City of Pontiac General Employees' Retirement System v. Bush

CourtDistrict Court, N.D. California
DecidedJune 24, 2021
Docket4:20-cv-06651
StatusUnknown

This text of City of Pontiac General Employees' Retirement System v. Bush (City of Pontiac General Employees' Retirement System v. Bush) is published on Counsel Stack Legal Research, covering District Court, N.D. California primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
City of Pontiac General Employees' Retirement System v. Bush, (N.D. Cal. 2021).

Opinion

1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 CITY OF PONTIAC GENERAL Case No. 20-cv-06651-JST (TSH) EMPLOYEES’ RETIREMENT SYSTEM, 8 Plaintiff, DISCOVERY ORDER 9 v. Re: Dkt. No. 62 10 WESLEY G. BUSH, et al., 11 Defendants. 12 13 The City of Pontiac General Employees’ Retirement System (“Plaintiff”) has filed this 14 shareholder derivative action on behalf of nominal party Cisco Systems, Inc., against its Board of 15 Directors and Chief Executive Officer for breach of fiduciary duty, unjust enrichment and 16 violation of federal securities laws. This lawsuit follows Plaintiff’s August 5, 2020 pre-suit 17 demand on the Cisco Board, which was denied on December 10, 2020, after this lawsuit was filed. 18 In brief, the Complaint alleges that since at least 2015, Defendants publicly misrepresented 19 Cisco’s success as an industry leader in top leadership diversity and as a company that effectively 20 promotes diversity throughout its ranks. The Complaint further alleges that in reality, there is a 21 visible absence of African Americans in leadership positions across Cisco, including no African 22 Americans on Cisco’s Board. Cisco’s senior Executive Leadership Team is likewise devoid of 23 any African Americans, and the noticeable lack of African Americans at Cisco extends deep into 24 the company, that is to the vice president, leadership and people manager levels as well. Although 25 each of the Defendants was aware of this reality between 2015 and 2020, and that this situation 26 has persisted for years, Defendants repeatedly represented that “Cisco regularly evaluates the need 27 for board refreshment” and that, “[a]s a part of its consideration of director succession,” the Board 1 Systems, Inc., Proxy Statement (Sch. 14A) (Oct. 22, 2019) at 4-5. 2 In response to the Complaint, the individual Defendants have filed a motion to dismiss at 3 ECF No. 45. In addition, nominal Defendant Cisco has filed a motion to dismiss or terminate the 4 derivative litigation. ECF No. 48. The governing statute provides that “[i]n any private action 5 arising under this chapter, all discovery and other proceedings shall be stayed during the pendency 6 of any motion to dismiss, unless the court finds upon the motion of any party that particularized 7 discovery is necessary to preserve evidence or to prevent undue prejudice to that party.” 15 8 U.S.C. § 78u-4(b)(3)(B). See In re Marvell Tech. Group Ltd. Derivative Litig., 2007 WL 9 1545194, *2 (N.D. Cal. May 29, 2007) (“The discovery stay of sub-part (b)(3) applies to ‘any 10 private action arising under’ the Securities Exchange Act of 1934.”); In re Altera Corp. Deriv. 11 Litig., 2006 WL 2917578, *1 (N.D. Cal. Oct. 11, 2006) (“The federal courts have previously 12 applied the PSLRA discovery stay to shareholder derivative actions alleging violations of federal 13 law.”). 14 The Court treats the joint discovery letter brief at ECF No. 62 as a motion by the Plaintiff 15 for particularized discovery. Plaintiff advances no argument why discovery is necessary to 16 preserve evidence. Therefore, the Court must decide whether discovery is necessary “to prevent 17 undue prejudice to that party.” 18 A. Whether the Pending Motions Warrant Discovery 19 As noted, there are two pending defense motions that seek to end this case. If Plaintiff 20 needs discovery to be in a position to oppose either motion, then denying it that discovery would 21 unduly prejudice it. But if Plaintiff can be expected to oppose both motions without doing any 22 discovery, there would be no undue prejudice in disallowing discovery. So, the Court will analyze 23 the nature of these motions. 24 1. ECF No. 45 25 This is a motion to dismiss the Complaint brought by the individual Defendants. They 26 make four arguments. First, Defendants argue that the allegations in paragraph 101 of the 27 Complaint fail to satisfy the particularity requirement in Federal Rule of Civil Procedure 1 of the Exchange Act. Third, Defendants argue that the Complaint fails to state a claim for breach 2 of fiduciary duty. Fourth, Defendants argue that the Complaint fails to state a claim for unjust 3 enrichment. 4 This motion to dismiss is a pure attack on the sufficiency of the Complaint as a pleading. 5 No discovery is necessary for Plaintiff to respond to this motion. 6 2. ECF No. 48 7 This motion by Cisco is two different things. First, it is a motion to dismiss, arguing that 8 the Complaint fails to satisfy the particularity requirement in Rule 23.1(b)(3). This is a pleadings 9 motion (duplicative of the same argument brought by the individual Defendants), and no 10 discovery is necessary for Plaintiff to respond to it. 11 Second, this is a motion to terminate the derivative litigation on the ground that Cisco’s 12 Board performed a reasonable and good faith investigation and that its resulting decision to reject 13 Plaintiff’s demand that the Board pursue these claims is entitled to deference under the business 14 judgment rule. This type of motion can warrant discovery. 15 “In Burks v. Laster, 441 U.S. 471 (1979), the Supreme Court held that a special litigation 16 committee has the power to terminate a derivative action to the extent allowed by the law of the 17 state of incorporation.” Johnson v. Hui, 811 F. Supp. 479, 483 (N.D. Cal 1991). Here, it appears 18 that Cisco was a California corporation at the time Plaintiff made its demand through the time the 19 Board rejected it, see Complaint ¶ 23; Declaration of Dean Kristy, ECF No. 50, ¶¶ 18, 20; id., Ex. 20 A (Cisco’s Secretary certified the December 10 Board Resolution “on behalf of Cisco Systems, 21 Inc., a California corporation”), though at the time the motion to terminate was filed, as today, it 22 was a Delaware corporation. Kristy Decl., ECF No. 50, ¶ 19. California and Delaware both 23 recognize the special litigation committee defense. See Desaigoudar v. Meyercord, 108 Cal. App. 24 4th 173, 185 (2003); Kaplan v. Wyatt, 484 A.2d 501, 504 (Del. Ct. Chancery 1984), aff’d, 499 25 A.2d 1184 (Del. 1985). At oral argument, the parties agreed that for purposes of this discovery 26 motion, it is immaterial which state’s law governs the underlying motion to terminate. 27 “Because the power to bring a motion to terminate a shareholder derivative suit . . . 1 by the Federal Rules of Civil Procedure is unclear, at least at first glance.” Johnson, 811 F. Supp. 2 at 484. It appears that the most common approach is to treat it as a motion under Federal Rule of 3 Civil Procedure 23.1. See id.; see also IP Telesis Inc. v. Velocity Networks Inc., 2013 WL 4 12126105, *2 (C.D. Cal. Feb. 8, 2013) (“A corporation may terminate the action by filing a 5 motion pursuant to Federal Rule of Civil Procedure (‘Rule’) 23.1 for failing to meet the 6 requirements of a derivative action.”); Kokocinski v. Collins, 850 F.3d 354, 361 (8th Cir. 2017) 7 (“We agree with the district court and the Eleventh Circuit that the closest fit for a motion to 8 terminate in the Federal Rules is Rule 23.1(c).”); Peller v. Southern Co., 911 F.2d 1532, 1536 9 (11th Cir. 1990) (“[S]hareholder derivative suits are governed by Fed. R. Civ. P. 23.1.”).

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Related

Burks v. Lasker
441 U.S. 471 (Supreme Court, 1979)
Kaplan v. Wyatt
484 A.2d 501 (Court of Chancery of Delaware, 1984)
Stoner v. Walsh
772 F. Supp. 790 (S.D. New York, 1991)
Johnson v. Hui
811 F. Supp. 479 (N.D. California, 1991)
People v. Hurst
290 P. 887 (California Court of Appeal, 1930)
Charlotte Kokocinski v. Arthur D. Collins, Jr.
850 F.3d 354 (Eighth Circuit, 2017)
William R. Deal v. Tugalo Gas Company, Inc.
991 F.3d 1313 (Eleventh Circuit, 2021)
Peller v. Southern Co.
911 F.2d 1532 (Eleventh Circuit, 1990)

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City of Pontiac General Employees' Retirement System v. Bush, Counsel Stack Legal Research, https://law.counselstack.com/opinion/city-of-pontiac-general-employees-retirement-system-v-bush-cand-2021.