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Marchand v. Barnhill

Court of Chancery of Delaware

September 27, 2018


          Date Submitted: June 13, 2018

          Robert J. Kriner, Jr., Esquire and Vera G. Belger, Esquire of Chimicles & Tikellis LLP, Wilmington, Delaware and Michael Hawash, Esquire and Jourdain Poupore, Esquire of Hawash Cicack & Gaston LLP, Houston, Texas, Attorneys for Plaintiff.

          Timothy R. Dudderar, Esquire and Travis R. Dunkelberger, Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware, Attorneys for Defendants John W. Barnhill, Jr., Richard Dickson, Paul A. Ehlert, Jim E. Kruse, W.J. Rankin, Howard W. Kruse, Patricia I. Ryan, Dorothy McLeod MacInerney, and Nominal Defendant Blue Bell Creameries USA, Inc.

          Srinivas M. Raju, Esquire and Kelly L. Freund, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware, Attorneys for Defendants Greg Bridges and Paul W. Kruse.



         In a companion case, I opened my decision denying a motion to dismiss the complaint by observing, in essence, that standards matter.[1] In Wenske, the general partner of a limited partnership allegedly engaged in wrongdoing that led to "corporate trauma." The standard governing the general partner's conduct was a bespoke contractual standard embedded within the limited partnership agreement.[2]In this case, the standard by which to measure the conduct of corporate managers, who are alleged to have engaged in essentially the same wrongdoing that led to the same "corporate trauma," is a well-settled common law fiduciary standard first articulated by former Chancellor Allen in In re Caremark Int'l Inc. Deriv. Litig.[3]As noted, in Wenske, I determined that the plaintiffs, holders of publicly traded limited partnership units, had adequately pled a derivative claim against the general partner for breach of the limited partnership agreement. In this case, for reasons explained below, I dismiss the complaint because I am satisfied this stockholder plaintiff has failed adequately to plead that demand upon the board of the company- on behalf of which he purports to prosecute his derivative claims-should be excused.

         To understand how this unique circumstance has unfolded, it is necessary to understand the structure and relationship of the entities involved. Plaintiff is a stockholder of Blue Bell Creameries USA, Inc. ("BB USA"), a Delaware subchapter S corporation that serves as the holding company for the well-known Blue Bell ice cream enterprise. BB USA wholly owns Blue Bell Creameries, Inc. ("BB GP"), the general partner and exclusive manager of Blue Bell Creameries, L.P. ("BB LP" or "Blue Bell"), the enterprise's operating subsidiary. BB USA owns 69.643% of the partner's equity in Blue Bell and that ownership interest comprises all of its assets and liabilities.

         Blue Bell produces and distributes Blue Bell ice cream. In early 2015, the Food & Drug Administration ("FDA") and several state health agencies found Listeria monocytogenes bacteria in many of Blue Bell's ice cream products.[4]By April 2015, Blue Bell had recalled all of its products and shut down all of its operations. Soon after, Blue Bell fired more than one-third of its workforce and ceased paying distributions to its limited partners.[5] Faced with a growing liquidity crisis, BB USA was forced to seek emergency outside financing on "massively dilutive" terms.[6]

         In Wenske, limited partners brought derivative claims against BB GP, BB USA and members of the BB USA board of directors (the "BB USA Board") alleging, among other claims, breach of fiduciary duty and breach of Blue Bell's limited partnership agreement relating to the Blue Bell Listeria crisis. For reasons stated at some length in a Memorandum Opinion, I dismissed the breach of fiduciary duty claims and the claims against BB USA and members of the BB USA Board.[7]I declined, however, to dismiss the breach of contract claim against BB GP upon concluding that the complaint adequately pled the general partner had not "use[d] its best efforts to conduct [the partnership's] business in a good and businesslike manner, and in accordance with sound business practices in the industry."[8]

         In this action, Plaintiff, a BB USA stockholder, purports to bring derivative claims on behalf of BB USA against two BB USA corporate officers (the "Officer Defendants"), and all BB USA directors except one (the "Director Defendants") (collectively, the "Defendants"), for breach of fiduciary duty. Specifically, the Verified Derivative Complaint (the "Complaint") sets forth two counts[9]:

• Count I, against Paul Kruse and Greg Bridges, in their capacity as BB USA officers, for "breach[ing] their fiduciary duties of loyalty and care" to BB USA by failing to "take any steps to correct or control . . . essential issues regarding [the] health and safety of [Blue Bell's] products[, ] despite their knowledge that Listeria was present in [Blue Bell's] products" and manufacturing facilities.[10]
• Count II, against BB USA directors (other than Bill Reimann), for "breach[ing] their fiduciary duties of loyalty" to BB USA "by the[ir] willful failure to govern the management of [BB LP] and to institute fundamental controls over managerial operations, "[11] including "controls to monitor for, avoid and remediate contamination and conditions exposing [BB LP] to contamination."[12]

         Defendants have moved to dismiss the Complaint under Court of Chancery Rules 23.1 and 12(b)(6). For the reasons that follow, I dismiss the Complaint under Rule 23.1. As for Count I, even assuming Plaintiff has pled a viable fiduciary claim against the Officer Defendants, an assumption that may or may not be valid, Plaintiff has failed to plead particularized facts to raise a reasonable doubt that a majority of the BB USA Board members could have impartially considered a pre-suit demand to prosecute Count I. As for Count II, Plaintiff has failed to state a Caremark claim against the Director Defendants and, consequently, has failed to plead particularized facts to raise a reasonable doubt that a majority of the otherwise disinterested BB USA Board could have exercised their business judgment in responding to a demand.

         I. BACKGROUND

         The facts are drawn from the allegations in the Complaint, documents incorporated by reference or integral to that pleading and judicially noticeable facts.[13] For purposes of this Motion to Dismiss, I accept as true the Complaint's well-pled factual allegations and draw all reasonable inferences in Plaintiff's favor.

         A. The Parties and Relevant Non-Parties

         Plaintiff, Jack Marchand II, is a stockholder of nominal defendant, BB USA, a Delaware corporation headquartered in Brenham, Texas.[14] He is alleged to have held twenty-nine shares of BB USA common stock at all relevant times.

         As noted, BB USA serves as a holding company. Its only assets are: (1) 2, 823 Class A limited partnership units in non-party Blue Bell, a Delaware limited partnership; and (2) a 100% ownership interest in non-party BB GP. BB GP is a Delaware corporation and BB LP's general partner, vested by contract with the exclusive authority to manage Blue Bell's business affairs.[15] As of 2015, Blue Bell operated three manufacturing plants located in Brenham, Texas, Broken Arrow, Oklahoma and Sylacauga, Alabama.[16]

         Defendant, Paul Kruse, has served as a BB USA director since 1983, and previously served as BB USA's President and Chief Executive Officer from 2004 to 2017.[17] He is the son of Ed Kruse and the nephew of Howard Kruse (both previous CEOs of BB USA), making him the third generation of his family to lead the Blue Bell enterprise.[18]

         Defendant, Greg Bridges, has served as a BB USA director since 2011, and currently serves as BB USA's "Vice President of Operations."[19] It appears he is also a BB GP officer and, as such, oversees "all aspects of [Blue Bell's] plant operations."[20] Bridges is the son of Howard and Ed Kruse's sister, Mildred. As Vice President of Operations, Bridges reported to his cousin, Paul Kruse (as BB USA CEO and Chairman of the BB USA Board), at all times relevant to the Complaint.[21]

         Defendant, Howard Kruse, began serving as a BB USA director in 1985. He previously served as BB USA President from 1986 to 2004, and CEO from 1993 to 2004.[22] He is the uncle of Directors Paul Kruse and Bridges.

         Defendant, Jim Kruse, has served as a BB USA director since 2004.[23] He is the current Chairman of the BB USA Board, having succeeded Paul Kruse in that role.[24] He is the son of Howard Kruse, the nephew of Ed Kruse and cousin of Bridges and Paul Kruse.[25]

         Defendant, Richard Dickson, has been a BB USA director since 2010 and currently serves as BB USA's President.[26] It appears that Dickson also previously served in various operational roles at BB GP, including "plant manager of [BB LP's] Broken Arrow, Oklahoma [production] plant."[27] Prior to becoming President in 2017, Dickson was "in charge of all areas of sale and promotion."[28]

         Defendant, John Barnhill, Jr., has served as a BB USA director since 1974. He "grew up in Brenham" and "officially joined Blue Bell in 1960" when Blue Bell's then-CEO, Ed Kruse, "recruited him to be [BB USA's] sole Houston salesman."[29] "Barnhill worked his way up to Vice President in 1986, [and] retir[ed] as a [BB USA] officer in 2000."[30]

         Defendant, Patricia Ryan, began serving as a BB USA director in 1997.[31] It is alleged that Ryan "begged Ed Kruse to write his memoir for years."[32]

         Defendant, Dorothy McLeod MacInerney, has served as a BB USA director since 1994.[33] MacInerney is the author of a book that features a comprehensive history of the Blue Bell business.[34] She also wrote a biography of Ed Kruse entitled Ed F. Kruse of Blue Bell Creameries.[35]

         Defendant, Paul Ehlert, began his service as a BB USA director in 2002.[36]According to the Complaint, "[t]he Ehlert and Kruse families are both old Brenham families who have remained close throughout the years."[37]

         Defendant, W.J. Rankin, has served as a BB USA director since 2004, and previously served as BB USA Chief Financial Officer from 1986 to 2014.[38] It is alleged that, in 2010, Rankin "joined with Ed Kruse and Friends [undefined] to present a $450, 000 check to the Blinn College Foundation for the newly constructed agricultural facility on the Brenham campus" that was named the "W.J. Rankin Agricultural Complex" in Rankin's honor.[39]

         Non-party, Bill Reimann, began serving as a BB USA director in 2015 (after the Listeria issues were discovered at Blue Bell) when Moo Partners, L.P. ("Moo"), a private equity fund affiliated with Sid Bass, [40] invested significantly in Blue Bell (an investment that flowed up to BB USA) in response to the Blue Bell liquidity crisis.[41] Reimann, who is also Rankin's brother-in-law, serves as Moo's Vice President.[42] In conjunction with Moo's investment, BB USA's certificate of incorporation was amended to grant Moo the right to appoint one director designee to the BB USA Board who would control one-third of the Board's total voting power.[43] Reimann is Moo's Board designee.[44]

         B. Health Agency Inspections Reveal Unsanitary Conditions

         The Complaint draws facts from FDA and state health agency inspection reports, as well as internal company reports, to paint a checkered-albeit incomplete-history of various sanitary issues at Blue Bell's three production plants from 2009 through the Listeria monocytogenes crisis in early 2015. These reports are integral to the Complaint and so I discuss them in some detail below.

         The Complaint cites reports of unsanitary conditions at Blue Bell plants dating back to 2009. A report of an FDA inspection of the Brenham plant, dated July 24, 2009, noted two instances of uncontained condensation, "one from a pipe carrying liquid caramel . . . dripping into three gallon cartons waiting to be filled, and one dripping into ice cream sandwich wafers."[45] In response, that same day, Blue Bell installed "stainless steel shrouds with sanitary welds around the fillers of all ice cream sandwiches" to address the issue, and the FDA "verified" the fix.[46] In a follow-up letter to the FDA, Paul Kruse emphasized that "condensation is treated by Blue Bell as a serious concern."[47]

         In a May 12, 2010 inspection report, the FDA noted a condensation drip, "ripped and open containers of ingredients, inconsistent hand-washing and glove use and a spider and its web near the ingredients."[48] The report also verified that the earlier condensation issues from July 2009 had been corrected.[49]

         A February 29, 2012 report noted that "no significant objectionable conditions [were observed, ] [no] FDA 483 [for violations] was . . . issued" and "[n]o voluntary corrections were implemented during the inspection."[50] Similarly, an FDA report dated April 4, 2012 states, "[a]t the conclusion of the inspection, there were no observations noted and a[n] FDA 483 was not issued."[51]

         The Alabama Department of Public Health ("ADPH") issued various inspection reports about the Sylacauga plant's operations during 2010 to 2014. A March 29, 2010 inspection report noted "equipment left on the floor and a ceiling in disrepair in the container forming room."[52] On July 11, 2011, ADPH observed "drips from a ceiling unit and pipelines, standing water, open tank lids and unprotected measuring cups."[53] During its March 14, 2012 inspection, ADPH issued instructions "to clean various rooms and items, make repairs and [alter] fruit processing to prevent contamination."[54] In March 2013, the agency "ordered cleaning and repairs and observed an uncapped fruit tank"; "[s]imilar findings" were noted during a July 24, 2014 inspection.[55]

         Of Blue Bell's three plants, the Complaint suggests that the Broken Arrow facility was most prone to negative reporting from regulators regarding unsanitary conditions.[56] For instance, in a March 28, 2012 report, the FDA observed a "[f]ailure to manufacture foods under conditions and controls necessary to minimize contamination" and "[f]ailure to handle and maintain equipment, containers and utensils used to hold food in a manner that protects against contamination."[57]In response, that same report noted that Blue Bell attributed the first issue to one employee, "acknowledged the employee's behavior [was] unacceptable, and then . . . pointed out the behavior to the line supervisor, who immediately corrected the employee."[58] With respect to the second problem-product labeling issues and observations of residue on packaging-Blue Bell again "acknowledged that all containers should be labeled," and that "buckets would be visually checked for filth and residue."[59] The report concluded by noting an issue from the previous inspection in March 2011 (i.e., "no soap at hand sink") was "verified to be corrected."[60]

         In addition to FDA inspections, Blue Bell monitored operations at Broken Arrow on its own during this time period. Internal Blue Bell tests for Listeria spp. found presumptively positive tests dating back to 2013.[61] A later FDA report noted the findings were on "non-food contact areas" and "surfaces."[62] Follow-up sampling taken in January and April 2014 and tested by Blue Bell's "third party laboratory" also yielded positive results for Listeria spp.[63] On three occasions in April 2014, internal company tests revealed "positive coliform [results] far above the known regulatory limit" of 20 CFUs/mL.[64] Subsequent samples showed elevated coliform levels twice in January 2015, and five times in February 2015.[65]

         Plaintiff alleges the minutes of BB USA's monthly Board meetings in 2014 show "a lack of reporting from management to the Board regarding contamination" and no "report or discussion regarding Listeria or positive test results."[66]Specifically, "there is no reference to Listeria or the lab reports in the minutes" for January, February or March 2014, and neither the Listeria nor coliform test results were reported or discussed in April 2014.[67] While the April 29, 2014 minutes do reference a report Bridges delivered to the BB USA Board regarding "Broken Arrow and Sylacauga plant operations," they provide no further details regarding the specific topics addressed in the report. [68]

         Other BB USA Board meeting minutes from 2014 show regular reports from Paul Kruse and Bridges on plant and manufacturing operations, although there are no specific mentions of sanitary conditions.[69] The reports, instead, addressed matters such as new equipment at the Brenham facility, a "new hardening and palletizing area," "newly hired personnel" and "a good report from the TCEQ."[70]The June 26, 2014 BB USA Board meeting minutes state that Bridges reported on several items, including production, "training grants," an oven overhaul to "help out with production volumes and product quality" and, notably, that "[B]oard members will be touring the new palletizing and cold storage area after next month's meeting."[71] According to Plaintiff, minutes from the September 30, 2014 BB USA Board meeting state that Bridges reported "[t]he recent Silliker audit went well," but do not state that a formal report was delivered to the Board or that the Board discussed the matter in any detail.[72] The Board meeting on October 29, 2014 featured a similar report from Bridges that "[BB LP] scored well on recent third party audits," but the minutes contain "no reference to the identities of the auditors or the [content] of the audits, and no evidence of Board discussions of the particular audit reports or information."[73]

         C. The 2015 Product Recall and Company Fallout

         In 2014, Blue Bell was the best-selling ice cream brand in the United States based on its comparative sales area.[74] Its products were sold to consumers in twenty-three states; it generated revenues in excess of $700 million annually; and it paid a quarterly dividend to stockholders of $4, 000 per share.[75]

         On January 30, 2015, the Brenham plant "ceased production" to "undergo routine cleaning and overhauling."[76] A few days later, the South Carolina Department of Health and Environmental Control discovered Listeria monocytogenes bacteria in a routine sampling of Blue Bell products.[77] The Texas Department of State Health Services notified Blue Bell of a similar finding on February 13, 2015.[78] Prior to notification of the contamination, internal company tests at Brenham showed positive results for Listeria monocytogenes in January and February 2015.[79] The BB USA Board held a special meeting after the annual stockholders meeting on February 19, 2015.[80] The minutes reflect "no report or discussion of Listeria, any product contamination, facilities problems or any product recall."[81]

         Although the precise date is unclear from the Complaint, on or about February 23, Blue Bell initiated a "recall of products." The recall is mentioned in the minutes of the Board's regular monthly meeting on February 25, [82] where Paul Kruse reported to the other directors that "[t]he FDA is working with Texas health inspectors regarding [Blue Bell's] recent recall of products. More information is developing and should be known within the next days or weeks."[83] Soon after, the FDA and state health agencies in Texas and Kansas found Listeria contamination in other Blue Bell ice cream products.[84] Unfortunately, the contamination was not contained-the Centers for Disease Control and Prevention identified ten people who contracted listeriosis as a result of the contamination, three of whom died.[85]

         Revelations of the listeriosis cases and resulting deaths and injuries devastated Blue Bell's business. By April 2015, Blue Bell had shut down all of its production operations and instituted a recall of all products.[86] On April 10, 2015, the BB USA Board members were informed of a potential Department of Justice investigation into the contamination.[87] Contemporaneous FDA inspections of Blue Bell's manufacturing plants revealed a multitude of food safety hazards at those facilities.[88]FDA investigators inspecting the Texas Plant in March, April and May 2015 observed, among other things:

• "[f]ailure to manufacture foods under conditions and controls necessary to minimize the potential for growth of microorganisms";
• that "[t]he procedure used for cleaning and sanitizing of [plant] equipment ha[d] not been shown to provide adequate cleaning and sanitizing";
• that "[t]he plant [was] not constructed in such a manner as to prevent condensate from contaminating food and food-contact surfaces";
• "[f]ailure to clean food-contact surfaces as frequently as necessary to protect against contamination of food";
• "[f]ailure to wear beard covers in an effective manner"; and
• "[f]ailure to maintain buildings in repair sufficient to prevent food from [be]coming adulterated."[89]

         FDA inspections of the Oklahoma Plant in March and April 2015 yielded similar negative reports, including:

• "[f]ailure to manufacture and package foods under conditions and controls necessary to minimize the potential growth of microorganisms and contamination";
• "[f]ailure to perform microbial testing where necessary to identify sanitation failures and possible food contamination";
• that "[t]he procedure use[d] for cleaning and sanitizing of [plant] equipment and utensils ha[d] not been shown to provide adequate cleaning and sanitizing treatment";
• "[f]ailure to provide running water at a suitable temperature for cleaning of equipment, utensils and food-packaging materials";
• that "[t]he plant [was] not constructed in such a manner as to prevent drip and condensate from contaminating food, food-contact surfaces, and food packaging materials";
• that "[e]mployees did not wash and sanitize hands thoroughly in an adequate hand-washing facility after each absence from the work station and at any time their hands may have become soiled or contaminated"; and
• "[f]ailure to store cleaned and sanitized portable equipment in a location and manner which protects food-contact surfaces from contamination."[90]

         The FDA report on the Alabama Plant, dated April 30, 2015, detailed much of the same:

• "[f]ailure to maintain food contact surfaces to protect food from contamination by any source, including unlawful indirect food additives";
• that "[t]he design and materials of equipment and utensils [did] not allow proper cleaning";
• that "[a]ll reasonable precautions [were] not taken to ensure that production procedure [did] not contribute contamination from any source";
• that "[e]mployees did not wash and sanitize hands thoroughly in an adequate hand-washing facility at any time their hands may have become soiled or contaminated"; and
• that "[n]onfood-contact equipment in manufacturing areas [was] not constructed so that it [could have been] kept in clean condition."[91]

         In addition to multiple lawsuits brought against Blue Bell by injured consumers, [92] the recall and complete shutdown of production caused Blue Bell to lay off 37% of its 3, 900-person workforce and prompted BB USA to warn its shareholders that it was on the brink of collapse.[93] With all Blue Bell production operations shut down, Blue Bell (and BB USA) faced an impending liquidity crisis; Blue Bell needed funding for working capital of approximately $125 million.[94]

         Blue Bell management promptly sought outside financing, first from JP Morgan Chase, [95] and then from Moo. Moo's proposal was to provide Blue Bell with a $125 million credit facility and $100 million cash in exchange for a warrant to acquire Blue Bell partnership interests at $50, 000 per unit.[96] On May 18, 2015, the BB USA Board determined that the Moo proposal was not "the best available option for the Partnership" and authorized management to proceed with an offering of convertible securities to existing stockholders and unitholders.[97] After considering a decreased revenue forecast, a drop in value, competing sponsorship proposals and an unsuccessful offering of convertible securities, however, the Board returned to Moo and entertained a revised proposal.[98]

         Moo's revised proposal provided for the same levels of financing and included a provision granting Moo a warrant to purchase 42% of BB USA's stock for $50, 000 per share and rights of first refusal respecting any issuances or sales of BB USA stock.[99] The revised proposal also called for an amendment to BB USA's certificate of incorporation to grant Moo the right to appoint one BB USA Board designee, who would be entitled to one-third of the Board's total voting power.[100] At its July 7, 2015 meeting, "the Board adopted a resolution accepting the [revised] Moo financing proposal and installing Reimann on the Board."[101]

         D. Federal and State Regulation of Blue Bell

         Under the Federal Food, Drug and Cosmetic Act ("FDCA"), [102] managers of food manufacturers like Blue Bell must ensure, among other things, that all employees who manufacture and process food are "qualified" to do so and that the manufacturing facilities develop and implement a "food safety plan" that includes "hazard analysis," preventative controls and oversight and management of preventative controls.[103] FDA regulations implement the FDCA. Among the FDA regulations relevant here are those codified at 21 C.F.R. Parts 110 and 117, which provide, in pertinent part[104]:

• "All operations in the . . . manufacturing, packaging, and storing of food shall be conducted in accordance with adequate sanitation principles. Appropriate quality control operations shall be employed to ensure that food is suitable for human consumption and that food-packaging materials are safe and suitable. Overall sanitation of the plant shall be under the supervision of one or more competent individuals assigned responsibility for this function."[105]
• The "operator . . . in charge of a facility"[106] "must prepare . . . and implement a written food safety plan, "[107] which must include provisions for:
• "conducting] a hazard analysis to identify and evaluate based on experience, illness data, scientific reports, and other information, known or reasonably foreseeable hazards for each type of food manufactured, processed, packed, or held at your facility to determine whether there are any hazards requiring a preventive control"[108];
• "identifying] and implementing] preventative controls to provide assurances that any hazards requiring a preventative control will be significantly minimized or prevented and the food manufactured, processed, packed, or held by [the] facility will not be adulterated under section 402 of the [FDCA]"[109];
\ • implementing "[p]rocess controls . . . to ensure the control of parameters during operations such as heat processing, acidifying, irradiating, and refrigerating foods"[110];
• implementing "[s]anitation controls . . . to ensure that the facility is maintained in a sanitary condition adequate to significantly minimize or prevent hazards such as environmental pathogens, biological hazards due to employee handling, and food allergen hazards"[111];
• "establish[ing] a written recall plan for the food . . . that describe[s] the steps to be taken, and assign[s] responsibility for taking those steps"[112];
• "monitor[ing] the preventative controls with adequate frequency to provide assurance that they are consistently performed"[113];
• "verify[ing] that preventative controls are consistently implemented and are effectively and significantly minimizing or preventing the hazards . . . includ[ing] . . . product testing"[114];
• "document[ing] the monitoring of preventative controls"[115]; and o the documentation to be "[r]eview[ed] . . . by (or under the oversight of) a preventative controls qualified individual."[116]

         Under 21 U.S.C. § 333, persons responsible for introduction of adulterated food products into interstate commerce are subject to civil and criminal penalties.[117]

         The Texas Health and Safety Code, Chapter 431 and related rules, govern the manufacturing and distribution of products, including ice cream, at the Brenham plant.[118] In Oklahoma, the Broken Arrow plant is regulated by the Food Safety Rules under Title 35, chapter 37.[119] And in Alabama, the Sylacauga plant is governed under the Rules of State Board of Health, Chapter 420-3-22 for Food Establishment Sanitation, by the Bureau of Environmental Services.[120]

         Despite the far-reaching regulatory schemes that governed Blue Bell's operations at the time of the Listeria contamination, the Complaint contains no allegations that Blue Bell failed to implement the monitoring and reporting systems required by the FDCA, FDA regulations or state statutes (or that it was ever cited for such a failure). Instead, the Complaint stands on the general allegations that "the Defendants breached their fiduciary duties by willfully failing to govern management and to institute any system of corporate controls and reporting at the Company regarding health and safety compliance."[121]

         E. This Litigation

         Following Blue Bell's Listeria crisis, Plaintiff demanded and obtained books and records from BB USA under 8 Del. C. § 220. He then commenced this derivative action on August 14, 2017. Defendants moved to dismiss the Complaint on October 30, 2017. Following the hearing on the motion, the Court requested supplemental submissions from the parties addressing certain issues relating to board oversight duties at the holding company level with respect to the operations of an indirect subsidiary.[122] The Court received the supplemental submissions on June 13, 2018.

         II. ANALYSIS

         The Motion presents several interesting issues, many of which appear to be of first impression. Among them: (1) what are the fiduciary obligations of directors of a holding company with respect to oversight of the company's indirect operating subsidiary, particularly when the subsidiary, by contract, is managed exclusively by a separate entity?; (2) do corporate officers owe Caremark duties?; and (3) if not, what are the fiduciary duties owed by an officer in a derivative case involving "corporate trauma" and by what standard are those duties to be measured? While these issues may well need to be addressed at some point, this is not the case to address them. Before reaching the merits of Plaintiff's derivative claims, the Court must first determine whether Plaintiff has met his burden to plead with particularity a basis for the Court to find demand futility. He has not. Having so concluded, I need not reach Defendants' arguments under Rule 12(b)(6). The analysis begins and ends with demand futility under Rule 23.1.

         "[A] cardinal precept of the General Corporation Law of the State of Delaware is that directors, rather than shareholders, manage the business and affairs of the corporation."[123] Plaintiff's claims against the Officer Defendants and Director Defendants allege harm suffered by BB USA. As such, all parties agree that the claims are derivative. Because stockholder derivative suits "by [their] very nature . . . impinge on the managerial freedom of directors, "[124] our law requires that a stockholder satisfy the threshold demand requirements of Court of Chancery Rule 23.1 before he may assume control of a claim belonging to the corporation. To do so, the plaintiff must demand that the board of directors pursue the claim or, alternatively, demonstrate that a demand on the board would be futile such that the demand requirement should be excused.[125] When a derivative plaintiff elects not to make a demand upon the board, Rule 23.1 places a heightened pleading burden on that plaintiff to meet "stringent requirements of factual particularity that differ substantially from the permissive notice pleadings" permitted by Court of Chancery Rule 8 and facilitated by Court of Chancery Rule 12(b)(6)'s reasonable conceivability standard.[126]

         This Court employs one of two tests when determining whether demand on the board would be futile. The first applies when a plaintiff challenges a decision of the board of directors to take affirmative action.[127] The second, established in Rales v. Blasband, [128] applies where, as here, a plaintiff challenges board inaction such as when a board is alleged to have consciously disregarded its oversight responsibilities.[129] Under the Rales test, the court "must determine whether or not the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand."[130] One basis upon which the court might question the board's independence and disinterestedness under Rales is when the complaint pleads particularized facts regarding board inaction of a nature that would expose the board to "a substantial likelihood" of personal liability.[131] When engaged in this inquiry, the court must be mindful that "the mere threat of personal liability . . . is insufficient."[132]

         "On a motion to dismiss pursuant to Rule 23.1, the Court considers the same documents, similarly accepts well-pled allegations as true, and makes reasonable inferences in favor of the plaintiff-all as it does in considering a motion to dismiss under Rule 12(b)(6)."[133] Given the heightened pleading requirements of Rule 23.1, however, "conclusory allegations of fact or law not supported by allegations of specific fact may not be taken as true."[134] Because the Complaint cites documents that Plaintiff obtained through his Section 220 demand, I may consider aspects of those documents under the incorporation-by-reference doctrine to determine whether the Complaint contains sufficient allegations to demonstrate demand futility.[135] I may also consider matters subject to judicial notice, including state and federal statutes and regulations.[136]

         A. Demand Is Not Excused as to Count I

         Count I purports to state a "derivative claim for breach of fiduciary duties of loyalty and care for knowingly disregard [sic] of contammination [sic] risks and failure to oversee Blue Bell's operation and compliance" against Paul Kruse (as BB USA CEO) and Bridges (as BB USA Vice President of Operations).[137] At first glance, one might surmise that Plaintiff is attempting to state a Caremark claim against corporate officers. In their Motion, Defendants vigorously maintain that a Caremark theory of liability does not work with respect to corporate officers.[138]Plaintiff apparently now agrees that Caremark is not implicated by Count I and, instead, characterizes Count I as a claim for breach of the duty of care arising out of the Officer Defendants' alleged failure to discharge their "direct acknowledged responsibility for the management of the Company's operations and the detection, prevention and correction of contamination-related problems."[139] In response, Defendants argue that the claim fails either because the officers are entitled to the presumptions of the business judgment rule or because Delaware law, in this circumstance, would require Plaintiff to allege that the officers acted in bad faith, which the Complaint fails to do.[140]

         As best I can tell, our courts have yet to decide the nature and scope of a corporate officer's fiduciary duties in the context of alleged oversight failures. For its part, the academy has engaged in a thorough debate of officer liability issues and, in the midst of the debate, several commentators have expressed surprise that the Delaware courts have yet to provide any specific direction.[141] While I certainly appreciate the need for guidance in this important area of our law, no new guidance will be forthcoming here. For reasons explained below, Plaintiff cannot pass through the demand futility filter. Under these circumstances, any analysis of the officer liability issues would be pure dicta.[142]

         Plaintiff maintains that the Officer Defendants face a "substantial likelihood of liability" and that a majority of the BB USA Board members have such close ties to the Officer Defendants, particularly Paul Kruse, that they would be incapable of impartially considering a demand to bring a fiduciary duty claim against them on behalf of BB USA. For purposes of this demand futility analysis only, I will assume, without deciding, that the Officer Defendants face a substantial likelihood of liability on Count I. Even so, Plaintiff's allegations of conflicts against a majority of the BB USA Board fall well short of the particularity mark set by Rule 23.1. Consequently, demand as to Count I is not excused.[143]

         At the time Plaintiff filed his Complaint, BB USA's "demand" Board comprised eleven members: Barnhill, Bridges, Dickson, Ehlert, Rankin, Reimann, Ryan, MacInerney, Paul Kruse, Howard Kruse and Jim Kruse.[144] BB USA's certificate of incorporation provides that the total votes possessed by this eleven-member Board is fifteen.[145] Moo's designee (Reimann) is entitled to exercise five of the fifteen votes and each of the other directors is entitled to exercise one vote.[146] Accordingly, for demand excusal purposes, a majority of the Board consists of a collection of BB USA directors holding a majority of the Board's voting power (i.e., at least eight votes).[147] Plaintiff concedes that Reimann and Ryan are independent.[148] As noted, together these directors possess six of the fifteen total Board votes. Plaintiff also concedes that, to avoid dismissal, he must have pled with particularity facts that raise a reasonable doubt regarding the independence of at least eight of the remaining directors.[149] As pled, the Complaint falls short of this target.

         The inquiry for director independence is contextual and asks whether a director's decision was "based on the merits of the subject before the board rather than on extraneous considerations or influences."[150] "To show lack of independence, the plaintiff must allege that a director is so beholden to an interested director that his or her discretion would be sterilized."[151] Specifically, the relationship between the challenged director and the interested director must be "so close that one could infer that the non-interested director would be more willing to risk his or her reputation than risk the relationship with the interested director."[152] With these standards in mind, the Court's function is to "count heads."[153]

         1. Bridges, Howard Kruse and Jim Kruse

         Directors Bridges, Howard Kruse and Jim Kruse are members of Paul Kruse's immediate or extended family. Defendants concede, for purposes of their Motion, that these directors "could not disinterestedly consider a ...

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