercise adequate oversight regarding Brocade’s affairs. In In re Caremark Int’l, Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996), the court explained that director liability for alleged inadequate oversight is “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” Id. at 967; Sagent, 278 F. Supp. 2d at 1090-92 (boilerplate allegations that directors failed to establish and maintain accounting controls insufficient). As such, when director liability is predicated upon failure to prevent or correct the liability-creating activity, “only a sustained or systematic failure of the board to exercise oversight . . . will establish the lack of good faith that is a necessary condition to liability.” 698 A.2d at 971; see also Guttman, 823 A.2d at 507; Baxter, 654 A.2d at 1270-71 (rejecting conclusory allegations directors condoned or failed to prevent misconduct). Plaintiffs’ own allegations belie any suggestion of abdication of duty by the Board or the Audit Committee. The Complaint alleges that, during the Company’s fiscal year 2004, the full Board held four meetings, the Audit Committee met eight times, the Nominating and Corporate Governance Committee met four times, and the Compensation Committee met twice. CAC ¶ 22. Thus, the Board and its committees held eighteen separate meetings during one fiscal year, or approximately one meeting every two weeks. Moreover, by Plaintiffs’ admission, “[e]ach director attended 75% of the total number of meetings of the Board and Board committees of which he was a member, except for Dempsey who attended 72%.” Id. As such, Plaintiffs’ own Complaint defeats their purported Caremark claim. See Guttman, 823 A.2d at 507 (plaintiff failed to state a claim where complaint lacked allegations that company lacked an audit committee, committee met only sporadically and devoted patently inadequate time to its work, or committee had clear notice of serious accounting irregularities and simply chose to ignore them). These undisputed facts make this case fundamentally different from the rare cases in which Caremark claims have succeeded. For example, In re Abbott Labs. Deriv. Shareholders Case3:05-cv-02233-CRB Document47 Filed10/27/05 Page15 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOM. DEFENDANT’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT -9- 2750738_3.DOC Litig., 325 F.3d 795, 809 (7th Cir. 2003), the court found the plaintiffs had pleaded sufficiently particularized facts to support a failure of oversight claim. “We find that six years of noncompliance, inspections, 483s, Warning Letters, and notice in the press, all of which then resulted in the largest civil fine ever imposed by the FDA and the destruction and suspension of products which accounted for approximately $250 million in corporate assets, indicate that the directors’ decision to not act was not made in good faith.” Id. at 809 (citing McCall v. Scott, 239 F.3d 808, 818, opinion amended on other grounds, 250 F.3d 997 (6th Cir. 2001) (directors sustained failure to act against corporation’s systematic health care fraud occurring from at least 1994 to 1996 alleged sufficient facts to demonstrate demand futility)). There are simply no similar allegations here. The Complaint is devoid of any particularized factual allegation suggesting that the Board (including members of the Audit Committee) “had clear notice of serious accounting irregularities and simply chose to ignore them or, even worse, to encourage their continuation.” Guttman, 823 A.2d at 507. To the contrary, the facts Plaintiffs do allege show that Brocade’s directors honored their fiduciary obligations and were given the green light from independent auditors with respect to the Company’s financial statements. Under these circumstances, Plaintiffs have not alleged the requisite substantial likelihood of liability on the part of the directors, and demand is not excused. C. Plaintiffs’ Other Allegations Fail to Show that A Majority of the Board Has a Disabling Interest Plaintiffs allege that “[a]ny suit by the current directors . . . would likely expose” the directors and Brocade “to further violations of the securities laws that would result in civil actions being filed” and, “thus, they are hopelessly conflicted in making any supposedly independent determination.” CAC ¶ 98(l). Plaintiffs also allege that the directors would not bring this suit against themselves for fear of “impair[ing] their defense of the class actions” and “increas[ing] the probability of their personal liability in the class actions.” Id. ¶ 98(n). These same conclusory allegations regarding potential liability in federal class actions have routinely been held to be insufficient for demand futility. E.g., Rattner v. Bidzos, No. 19700, 2003 WL Case3:05-cv-02233-CRB Document47 Filed10/27/05 Page16 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOM. DEFENDANT’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT -10- 2750738_3.DOC 22284323, at *14 (Del. Ch. Sept. 30, 2003) (conclusory allegations about potential liability in federal securities class actions are “insufficient to satisfy the demand excusal requirement”); Seminaris v. Landa, 662 A.2d 1350, 1354-55 (Del. Ch. 1995) (allegations that directors were named defendants in several pending securities class actions and subjects of ongoing SEC investigation did not create a “reasonable doubt” that the directors were disinterested). 10 Plaintiffs’ contention that demand would be futile because the “Board ha[s] not filed any lawsuits against themselves or others” (CAC ¶ 98(m)) is similarly insufficient. See, e.g., Blasband v. Rales, 971 F.2d 1034, 1052 (3d Cir. 1992) (a “[b]oard’s failure to take action, even if it is aware of wrongdoing, does not demonstrate [demand] futility”). To hold otherwise would eviscerate the Board’s “authority to initiate or to refrain from initiating legal actions asserting rights held by the corporation.” White v. Panic, 783 A.2d 543, 550 (Del. 2001). The absurdity of such a position is particularly evident in this case, where the Board and the Audit Committee have pro-actively initiated and supported two significant internal investigations into the matters at issue, spanning an entire year, that have resulted in the restatement of Brocade’s financial results on two separate occasions. See, e.g., CAC ¶¶ 81-86 (describing ongoing restatement activity in August and September, 2005). III. PLAINTIFFS ALSO FAIL TO ALLEGE PARTICULARIZED FACTS SHOWING THAT A MAJORITY OF THE BOARD LACKED INDEPENDENCE Because Plaintiffs fail to show that any director has a disqualifying interest, Plaintiffs can only satisfy the demand futility standard by pleading particularized facts establishing that the majority of the directors lacked independence. When lack of independence is charged, the question is whether the purported controlling person(s) had “the direct or indirect unilateral 10 Plaintiffs’ allegation that defendants would be unwilling to initiate litigation because there might be an “insured verses insured exclusion” in D&O liability insurance policies (CAC ¶ 98(o)), has been rejected repeatedly by courts as nothing more than a “variation[] on the ‘directors suing themselves’ and ‘participating in the wrongs’ refrain.” Decker v. Clausen, No. 10,684-85, 1989 WL 133617, at *2 (Del. Ch. Nov. 6, 1989) (citation omitted); see Stepak v. Addison, 20 F.3d 398, 411 (11th Cir. 1994) (rejecting identical allegation) (citation omitted); see also Caruana v. Saligman, [1990-1991 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 95,889, at 99,379 (Del. Ch. Dec. 21, 1990) (same). Case3:05-cv-02233-CRB Document47 Filed10/27/05 Page17 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOM. DEFENDANT’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT -11- 2750738_3.DOC power to decide whether the director continues to receive a benefit upon which the director is so dependent or is of such subjective material importance that its threatened loss” creates a reasonable doubt that the director will be able to consider objectively the merits of a demand. Telxon Corp. v. Meyerson, 802 A.2d 257, 264 (Del. 2002); Rales, 634 A.2d at 936 (to plead lack of independence excusing demand, plaintiff must show that each director was so “beholden” to the controlling person that his “discretion would be sterilized”). Absent particularized factual allegations to that effect, demand is not excused. Plaintiffs fail to plead any facts, let alone particularized facts, demonstrating a lack of independence by a majority of Brocade’s Board. A. Boilerplate Allegations Regarding Defendants’ Compensation Do Not Excuse Demand Plaintiffs allege that defendants Dempsey, Krause and Vaswani, as the Brocade Compensation Committee, “singularly control the other defendants’” stock option awards, and thus “the remaining members of the Board will not institute this action” against them because “[t]o do so would jeopardize each defendant’s personal financial compensation.” CAC ¶ 98(a). Plaintiffs claim defendant Klayko lacks independence from the members of the Compensation Committee for the additional reason that they “exert influence over defendant Klayko’s compensation” as an officer of the Company -- namely his alleged base salary of $520,000, incentive bonus of $390,000 and grant of 1,000,000 stock options. Id. ¶ 98(b). Plaintiffs’ boilerplate allegations fail to raise a reasonable doubt as to any director’s independence. As an initial matter, Plaintiffs plead no particularized facts establishing that defendants Dempsey, Krause or Vaswani are interested in the alleged wrongdoing, and thus their purported control over the other directors is irrelevant to whether those directors could fairly consider a demand. See Point II, supra, at 4-10. Additionally, Plaintiffs plead no particularized facts demonstrating that the perquisites received for membership on the Brocade Board are outside the range of industry norms or that they are relevant to any of the directors’ net worth in such a way as to taint his judgment. White v. Panic, 793 A.2d 356, 366 & n.34 (Del. Ch. 2000), aff’d, 783 A.2d 543 (Del. 2001). Rather, the directors’ significant leadership positions at other major companies and institutions actually belie any suggestion that the $25,000 of annual directors fees Case3:05-cv-02233-CRB Document47 Filed10/27/05 Page18 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOM. DEFENDANT’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT -12- 2750738_3.DOC and $20,000 of annual stock options they received for their service on Brocade’s Board rendered them incapable of discharging their duties in an independent and disinterested manner. See Ex. D (describing each director’s business background). In the absence of any particularized allegations establishing that the alleged fees and options were so material to the director as to raise a reasonable doubt about their independence, Plaintiffs allegations that the directors lack independence from the members of the Compensation Committee fail. With respect to defendant Klayko, Plaintiffs also fail to plead particularized facts demonstrating that the compensation he receives from Brocade is significant when compared to his personal worth, or that maintaining that compensation is so material to him that his motivations may reasonably be questioned. See White v. Panic, 793 A.2d at 366 & n.34 (demand not excused where plaintiff failed to allege specific facts showing that amount paid to director “was so material” as to taint his judgment). Instead, Plaintiffs’ claims are no more than the oft-dismissed boilerplate allegation that Klayko “acted or would act to preserve [his] positions.” Sagent, 278 F. Supp. 2d at 1089; see Citron, 796 F. Supp. at 652 (“[a] shareholder must plead particularized facts demonstrating a financial interest – other than merely receiving a salary or compensation”). In fact, Plaintiff’s claims regarding defendant Klayko are so boilerplate that he is referred to as “defendant Patrick Smith,” an individual whom defendants do not know. CAC ¶ 98(b). B. Conclusory Allegations of Personal Relationships Are Insufficient To Excuse Demand Plaintiffs also allege purported “prejudicial entanglements” in which current directors previously worked at the same companies (CAC ¶ 98(e)), but these allegations are of the most conclusory variety conceivable. Plaintiffs allege that Klayko and Walker were both employed by Hewlett-Packard -- a massive company with tens of thousands of employees-- at unidentified times in unidentified positions, and thus lack independence from one another. Id. ¶ 98(e)(ii). Plaintiffs also allege that Paisley and Krause had a five year employment overlap at 3Com fifteen years ago, and therefore “will not take the action requested by plaintiffs herein against one another.” Id. ¶ 98(e)(i). Delaware law rejects the claim that demand would be futile “just Case3:05-cv-02233-CRB Document47 Filed10/27/05 Page19 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOM. DEFENDANT’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT -13- 2750738_3.DOC because directors would have to sue ‘their friends, family and business associates.’” In re Walt Disney Co. Deriv. Litig., 731 A.2d 342, 355 n.18 (Del. Ch. 1998), aff’d in part, rev’d in part on other grounds, Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (citation omitted); see also Beam, 845 A.2d at 1051 (Allegations that directors “moved in the same social circles, attended the same weddings, developed business relationships before joining the board, and described each other as ‘friends’” were insufficient.). Plaintiffs fail to allege particularized facts showing any director is so beholden to any other Brocade officer or director that he would favor the other’s interest over that of Brocade.11 IV. THE COMPLAINT DOES NOT COMPLY WITH FED. R. CIV. P. 23.1 Federal Rule of Civil Procedure 23.1 sets forth the procedural requirements for bringing a derivative action in federal court. Sax v. World Wide Press, Inc., 809 F.2d 610, 613 (9th Cir. 1987); Lefort v. Black, No. C02-2465, 2003 WL 1563997, at *2 (N.D. Cal. Mar. 21, 2003). The Complaint here runs afoul of three of Rule 23.1’s express requirements and, as a result, dismissal is appropriate. Id. at *4 (dismissing complaint where plaintiff failed to comply with Rule 23.1). First, Plaintiffs have not verified the Complaint. See FED. R. CIV. P. 23.1 (lack of verification among grounds for dismissal of derivative claim); Smachlo v. Birkelo, 576 F. Supp. 1439, 1442-43 (D. Del. 1983) (Rule 23.1 verification requirement not to be taken lightly); Goldberg v. Meridor, 81 F.R.D. 105, 110 (S.D.N.Y. 1979) (lack of verification required by Rule 23.1 is grounds for dismissal); Walden v. Elrod, 72 F.R.D. 5, 12 (W.D. Okla. 1976) (same). Second, the Complaint lacks allegations showing that Plaintiffs were “shareholder[s] . . . at the time of the transaction of which [they] complain[].” FED. R. CIV. P. 23.1; Lewis v. Chiles, 719 F.2d 1044, 1047 (9th Cir. 1983). The Complaint simply alleges in conclusory fashion that “[p]laintiff is and was an owner of Brocade common stock during all times relevant to the 11 Plaintiffs also do not allege particularized facts showing why Brocade’s Board could not act in an independent and disinterested manner in considering a demand to bring suit against KPMG, a third party. Plaintiffs were required to allege particularized facts showing that each director was so “beholden” to or so under the influence of KPMG that his "discretion would be sterilized." Rales, 634 A.2d at 936. In their Complaint, however, Plaintiffs allege no facts of any kind that even attempt to establish demand futility with respect to KPMG. As a result, Plaintiffs also lack standing to pursue any claim against KPMG. Case3:05-cv-02233-CRB Document47 Filed10/27/05 Page20 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOM. DEFENDANT’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT -14- 2750738_3.DOC Individual Defendants’ wrongful course of conduct alleged [in the complaint], and remains a Brocade shareholder.” CAC ¶ 97, see also id. ¶ 7. That does not suffice. Sagent, 278 F. Supp. 2d at 1096 (complaint “must indicate when [the plaintiff] bought stock . . . and must state that they have owned stock continuously” in order to satisfy Rule 23.1); see also Abramson v. Pennwood Inv. Corp., 392 F.2d 759, 761-62 (2d Cir. 1968) (unsworn statement that appellant was stockholder at the time of transaction in derivative complaint did not satisfy Rule 23). Finally, nowhere in the one hundred and forty seven paragraph Complaint do Plaintiffs identify themselves. While Plaintiffs makes the boilerplate allegation that “Plaintiff is a citizen of the State of New York” (CAC ¶ 7), “Plaintiff will adequately and fairly represent” Brocade’s interests (id. ¶ 96), and “Plaintiff is and was an owner of Brocade common stock” (id. ¶ 97), Plaintiffs never state their names in the complaint. See generally CAC. Moreover, while Court previously appointed four co-lead Plaintiffs (at Plaintiffs’ request), most references to Plaintiffs in the Complaint are made in the singular form. E.g., id. ¶¶ 7, 97-98; but see id. ¶ 98. Thus, the Complaint appears to be filed on behalf of one anonymous purported Brocade shareholder. Given that Plaintiffs must verify the Complaint and plead facts establishing continuous stock ownership to satisfy Rule 23.1, and must establish complete diversity of citizenship between the parties in order to bring this action pursuant to 28 U.S.C. § 1332(a)(2), Plaintiffs failure to plead identifying facts with respect to each plaintiff on whose behalf the Complaint is purported brought renders the Court’s analysis of these threshold requirements difficult, if not impossible. CONCLUSION For the foregoing reasons, Plaintiffs have no legal standing to pursue this derivative action and the Consolidated Amended Complaint should be dismissed. Dated: October 27, 2005 WILSON SONSINI GOODRICH & ROSATI Professional Corporation By: /s/ Nina F. Locker Nina F. Locker Attorneys for Nominal Defendant Brocade Communications Systems, Inc. Case3:05-cv-02233-CRB Document47 Filed10/27/05 Page21 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOM. DEFENDANT’S MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT -15- 2750738_3.DOC I, Cameron P. Hoffman, am the ECF User whose identification and password are being used to file this Nominal Defendant Brocade Communications Systems, Inc.’s Motion to Dismiss Consolidated Amended Complaint. In compliance with General Order 45.X.B, I hereby attest that Nina F. Locker has concurred in this filing. Dated: October 27, 2005 WILSON SONSINI GOODRICH & ROSATI Professional Corporation By: /s/ Cameron Hoffman Cameron Hoffman Attorneys for Nominal Defendant Brocade Communications Systems, Inc. Case3:05-cv-02233-CRB Document47 Filed10/27/05 Page22 of 22