IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
PARK EMPLOYEES’ AND ) RETIREMENT BOARD EMPLOYEES’ ) ANNUITY AND BENEFIT FUND OF ) CHICAGO, derivatively and on behalf of ) Bioscrip, Inc., ) ) Plaintiff, ) ) v. ) C.A. No. 11000-VCG ) RICHARD M. SMITH, MYRON Z. ) HOLUBIAK, CHARLOTTE W. ) COLLINS, SAMUEL P. FRIEDER, ) DAVID R. HUBERS, RICHARD L. ) ROBBINS, STUART A. SAMUELS, ) GORDON H. WOODWARD, ) KIMBERLEE C. SEAH, HAI V. TRAN, ) PATRICIA BOGUSZ, KOHLBERG & ) CO., L.L.C., KOHLBERG ) MANAGEMENT V, L.L.C., ) KOHLBERG INVESTORS V, L.P., ) KOHLBERG PARTNERS, V, L.P., ) KOHLBERG TE INVESTORS V, L.P., ) KOCO INVESTORS V, L.P., and ) JEFFERIES LLC, ) ) Defendants, ) ) and ) ) BIOSCRIP, INC., ) ) Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: January 19, 2017 Date Decided: April 18, 2017 Pamela S. Tikellis, A. Zachary Naylor, and Vera G. Belger, of CHIMICLES & TIKELLIS LLP, Wilmington, Delaware; OF COUNSEL: Catherine Pratsinakis, of CHIMICLES & TIKELLIS LLP, Haverford, PA; Carol V. Gilden, of COHEN MILSTEIN SELLERS & TOLL PLLC, Chicago, Illinois; Richard A. Speirs and Kenneth Rehns, of COHEN MILSTEIN SELLERS & TOLL PLLC, New York, New York, Attorneys for Plaintiff Park Employees’ and Retirement Board Employees’ Annuity and Benefit Fund of Chicago.
Stephen P. Lamb and Matthew D. Stachel, of PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, Wilmington, Delaware; OF COUNSEL: Leslie Gordon Fagen, Daniel J. Kramer, and Robert N. Kravitz, of PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, New York, New York, Attorneys for Defendants Kohlberg & Co., L.L.C., Kohlberg Management V, L.L.C., Kohlberg Investors V, L.P., Kohlberg Partners V, L.P., Kohlberg TE Investors V, L.P., and KOCO Investors V, L.P.
David C. McBride, Martin S. Lessner, Tammy L. Mercer, and Nicholas J. Rohrer, of YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; OF COUNSEL: Jonathan Rosenberg and William J. Sushon, of O’MELVENY & MYERS LLP, New York, New York, Attorneys for Defendant Jefferies LLC.
Gregory P. Williams, Brock E. Czeschin, and Sarah A. Clark, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; OF COUNSEL: Jay Lefkowitz, P.C., Joseph Serino, Jr., P.C., and Shireen A. Barday, of KIRKLAND & ELLIS LLP, New York, New York, Attorneys for Nominal Defendant BioScrip, Inc. and Defendants Richard M. Smith, Myron Z. Holubiak, Charlotte W. Collins, Samuel P. Frieder, David R. Hubers, Richard L. Robbins, Stuart A. Samuels, Gordon H. Woodward, Kimberlee C. Seah, Hai V. Tran, and Patricia Bogusz.
GLASSCOCK, Vice Chancellor I am in the unusual position here of issuing a second decision granting a
motion to dismiss in a single matter. Court of Chancery Rule 15(aaa) is designed to
prevent such a situation. Here, under the good-cause rationale of Rule 15(aaa), I
granted the Defendants’ first motions to dismiss, but allowed the Plaintiff to amend
its complaint.
The case involves the alleged receipt of illegal kickbacks by the Nominal
Defendant, BioScrip, Inc., in connection with sales of a drug, Exjade. The complaint
alleges that the then-Board of Directors and other BioScrip fiduciaries failed to
properly oversee the company, allowing this illegal activity to exist, leading to
damages to BioScrip. The Plaintiff, a BioScrip stockholder, seeks to hold these
fiduciaries liable to the company, via this derivative litigation.
The first incarnation of the Plaintiff’s Complaint (the “Original Complaint”)
sought to excuse demand and justify this derivative proceeding on the not-unusual
allegation that the directors could not exercise their business judgment with respect
to a demand, because of a substantial likelihood that they themselves would be found
liable in the matter. Because, under the unusual facts here, I found that it was clear
at the time the Original Complaint was filed that the composition of the Board would
have changed before such a demand could be considered, I found that the operative
board for demand analysis was not composed of the directors named in the Original
Complaint. Instead, the operative Board consisted largely of new directors, seated
1 on May 11, 2015 (the “May 11 Board”). The Original Complaint did not address
the ability of the May 11 Board to consider a demand. Therefore, I dismissed, but
with leave to refile if the Plaintiff considered the May 11 Board also incapable of
addressing a demand to litigate. The Plaintiff did so, and the Defendants filed new
Motions to Dismiss, addressed in this Memorandum Opinion.
A complaint may proceed derivatively on behalf of a corporation without
demand first being made upon the board of directors, but only upon a showing that
such demand should be excused as futile. The Plaintiff here has failed to plead facts
that, if true, raise a reasonable doubt that the May 11 Board is capable of applying
its business judgment to a demand that such litigation on behalf of BioScrip proceed;
accordingly, demand is not excused, and the Motions to Dismiss are granted. My
reasoning follows.
I. BACKGROUND1
This matter may proceed derivatively only if the Plaintiff can demonstrate that
a demand on the Board of Directors is excused. The suit was filed when Board
membership was in a state of flux, raising the question of whether the outgoing or
incoming directors were the fiduciaries against whom demand futility must be
measured. I issued a Memorandum Opinion in this matter on May 31, 2016
1 For purposes of evaluating the Defendants’ Motions to Dismiss, the facts are drawn from the well-pled allegations of Plaintiff’s Verified Amended Stockholder Derivative Complaint (the “Amended Complaint” or “Am. Compl.”), and all documents incorporated by reference therein. 2 addressing that question (“Park Emps’ I”).2 I found that, contrary to the Plaintiff’s
argument, the proper Board against which to make demand was the Board of
Directors as constituted on May 11, 2015.3 Due to the unique facts of the matter and
because the Original Complaint as pled—focusing on the composition of the Board
on May 7, 2015—was insufficient to support a finding of demand futility, I also
found it appropriate to allow the Plaintiff an opportunity to move to amend its
complaint, under the good cause exception to Court of Chancery Rule 15(aaa).4 The
Plaintiff did so, amending its complaint and alleging that demand would be futile as
to the May 11 Board. The Defendants have moved to dismiss the Amended
Complaint under Rule 23.1 and Rule 12(b)(6). The following factual recitation is
sufficient to evaluate Defendants’ motions pursuant to Rule 23.1 as they relate to the
May 11 Board.5 Interested parties are referred to the more detailed statement of facts
in Park Emps’ I.
A. The Parties
The Plaintiff is a stockholder of BioScrip, Inc. and has been a stockholder at
all relevant times.6 The Plaintiff purports to bring this action derivatively on behalf
2 Park Emps.' & Ret. Bd. Emps.' Annuity & Benefit Fund of Chicago v. Smith, 2016 WL 3223395 (Del. Ch. May 31, 2016). 3 Id. at *3. 4 Id. at *2–3. 5 Given my decision below, I need not address Defendants’ motions under Rule 12(b)(6). 6 Motion for Leave to File an Amended Complaint, Ex. A (the “Amended Complaint or “Am. Compl.”) ¶ 22. See also Order (Sept. 20, 2016) (Dkt. No. 98) (granting Motion for Leave to File an Amended Complaint). 3 of BioScrip, Inc. Nominal Defendant BioScrip, Inc. (“BioScrip”) is a Delaware
corporation that provides infusion services, home health services, and pharmacy
benefit management (“PBM”) services nationwide.7
Defendant Smith has been the President and CEO of BioScrip since 2011 and
previously worked as the COO starting in 2009.8 Smith has also served on the Board
since 2009.9 Defendant Holubiak served as a director from 2005 until June 1, 2016.10
Starting in 2005, Holubiak served on the Audit Committee, the Management
Development and Compensation Committee (the “Compensation Committee”), and
the Corporate Strategy Committee.11 Beginning in 2013, Holubiak also served on
the Governance, Compliance and Nominating Committee (the “Governance
Committee”).12
Defendants David R. Hubers, Charlotte W. Collins, Stuart A. Samuels,
Samuel P. Frieder, and Gordon H. Woodward all left the BioScrip Board on May
11, 2015, but were directors at all times relevant to any liability (collectively with
Smith and Holubiak, the “Director Defendants”).13 Defendants Patricia Bogusz, Hai
V. Tran, and Kimberlee C. Seah were BioScrip officers at all relevant times (the
7 Am. Compl. ¶¶ 1, 23. 8 Id. at ¶ 24. 9 Id. 10 Id. at ¶ 25. 11 Id. 12 Id. 13 See id. at ¶¶ 26–30. 4 “Officer Defendants” and collectively with the Director Defendants, the “Individual
Defendants”).14
Defendants Kohlberg & Co., L.L.C., Kohlberg Management V, L.L.C.,
Kohlberg Investors V, L.P., Kohlberg Partners V, L.P., Kohlberg TE Investors V,
L.P. and KOCO Investors V., L.P. (collectively, “Kohlberg”) consist of various
Delaware LLCs and partnerships.15 Before the stock offerings at issue in this matter,
Kohlberg beneficially owned approximately 26.2% of BioScrip’s outstanding
shares. Kohlberg also held the right to appoint two directors to the BioScrip Board
and accordingly designated two of its senior executive officers—Frieder and
Woodward—to the Board.16
Defendant Jefferies LLC (“Jefferies”) is a global investment banking firm and
a Delaware LLC.17 BioScrip hired Jefferies to advise it in connection with a shelf-
registration “leading up to the April 2013 Offering in which [BioScrip] and Kohlberg
sold [BioScrip securities and] the August 2013 Offering in which Kohlberg (by and
through its Board designees, Frieder and Woodward) sold” BioScrip securities.18
Jefferies also was to advise BioScrip in connection with BioScrip’s possible sale of
its PBM business segment and possibly the entire company.19 Additionally, Jefferies
14 Id. at ¶¶ 31–33. 15 Id. at ¶ 34. 16 Id. 17 Id. at ¶ 35. 18 See id. 19 Id. 5 “served as underwriter for the April 2013 Offering.”20
B. Relevant Non-parties
Christopher S. Shackelton is the co-founder and managing partner of
Coliseum Capital Management, LLC (“Coliseum”).21 On March 9, 2015, in
connection with a securities purchase agreement with Coliseum, Shackelton was
appointed to the BioScrip Board and currently serves as a member of the Board’s
Audit and Compensation Committees.22 Shackelton “also has a significant business
relationship with BioScrip.”23 Since November 16, 2012, Shackelton has been a
member of the board of directors of LHC Group, Inc. (“LHC”), of which
Coliseum—the LLC that Shackelton founded—owns 23%.24 LHC purchased two
BioScrip operating subsidiaries in April 2014 that together brought in approximately
$72.6 million in revenues in the year prior to their sale.25 Additionally, Jefferies “is
a longtime advisor to LHC” and served as an underwriter on LHC’s initial public
offering as well as its second stock offering.26 LHC also “presented at Jefferies’
2016 Annual Healthcare Conference.”27
20 Id. 21 Id. at ¶ 36. 22 Id. 23 Id. 24 Id. 25 Id. 26 Id. 27 Id. 6 R. Carter Pate has served on the Board since May 11, 2015.28 Upon
Holubiak’s resignation on June 1, 2016, Pate took over as Chairman of the Board.29
Pate is also Chairman of the Audit Committee and a member of the Compensation
Committee.30 Pate was the “Global and U.S. Managing Partner of the Healthcare
Practice at PriceWaterhouse Coopers (‘PWC’)” from 2007 until 2010.31 It was
during this time that, “while under Pate’s management, PWC audited Novartis’
financial statements and internal controls.”32
Michael Goldstein has served as a member of the Board since May 11, 2015.33
Goldstein currently chairs the Governance Committee and is a member of the Audit
Committee.34 Goldstein “has been an advisor to Jefferies & Company Inc. (an
affiliate of Jefferies Group LLC) since 2011.”35 An April 16, 2012 press release
named Goldstein to the first “six distinguished members” of the “Global Senior
Advisory Board” of Jefferies Group Inc.—the predecessor to Jefferies Group LLC.36
This advisory board was established by Richard B. Handler, who is the Chairman
and CEO of Jefferies Group LLC, which is the parent of Jefferies. An additional
28 Id. at ¶ 41. 29 Id. 30 Id. 31 Id. 32 Id. “PWC audited Novartis financial statements and its internal controls from at least 2001 to 2013.” Id. 33 Id. at ¶ 43. 34 Id. at ¶¶ 25, 43. 35 Id. at ¶ 43. 36 Id. 7 press release issued in September 2012 “continued to tout Goldstein as a member of
the ‘distinguished group’” of the Global Senior Advisory Board.37
Tricia Nguyen has been a director of the Board since 2014 and currently
serves on the Governance Committee.38 David W. Golding has served as a director
on the Board since May 11, 2015.39 Golding currently chairs the Compensation
Committee and serves on the Governance Committee.40 Golding was originally
nominated to the Board in February 2015 “as a result of an Investor Agreement with
Cloud Gate Capital, LLC and DSC Advisors LLC, which at the time owned
approximately 7% of [BioScrip’s] common stock.”41
C. Facts Leading to this Litigation
This matter centers around three areas of alleged misconduct: “(1) a kickback
scheme related to the Company's sale of a drug called Exjade (the ‘Exjade Kickback
Scheme’); (2) the Individual Defendants' fraudulent concealment of the quick and
significant erosion of BioScrip's pharmacy benefit management services segment;
and (3) insider trading in connection with two stock offerings in 2013.” 42 The
intricacies of these areas of alleged misconduct are explored in further detail in Park
37 Id. 38 Id. at ¶ 37. 39 Id. at ¶ 42. 40 Id. 41 Id. 42 Park Emps.’ I, 2016 WL 3223395, at *3. 8 Emps’ I.43 A brief review of the Exjade Kickback Scheme is warranted, however.
In November 2005, Novartis Pharmaceuticals Corporation (“Novartis”) chose
“BioScrip and two others pharmacies to be exclusively responsible for processing
and filling almost all Exjade prescriptions.”44 BioScrip received a rebate from
Novartis of $13 per Exjade shipment.45 This rebate was not illegal.46 In 2007,
BioScrip’s Exjade sales decreased due to increased recognition of the drug’s
negative side effects.47 Novartis then used “threats and substantial financial
kickbacks to incentivize BioScrip’s management” to recommend Exjade refills.48
By late 2007, BioScrip’s refill rates were among the highest of its peers and in early
2008, Novartis raised BioScrip’s per shipment rebate from $13 to $20, allegedly
constituting an illegal kickback.49 By the end of 2008, Novartis would again increase
this rebate to $30.50 BioScrip eventually sold the division involved in this scheme
in approximately May 2012 but retained any liabilities arising from the division.51
D. Procedural History
In response to my holding in Park Emps I, the Plaintiff filed its Motion for
43 Park Emps.’ I, 2016 WL 3223395. 44 Am. Compl. ¶ 71. 45 Id. at ¶ 74. 46 Id. 47 See id. at ¶ 75. 48 Id. at ¶ 77. 49 Id. at ¶ 80. 50 Id. 51 Id. at ¶ 85. 9 Leave to File an Amended Stockholder Derivative Complaint on June 30, 2016 (the
“Motion to Amend”) and attached the Amended Complaint to this Motion. The
Amended Complaint pleads the same counts as the Original Complaint, but adds
alternative allegations that demand would be futile as to the May 11 Board instead
of solely the May 7 Board.
Count I asserts a derivative Caremark claim against the Director Defendants,
Bogusz and Seah for breach of their fiduciary duties of care and loyalty for failing
to oversee BioScrip’s operations and compliance.52 Count II asserts a derivative
claim against the Individual Defendants for breaching their fiduciary duties of care
and loyalty in connection with alleged federal securities disclosure violations.53
Count III asserts a derivative claim against the Director Defendants and Kohlberg
for breaching their fiduciary duties of care and loyalty for causing BioScrip to
engage in unlawful stock offerings in 2013.54 Count IV asserts a derivative Brophy
claim for insider selling against Kohlberg, Frieder, Woodward, Bogusz, Holubiak,
and Hubers.55 Counts V and VI assert derivative claims against Jefferies and
Kohlberg, respectively, for aiding and abetting the breach of fiduciary duty and
52 See id. at ¶¶ 255–267. 53 See id. at ¶¶ 268–272. 54 See id. at ¶¶ 273–282. 55 See id. at ¶¶ 283–287. 10 insider selling claims in the other counts of the Complaint.56 The Plaintiff seeks,
among other things, an award of damages to BioScrip for injuries it sustained
because of the alleged breaches of fiduciary duties and an order requiring the
disgorgement of “ill-gotten gains” from the alleged insider sales transactions.57
The Defendants, in opposition to the Motion to Amend, argued that, pursuant
to Rules 15(aaa) and 23.1, amendment of the Original Complaint would be futile,
because demand on the May 11 Board was not excused. I held a teleconference on
the Motion to Amend on September 13, 2016, after which I granted the Motion.
However, that decision was without prejudice to the Defendants’ arguments under
Rule 23.1. I told the parties I would hear any arguments pursuant to Rule 12(b)(6)
at the same time as I would hear arguments under Rule 23.1, presuming motions to
dismiss. The Defendants so moved, and I heard argument under Rules 23.1 and
12(b)(6) on January 19, 2017. My Memorandum Opinion follows.
II. ANALYSIS
The Defendants have moved to dismiss Plaintiff’s Amended Complaint
pursuant to Court of Chancery Rule 23.1, for failure to make a demand.58 That rule
acknowledges that directors, not stockholders, control the property of the
56 See id. at ¶¶ 288–301. Count VI clarifies that it does not include a claim against Kohlberg for aiding and abetting the claims in Count IV against Defendants Bogusz, Hubers and Holubiak. Id. at ¶ 301. 57 See id. at Prayer for Relief. 58 As well as under Rule 12(b)(6) for failure to state a claim. 11 corporation, including choses-in-action. Rule 23.1 requires that a derivative plaintiff
“allege with particularity the efforts, if any, made by the plaintiff to obtain the action
the plaintiff desires from the directors or comparable authority and the reasons for
the plaintiff's failure to obtain the action or for not making the effort.”59 Where, as
here, a “plaintiff forgoes demand and seeks to proceed with derivative litigation
nonetheless, the action will be dismissed unless the plaintiff can demonstrate that
demand is futile.”60
This Court assesses demand futility using the standard articulated by the
Delaware Supreme Court in Rales v. Blasband.61 Under Rales, the plaintiff must
allege particularized facts that create a reasonable doubt that “the board of directors
could have properly exercised its independent and disinterested business judgment
in responding to a demand,” had one been made.62 An earlier case of the Court,
Aronson v. Lewis,63 addresses the same problem in the specific context of a subset
of such cases: where an action of the current Board is the matter at issue.64 Under
Aronson, the plaintiff must allege particularized facts that create a reasonable doubt
that “the directors are disinterested and independent” or the “challenged transaction
59 Ct. Ch. R. 23.1 (emphasis added). 60 In re Duke Energy Corp. Derivative Litig., 2016 WL 4543788, at *11 (Del. Ch. Aug. 31, 2016). 61 634 A.2d 927 (Del. 1993). 62 Id. at 934. 63 473 A.2d 805 (Del. 1984). 64 See Rales, 634 A.2d at 933–34 (explaining that Aronson does not apply in the absence of a derivative suit challenging an actual business decision by the board of directors that would be considering the demand). 12 was otherwise the product of a valid exercise of business judgment.”65 The analyses
in both Rales and Aronson drive at the same point; they seek to assess whether the
individual directors of the board are capable of exercising their business judgment
on behalf of the corporation.66
The Plaintiff here presents arguments under both the Aronson and the Rales
tests. As an initial matter, the Plaintiff argues under Aronson that demand is futile
with respect to the May 11 Board because, in light of the Board taking an affirmative
action by moving to dismiss under Rule 12(b)(6), the Board has prejudged the claims
in a way that is not in BioScrip’s interest.67 The Plaintiff also argues under Rales
that a majority of the May 11 Board “lacks independence or is otherwise interested
with respect to each of the six Counts” in the Complaint.68 I address each contention
in turn.
A. Moving to dismiss under Rule 12(b)(6) does not excuse demand.
The Plaintiff makes the novel argument that the Board has effectively
demonstrated demand futility here, in that the Board has “taken an affirmative legal
position hostile to BioScrip’s interests” and “fail[ed] to act on an informed basis and
65 Aronson, 473 A.2d at 814. 66 See Park Emps.’ I, 2016 WL 3223395, at *8 n.73. See also Guttman v. Huang, 823 A.2d 492, 500–502 (Del. Ch. 2003) (explaining that “the differences between the Rales and the Aronson tests . . . are only subtly different, because the policy justification for each test points the court toward a similar analysis”). 67 See Pl’s Reply Br. in Support of its Motion for Leave to Amend (“Pl’s Reply Br.”) 10. The Plaintiff adds that demand is also excused for the same reasons under Rales. See id. at 11 n.7. 68 Id. at 16. 13 in good faith” in its authorization of motion practice in this matter.69 Specifically,
the Plaintiff contends that the Board prejudged the merits of the underlying claims
by seeking to dismiss them under Rule 12(b)(6) with prejudice. 70 The Plaintiff
contrasts this case with the more typical derivative case where the directors
considering demand would themselves be defendants. In such a case, according to
the Plaintiff, “substantive defense of conduct is expected.”71 However, the BioScrip
Board changed composition from May 7 to May 11, and only two directors on the
Board face any liability. Therefore, the Plaintiff argues that the Board had an
opportunity to investigate the claims on the merits but “chose not to do so,” and
instead moved to dismiss the Amended Complaint under 12(b)(6) within six weeks
of receiving it.72 The Board, the Plaintiff asserts, could not have chosen this course
of conduct consistent with exercising its business judgment.73
Although I appreciate the creativity of Plaintiff’s argument here, I cannot
agree. The Plaintiff essentially presents a circular argument that demand is excused
because it is clear that the Board would reject demand. However, to my mind, this
is short of a demonstration that the Board would wrongfully reject demand. The
Plaintiff has not alleged facts showing any breach of the Board’s fiduciary duties in
69 See id. at 12. 70 Id. at 14. 71 Id. 72 Id. 73 Id. at 13. 14 this regard. Rather, the Plaintiff settles for a res ipsa loquitur-style argument that
the Board’s decision to move to dismiss under 12(b)(6) immediately equates to a
failure to exercise its business judgment. This, however, approaches tautology. As
this Court has noted, “[t]he failure to sue . . . is not enough to demonstrate an
‘interestedness’ sufficient to sterilize the discretion of the remaining members of the
board,” and “it is the Board’s inaction in most every case which is the raison d’etre
for Rule 23.1.”74
Accordingly, I find that the Plaintiff has not pled particularized facts sufficient
to create a reasonable doubt that demand would be futile as to the May 11 Board
based on those directors authorizing a motion to dismiss under Rule 12(b)(6).
B. The Plaintiff fails to demonstrate that a majority of the Board lacks independence or is otherwise interested with respect to any of the six counts.
As mentioned, pursuant to the Rales test, a plaintiff must allege particularized
facts that create a reasonable doubt that “the board of directors could have properly
exercised its independent and disinterested business judgment in responding to a
demand.”75 “A director cannot consider a litigation demand under Rales if the
director is interested in the alleged wrongdoing, not independent, or would face a
substantial likelihood of liability if suit were filed.”76 When assessing demand
74 Richardson v. Graves, 1983 WL 21109, at *3 (Del. Ch. June 17, 1983). 75 Rales, 634 A.2d at 934. 76 In re China Agritech, Inc. S'holder Derivative Litig., 2013 WL 2181514, at *16 (Del. Ch. May 21, 2013) (internal quotations omitted). 15 futility, the Court must accept all particularized allegations as true as well as any
reasonable inferences that logically follow therefrom.77 In doing so, I must keep in
mind that “Delaware law presumes the independence of corporate directors.”78
Nonetheless, “it is important that the trial court consider all particularized facts pled
by the plaintiffs about the relationships between the director and the interested party
in their totality and not in isolation from each other,” and give such relationships due
weight in assessing demand futility.79 Additionally, when examining a director’s
purported conflict of interest, “there must be some basis to conclude it is material
enough to that director that it could overcome their rational business judgment.”80
Materiality means that an alleged benefit, or an alleged detriment, is “significant
enough in the context of the director’s economic circumstances, as to have made it
improbable that the director could perform her fiduciary duties to the . . .
shareholders without being influenced by her overriding personal interest.”81
The May 11 Board consists of seven directors: Smith, Holubiak, Shackelton,
Pate, Goldstein, Nguyen, and Golding.82 The Plaintiff challenges the
disinterestedness of five of the seven directors on the Board: Smith, Holubiak, Pate,
77 See Brehm v. Eisner, 746 A.2d 244, 255 (Del. 2000). 78 DiRienzo v. Lichtenstein, 2013 WL 5503034, at *12 (Del. Ch. Sept. 30, 2013) (citing Aronson, 473 A.2d at 815). 79 Del. Cty. Empls. Ret. Fund v. Sanchez, 124 A.3d 1017, 1019 (Del. 2015). 80 DiRienzo, 2013 WL 5503034, at *12. 81 Khanna v. McMinn, 2006 WL 1388744, at *20 (Del. Ch. May 9, 2006) (internal quotations omitted). 82 See Compl. ¶¶ 24–25, 36, 39–43. 16 Goldstein, and Shackelton. I assume, without deciding, that Smith and Holubiak are
sufficiently interested to be unable to bring their business judgment to bear.
Consequently, for two of Pate, Goldstein, and Shackelton, the Plaintiff must plead
particularized facts sufficient to create a reasonable doubt as to their ability to
exercise their business judgment in responding to a demand. In this endeavor, the
Plaintiff has failed, as explained below.
1. Pate
The Plaintiff does not contend that Pate has a direct interest in the proposed
derivative litigation, or faces liability therefrom. The Plaintiff’s rationale is much
more attenuated; it alleges that Pate was the “Global and U.S. Managing Partner of
the Healthcare Practice” at PWC from 2007 to 2010, during which time PWC
audited Novartis’ financial statements.83 As a reminder, non-party Novartis is the
pharmaceutical company that allegedly pressured BioScrip to increase its refill rates
of Exjade through the use of illegal kickback rebates, among other things. 84 Even
accepting all reasonable inferences from these alleged facts and considering them in
their totality, the Plaintiff has failed to raise a reasonable doubt as to Pate’s ability
to exercise his business judgment here.
83 See id. at ¶ 41. 84 See id. at ¶¶ 70–85. 17 For all six counts, the Plaintiff argues that demand is excused as to Pate
because of his “conflict involving the Exjade Kickback Scheme.”85 This alleged
conflict stems from “Pate’s involvement with PWC at the time when PWC had
managerial responsibility for auditing Novartis’ financial statements and internal
controls, and Pate’s oversight of PWC’s auditing of Novartis.”86 According to the
Plaintiff, any litigation over the Exjade Kickback Scheme or finding of a breach of
fiduciary duties by the Defendants would reflect negatively on Novartis, and
secondarily “would embarrass Pate professionally and negatively affect his
professional reputation.”87 Moreover, the Plaintiff contends that Pate would be
forced to consider questions about his own competence—or that of others at PWC—
as well as the Exjade Kickback Scheme’s illegality and Novartis’ role in it.88
PWC is not a defendant here. The Plaintiff’s allegation here is that a global
managing partner of an international accounting firm’s healthcare practice would
find a negative judgment against his firm’s former client damaging to his personal
reputation; so much so that he could not bring his business judgment to bear. I
remain unconvinced. The Plaintiff has failed to alleged particularized facts assisting
me with this inference. Other than Pate’s position as the global and U.S. managing
85 See Pl’s Reply Br. 21, 27, 29, 32, 35. 86 Id. at 21. 87 Id. 88 See id. 18 partner of PWC’s healthcare practice, the Plaintiff points to no further facts to show
that Pate was involved in PWC’s audit of Novartis, let alone that he, or PWC, was,
or should have been, aware that Novartis was offering alleged illegal incentives to
BioScrip. Accordingly, I find that the Plaintiff has failed to create a reasonable doubt
as to Pate’s ability to bring his business judgment to bear on this matter.
2. Shackelton and Goldstein
The Plaintiff’s arguments that Shackelton and Goldstein could not exercise
their business judgment in the case of a demand are reminiscent of its assertions
regarding Pate, rejected above. Again, the Plaintiff does not contend that these
directors face liability in the proposed derivative action. The Plaintiff relies instead
on these directors’ relationship with Jefferies, which is a Defendant here. Jefferies
served as a financial advisor to BioScrip. The Plaintiff, in Count V, brings an aiding
and abetting claim against Jefferies, arguing that Jefferies assisted in the wrongful
conduct connected to the Individual Defendants’ breach of their fiduciary duties.89
The Plaintiff’s allegations against Goldstein and Shackelton do not concern these
two directors’ connections to the directors and officers who allegedly, with the
advice of Jefferies, breached their fiduciary duties. Rather, the Plaintiff’s allegations
focus on the connections of Goldstein and Shackelton to Jefferies, the alleged aider
and abettor, itself. Alleged connections to an aider and abettor could, I presume,
89 See Compl. ¶¶ 288–294. 19 support demand futility where those facts imply an inability by the connected
director to act independently; here, however, I find that the Plaintiff has not met its
burden to show demand futility arising out of the relationship between Jefferies and
these directors.
The Plaintiff argues that both Shackelton and Goldstein are beholden to
Jefferies due to their alleged “substantial relationships” with Jefferies.90 For
Shackelton, the Plaintiff alleges that he is the co-founder and managing partner of
non-party Coliseum, and that Shackelton was appointed to the BioScrip Board in
connection with a securities purchase agreement with Coliseum.91 Coliseum, in turn,
holds a substantial minority interest in another corporation, LHC, and Shackelton
sits on the LHC board of directors.92 Shackelton’s “substantial relationship” with
Jefferies allegedly arises from Jefferies acting as a “longtime advisor to LHC” and
serving as an underwriter for LHC’s IPO and second stock offering; not to mention,
the Plaintiff adds, LHC “presenting” at Jefferies’ 2016 Annual Healthcare
Conference.93
With respect to the ties between Jefferies and Goldstein, the Plaintiff
concentrates on its allegations that Goldstein is one of “six distinguished members”
90 Pl’s Reply Br. 22–23. 91 Id. at 22 n.15 (citing Compl. ¶ 36). 92 Id. 93 Id. 20 of a “Global Senior Advisory Board,” advising Jefferies’ parent company, Jefferies
Group LLC. The Plaintiff points out that he was nominated to this advisory board
by the joint Chairman and CEO of Jefferies Group LLC, and that a press release
“tout[ed] Goldstein as a member of [this] ‘distinguished group.’” 94 The Plaintiff
also argues that, since 2011, Goldstein has been an advisor to Jefferies & Company
Inc., which is an affiliate of Jefferies Group LLC.95 The Amended Complaint fails
to add details regarding the nature, materiality or associated remuneration (if any) of
these “advisory” positions.
In light of these alleged facts, according to the Plaintiff, Shackelton and
Goldstein have “an incentive to shield Jefferies from liability both for financial and
reputational reasons” and are thus unable to consider a demand for Counts I through
V.96 The Plaintiff reasons more fully as follows: The facts alleged in Count I—the
Caremark Claim—are the “genesis of the claims against Jefferies” and support all
other counts; that is, they support Count II’s alleged federal securities disclosure
violations, Count III’s alleged unlawful stock offerings, Count IV’s alleged Brophy
claims for insider selling, and the alleged aiding and abetting of all of these claims
by Jefferies in Count V.97 Therefore, the Plaintiff argues, since “[a]llegations should
94 Id. at 22 n.16. 95 See id.; Compl. ¶ 43. 96 Id. at 22. 97 Id. at 23. 21 be analyzed collectively when determining demand futility,” both Shackelton and
Goldstein, allegedly beholden to Jefferies, “cannot possibly impartially consider the
conduct alleged in Count I when this conduct is the foundation of the claims made
in Counts II, III, IV and V, all of which implicate Jefferies.”98
In other words, the Plaintiff is attempting to rebut the presumption that
Shackelton and Goldstein are directors capable of exercising their business
judgment, on the ground that both directors would have to consider litigation against
corporate fiduciaries on behalf of BioScrip. Their judgment is impermissibly tainted
in this exercise, because a third party, to whom they are allegedly beholden, could
then potentially face liability as an aider and abettor of the underlying claims in such
litigation. I assume here that an indirect interest in an aider-and-abettor could, in
proper circumstances, disable the exercise of fiduciary duties.99 I find that the
Plaintiff has not pled particularized facts sufficient to raise a reasonable doubt as to
98 See id. at 23 (citing In re Ezcorp Inc. Consulting Agreement Derivative Litig, 2016 WL 301245 (Del. Ch. Jan. 25, 2016)). 99 The Plaintiff cites to only two cases for the proposition that a director cannot impartially consider a demand to pursue breach of fiduciary duty when that breach is one of the elements of an aiding and abetting claim. See id. at 29, 35. Neither case, however, directly addresses such a proposition; each merely demonstrates the common-sense notion that primary liability, such as a breach of fiduciary duty, is necessary for the existence of secondary liability for aiding and abetting. See In re KKR Fin. Holdings LLC S'holder Litig., 101 A.3d 980, 1003 (Del. Ch. 2014) (“An aiding and abetting claim may be summarily dismissed based upon the failure of the breach of fiduciary duty claims against the director defendants.”) (internal quotations omitted); In re Alloy, Inc., 2011 WL 4863716, at *14 (Del. Ch. Oct. 13, 2011) (“As a matter of law and logic, there cannot be secondary liability for aiding and abetting an alleged harm in the absence of primary liability.”). 22 the ability of either Shackelton or Goldstein to bring his business judgment to bear,
however.
The Plaintiff attempts to establish that Shackelton is beholden to Jefferies by
virtue of his indirect minority interest in, and directorship of, a company—LHC—
unrelated to this litigation, because that company in turn used Jefferies as its
underwriter and received advice from Jefferies for a long period of time. Such an
allegation is simply too attenuated to imply that Shackelton is materially personally
beholden to Jefferies in some non-economic way. The Plaintiff also fails to allege
any fact from which I could draw a reasonable inference that the Jefferies-LHC-
Shackelton relationship is economically material to Shackelton. Moreover, with
respect to LHC’s connection to Jefferies (to the extent pertinent to establishing
Shackelton’s connection to Jefferies), it seems to me that, if anything, Jefferies
would be beholden to LHC, not the other way around, as Jefferies is the entity
presumably receiving money from LHC in exchange for its business services. Thus,
I find that the Plaintiff has failed to plead particularized facts sufficient to create a
reasonable doubt as to Shackelton’s ability to exercise his business judgment in
considering a demand upon the Board.
The Plaintiff’s allegations here also fail as to Goldstein. The Plaintiff attempts
to paint Goldstein’s membership on the “advisory board” as one of a distinguished
professional accomplishment, but fails to allege any facts as to why service on such
23 a board would be material to Goldstein. This Court has held that merely serving on
an advisory board does not create a disabling interest even when the plaintiff alleged
such service was prestigious and lucrative.100 Here, the Plaintiff simply alleges that
Goldstein serves on a Jefferies’ advisory board that Jefferies has referred to as
“distinguished” and argues that the prestige of this alone establishes the materiality
of such a position to Goldstein.101 The Plaintiff, however, points to no facts to
elucidate the work of the advisory board or that Goldstein receives compensation for
his service, let alone that any such compensation might be material to Goldstein.
The Plaintiff also fails to allege facts from which I could reasonably infer
Goldstein possesses any personal relationships with Jefferies that would render him
an interested party. The Plaintiff does allege that the joint Chairman and CEO of the
parent company of Jefferies nominated Goldstein to the advisory board. However,
“to render a director unable to consider demand, a relationship must be of a bias-
producing nature.”102 Furthermore, “[t]he naked assertion of a previous business
100 See Khanna, 2006 WL 1388744, at *20 (“The Amended Complaint does not inform the Court what membership on the [advisory board] actually entails. . . . The allegations provided by the Plaintiffs clearly fail to meet the above-articulated [materiality] standard: they set forth no particularized allegations of compensation actually received by Lynch in return for his [a]dvisory [b]oard service or as to whether such compensation would be material to a director in Lynch's position.”). See also id. at *2 n.9 (“The Amended Complaint fails to develop sufficiently . . . the nature of [the board of advisors]. It may be that appointment to [the board of advisors] carried significant remunerative benefits, but the Plaintiffs' conclusory pleadings in this respect fail to set forth the detail necessary to satisfy Court of Chancery Rule 23.1.”). 101 See Oral Arg. Tr. 38:13–39:2 (Jan. 19, 2017). 102 Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1050 (Del. 2004). 24 relationship is not enough to overcome the presumption of a director's
independence.”103 The Plaintiff alleges no further facts with regards to the joint
Chairman and CEO of the parent company of Jefferies. Accordingly, and in light of
the shortcomings of its allegations regarding the advisory board already discussed, I
am unable to infer that Goldstein’s appointment renders him beholden to his
appointer—the joint Chairman and CEO—and transitively beholden to his
appointer’s employer’s subsidiary—Jefferies. I also note that the press releases
touting Goldstein as a member of the “distinguished group” of the advisory board
tends, if anything, to indicate that Jefferies is capitalizing on and beholden to the
reputation of Goldstein, rather than the other way around. I therefore find that the
Plaintiff has failed to plead particularized facts sufficient to create a reasonable doubt
as to Goldstein’s ability to exercise his business judgment.
Our Supreme Court’s recent case-law has stressed that when evaluating
director independence, personal relationships matter.104 This truth is not a license to
base findings of demand futility on attenuated relationships naked of supporting
allegations implying divided loyalties sufficient to taint the exercise of fiduciary
duties, however. The Plaintiff’s contentions regarding the relationships between
Jefferies and Goldstein and Shackelton are of this latter variety.
103 Orman v. Cullman, 794 A.2d 5, 27 (Del. Ch. 2002). 104 See generally Sandys v. Pincus, 152 A.3d 124 (Del. 2016); Sanchez, 124 A.3d 1017. 25 III. CONCLUSION
For the foregoing reasons, I find that the Plaintiff has failed to plead demand
futility under Rule 23.1. Accordingly, the Amended Complaint is dismissed.105 An
appropriate form of order is attached.
105 The dismissal of the underlying insider selling and fiduciary duty claims logically compels the dismissal of the aiding and abetting claims against Jefferies and Kohlberg in Counts V and VI as well. 26 IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
PARK EMPLOYEES’ AND ) RETIREMENT BOARD EMPLOYEES’ ) ANNUITY AND BENEFIT FUND OF ) CHICAGO, derivatively and on behalf of ) Bioscrip, Inc., ) ) Plaintiff, ) ) v. ) C.A. No. 11000-VCG ) RICHARD M. SMITH, MYRON Z. ) HOLUBIAK, CHARLOTTE W. ) COLLINS, SAMUEL P. FRIEDER, ) DAVID R. HUBERS, RICHARD L. ) ROBBINS, STUART A. SAMUELS, ) GORDON H. WOODWARD, ) KIMBERLEE C. SEAH, HAI V. TRAN, ) PATRICIA BOGUSZ, KOHLBERG & ) CO., L.L.C., KOHLBERG ) MANAGEMENT V, L.L.C., ) KOHLBERG INVESTORS V, L.P., ) KOHLBERG PARTNERS, V, L.P., ) KOHLBERG TE INVESTORS V, L.P., ) KOCO INVESTORS V, L.P., and ) JEFFERIES LLC, ) ) Defendants, ) ) and ) ) BIOSCRIP, INC., ) ) Nominal Defendant. )
ORDER
AND NOW, this 18th day of April, 2017,
27 The Court having considered Defendants’ Motions to Dismiss pursuant to
Rule 23.1 for failure to plead demand futility, and for the reasons set forth in the
Memorandum Opinion dated April 18, 2017, IT IS HEREBY ORDERED that
Defendants’ Motions to Dismiss are GRANTED.
SO ORDERED:
/s/ Sam Glasscock III
Vice Chancellor