Wang v. Page et al
Filing
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ORDER by Judge Hamilton granting 15 Motion to Dismiss (pjhlc2, COURT STAFF) (Filed on 8/10/2012)
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UNITED STATES DISTRICT COURT
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NORTHERN DISTRICT OF CALIFORNIA
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JUDY WANG,
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Plaintiff(s),
No. C 12-1785 PJH
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v.
ORDER GRANTING MOTION TO
DISMISS
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LARRY PAGE, et al.,
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Defendant(s).
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Defendants’ motion to dismiss plaintiff’s verified shareholder derivative complaint
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came on for hearing before this court on August 8, 2012. Plaintiff Judy Wang (“plaintiff”)
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appeared through her counsel, Joseph Profy. Defendants Larry Page, Sergey Brin, Eric E.
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Schmidt, L. John Doerr, John L. Hennessy, Ann Mather, Paul S. Otellini, K. Ram Shiram,
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Shirley M. Tilghman, Nikesh Arora, and Patrick Pichette and nominal party Google, Inc.
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(collectively, “defendants”) appeared through their counsel, Boris Feldman. Having read
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the parties’ papers and carefully considered their arguments and the relevant legal
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authority, and good cause appearing, the court hereby GRANTS defendants’ motion for the
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reasons stated at the hearing and as follows:
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BACKGROUND
This is a shareholder derivative action brought by plaintiff on behalf of Google Inc.,
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against certain current and former Google directors and officers. Plaintiff alleges that
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defendants allowed certain Canadian pharmacies to advertise via Google’s search engine
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for the sale of prescription medications to be imported to the United States, which was
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unlawful, and resulted in the entry of a non-prosecution agreement between Google and
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the United States Department of Justice and the payment of a $500 million fine. See
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generally Verified Shareholder Derivative Complaint (Dkt. 1). Plaintiff alleges that Google
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was forced to forfeit this money as a result of defendants’ breaches of fiduciary duties.
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Id. ¶ 89.
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As a result of these alleged breaches, plaintiff sent a demand letter to defendants on
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September 8, 2011. The letter demanded that the Board undertake an independent
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internal investigation as to the alleged violations and commence a civil action against each
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member of management. On September 27, 2011, Google’s general counsel
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acknowledged receipt of the demand letter, stated that it would be forwarded to the board
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of directors, and that “[he] or they would get back to you on your demand.” The letter also
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stated that the “demand does not provide sufficient information regarding” the plaintiff, and
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asked for further information regarding the amount and dates of her stock ownership.
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Plaintiff did not respond to the letter. After waiting over six months (until April 10, 2012),
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plaintiff filed the complaint in this case. The complaint alleges six causes of action (labeled
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“counts”) against defendants: (1) breach of fiduciary duties of care, loyalty, and good faith
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by disseminating false and misleading information; (2) breach of fiduciary duty of good faith
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for failing to maintain internal controls; (3) breach of fiduciary duties of care, loyalty,
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reasonable inquiry, oversight, good faith, and supervision for failing to properly oversee and
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manage the company; (4) unjust enrichment; (5) abuse of control; and (6) gross
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mismanagement.
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DISCUSSION
Because a derivative suit is premised on the idea that the cause of action belongs to
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the corporation, any shareholder must make a demand on the board (or allege that such a
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demand would have been futile) before filing suit. The demand must be made in writing,
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be addressed to the board, and provide sufficient specificity to “give the directors a fair
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opportunity to initiate the action.” Shlensky v. Dorsey, 574 F.2d 131, 141 (3rd Cir. 1978).
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“At a minimum, a demand must identify the alleged wrongdoers, describe the factual basis
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of the wrongful acts and the harm caused to the corporation, and request remedial relief.”
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Allison v. General Motors, 604 F.Supp. 1106, 1117 (D. Del. 1985). After a demand is
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made, the board of directors can decide whether to pursue litigation, resolve the grievance
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before litigation, or refuse the demand (allowing the shareholder who made the demand to
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file suit herself). Zapata Corp. v. Maldonado, 430 A.2d 779, 783 (Del. 1996). There is no
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set period of time within which a board must make this decision; instead, Delaware law
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requires the shareholder to “allow the board a reasonable time to investigate and respond
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to the claim before filing suit or the court will consider that suit premature.” Charal Inv. Co.
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v. Rockefeller, 1995 WL 684869, *3 (Del. Ch. Nov. 7, 1995). Because Google is
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incorporated in Delaware, issues relating to shareholder demands are governed by
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Delaware law. See In re Silicon Graphics Sec. Litig., 183 F.3d 970, 989-90 (9th Cir. 1999).
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Plaintiff’s demand was sent on September 6, 2011, Google’s response was sent on
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September 27, 2011, and plaintiff filed this suit on April 10, 2012. While plaintiff is correct
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that certain language in Google’s response indicated that a further response would be
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forthcoming (i.e., the general counsel’s statement that “[he] or they would get back to you
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on your demand.”), plaintiff was not justified in ignoring Google’s request for information as
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to her stock ownership. Federal Rule of Civil Procedure 23.1 requires an individual seeking
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to sue derivatively to be “a shareholder or member at the time of the transaction being
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complained of,” and courts have found that this requirement also applies to individuals
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making a demand on a board of directors. See Richelson v. Yost, 738 F.Supp.2d 589, 598-
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99 (E.D. Pa. 2010) (citing Potter v. Hughes, 546 F.3d 1051, 1057 (9th Cir. 2008)). Google
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was therefore justified in seeking information as to plaintiff’s stock holdings before providing
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a substantive response to the demand, as it “should not be expected or forced to
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investigate allegations from one who is neither (1) entitled to make the demand; nor (2) file
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a derivative suit.” Richelson, 738 F.Supp.2d at 599. Because plaintiff offered no
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information as to her stock holdings, and because plaintiff’s name does not appear on
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Google’s shareholder lists1, Google had no way of knowing whether the demand letter was
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sent from an actual shareholder. As Richelson and other cases have held, a corporation
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has no obligation to investigate a demand if the corporation cannot verify whether the
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Shares of stock are often held under the name of a brokerage firm, rather than
under the name of an individual shareholder. As a result, Google was not able
to independently ascertain whether plaintiff was a shareholder.
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demand was made by an actual shareholder. See, e.g., Potter v. Hughes, 546 F.3d at
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1057 (plaintiff “failed to make a valid demand about that transaction because she was not
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named in the demand letter.”); Smachlo v. Birkelo, 576 F.Supp. 1439, 1445 (D. Del. 1983)
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(“the identity of the shareholder requesting board action is [] important information for the
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board and the Court cannot expect a board of directors to act upon a shareholder’s request
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without such information.”). Google’s letter may have asked too much by seeking “written
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confirmations reflecting” plaintiff’s stock ownership, as it cannot identify any authority
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showing that such confirmation is required to be provided with a demand letter. However,
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plaintiff could have sent a letter objecting to the request for written confirmation, while still
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responding to the first part of Google’s request, asking her to “please advise [Google] as to
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the amount and dates of her holdings in Google stock.” Instead, plaintiff did not provide
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this information until after this suit was filed. According to Google, plaintiff then declined its
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offer to investigate the demand, stating her belief that the passage of time alone constituted
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a refusal of the demand. (See Dkt. 15 at 5.)
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The court disagrees with plaintiff. First, the passage of time alone does not
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automatically constitute refusal of a demand. See, e.g., Lucas v. Lewis, 2009 WL 7847026
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(C.D. Cal. Apr. 14, 2009) (passage of four months between demand letter and filing of
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complaint did not constitute a refusal); Stoller v. Funk, 2010 WL 3991781 (W.D. Okla. Oct.
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12, 2010) (passage of 10 months did not constitute refusal). As stated above, there is no
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set period of time during which the board must act on a demand, but rather, “the amount of
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time needed for a response will vary in direct proportion to the complexity of the
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technology, quantitative, and legal issues raised by the demand.” Charal, 1995 WL 684869
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at *3. Second, because plaintiff did not provide stock ownership details until after this suit
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was filed, the court finds that plaintiff did not meet the requirements of Rule 23.1, which
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requires both a proper demand and a refusal of that demand before filing suit. Accordingly,
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plaintiff’s complaint is DISMISSED without prejudice. Now that plaintiff has provided stock
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ownership details, her demand is complete, and Google is obligated to investigate the
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demand and either pursue litigation on its own, resolve the grievance
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without litigation, or refuse the demand, which would allow plaintiff to re-file this suit. To
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prevent any additional unnecessary delay, the court sets a deadline for Google’s response.
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If Google has not provided a substantive response to plaintiff’s demand within six months
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from the date of this order, such non-response shall constitute a refusal, and plaintiff shall
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be permitted to re-file this suit.
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Finally, the court notes that plaintiff has conceded that the causes of action for
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abuse of control and gross mismanagement are redundant of the breach of fiduciary duty
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claims, so the causes of action for abuse of control and gross mismanagement (counts V
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and VI of the complaint) are DISMISSED with prejudice. The Clerk shall close the file.
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IT IS SO ORDERED.
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Dated: August 10, 2012
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______________________________
PHYLLIS J. HAMILTON
United States District Judge
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