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IN THE UNITED STATES DISTRICT COURTNORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
IN RE THE HOME DEPOT, INC.SHAREHOLDER DERIVATIVELITIGATION
LEAD CASENO. 1:15-CV-2999-TWT
MEMORANDUM IN SUPPORT OFDEFENDANTS’ MOTION TO DISMISS THE VERIFIED
CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT
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TABLE OF CONTENTS
Page(s)I. PRELIMINARY STATEMENT .....................................................................1
II. STATEMENT OF FACTS AND PROCEDURAL HISTORY......................4
A. The Parties. ............................................................................................5
B. The Criminal Cyberattack on the Company..........................................6
III. ARGUMENT...................................................................................................8
A. The Complaint Fails to Adequately Plead Demand Futility. ................9
B. The Complaint Fails to Plead an Actionable Claim for Breachof Fiduciary Duty Against Any Individual Defendant........................15
1. The Company’s Certificate of Incorporation ExculpatesDuty of Care Claims Against the Director Defendants. ...........16
2. Plaintiffs Fail to State a Claim for Breach of the Duty ofCare Against the Officer Defendants........................................17
3. Plaintiffs Fail to State a Duty of Loyalty Claim AgainstAny of the Individual Defendants.............................................19
C. The Complaint Fails to Plead an Actionable Claim for WasteAgainst Any Defendant. ......................................................................26
D. The Complaint Fails to Plead an Actionable Claim for Violationof Section 14(a). ..................................................................................27
1. Plaintiffs Fail to Allege that the Purported OmissionsMade Any Other Statements in the Proxies False orMisleading.................................................................................29
2. Plaintiffs Fail to Plead that the Alleged Omissions wereMaterial. ....................................................................................32
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3. Plaintiffs Have Not Pleaded that the Alleged OmissionsLed to the Transactions or Caused the Company AnyHarm..........................................................................................34
IV. CONCLUSION..............................................................................................36
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TABLE OF AUTHORITIES
Page(s)CASES
In re Acceptance Ins. Cos., Inc., Sec. Litig.,352 F. Supp. 2d 928 (D. Neb. 2003)...................................................................33
Adams v. Calvarese Farms Maintenance Corp.,No. 4262, 2010 WL 3944961 (Del. Ch. Sept. 17, 2010)....................................17
Ashcroft v. Iqbal,556 U.S. 662 (2009)............................................................................................16
In re Baxter Int’l. Inc. S’holder Litig.,654 A.2d 1268 (Del. Ch. 1995) ..........................................................................12
Beam v. Stewart,845 A.2d 1040 (Del. 2004) .................................................................................19
Bell Atl. Corp. v. Twombly,550 U.S. 544 (2007)..................................................................................8, 15, 16
Brehm v. Eisner,746 A.2d 244 (Del. 2000) ...................................................................................10
In re Browning-Ferris Indus., Inc. S’holder Deriv. Litig.,830 F. Supp. 361 (S.D. Tex. 1993).....................................................................35
Bryant v. Avado Brands, Inc.,187 F.3d 1271 (11th Cir. 1999) ............................................................................4
In re Caremark Int’l., Inc. Deriv. Litig.,698 A.2d 959 (Del. Ch. 1996) .....................................................................passim
Caspian Select Credit Master Fund Ltd. v. Gohl,No. 10244, 2015 WL 5718592 (Del. Ch. Sept. 28, 2015)............................17, 18
In re China Auto. Sys. Inc. Derivative Litig.,No. 7145, 2013 WL 4672059 (Del. Ch. Aug. 30, 2013) ..............................13, 24
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In re Citigroup Inc. S’holder Derivative Litig.,964 A.2d 106 (Del. Ch. 2009) .....................................................................passim
In re Coca-Cola Enters., Inc. Deriv. Litig.,478 F. Supp. 2d 1369 (N.D. Ga. 2007),aff’d Staehr v. Alm, 269 F. App’x 888 (11th Cir. 2008).....................9, 10, 11, 13
In re Cornerstone Therapeutics Inc., S’holder Litig.,115 A.3d 1173 (Del. 2015) .................................................................................19
Desimone v. Barrows,924 A.2d 908 (Del. Ch. 2007) ............................................................................10
In re Diamond Foods, Inc. Deriv. Litig.,No. 11-05692, 2012 WL 1945814 (N.D. Cal. May 29, 2012) ...........................35
In re Dow Chem. Co. Deriv. Litig.,No. 4349, 2010 WL 66769 (Del. Ch. Jan. 11, 2010)..........................................14
Edgar v. MITE Corp.,457 U.S. 624 (1982)..............................................................................................2
Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc.,595 F. Supp. 2d 1253 (M.D. Fla. 2009), aff’d 594 F.3d 783(11th Cir. 2010).............................................................................................28, 34
Field v. Trump,850 F.2d 938 (2d Cir. 1988) ...............................................................................36
Gantler v. Stephens,965 A.2d 695 (Del. 2009) ...................................................................................18
In re Gen. Motors Co. Deriv. Litig.,No. 9627, 2015 WL 3958724 (Del. Ch. June 26, 2015)...................12, 22, 23, 25
In re Goldman Sachs Grp. S’holder Litig.,No. 5215, 2011 WL 4826104 (Del. Ch. Oct. 12, 2011) .....................................25
Grimes v. Donald,673 A.2d 1207 (Del. 1996), overruled in part on other grounds byBrehm v. Eisner, 746 A.2d 244 (Del. 2000) .......................................................11
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Guttman v. Huang,823 A.2d 492 (Del. Ch. 2003) ............................................................................11
In re Heartland Payment Sys.,No. 09-cv-1043, 2009 WL 4798148 (D.N.J. Dec. 7, 2009) ...............................26
Hulliung v. Bolen,548 F. Supp. 2d 336 (N.D. Tex. 2008) ...............................................................28
In re INFOUSA, Inc. S’holders Litig.,953 A.2d 963 (Del. Ch. 2007) ............................................................................11
Jacobs v. Airlift Int’l, Inc.,440 F. Supp. 540 (S.D. Fla. 1977) ......................................................................35
JPMorgan Chase Deriv. Litig., No. 14-cv-02414, 2014 WL 5430487,(E.D. Cal. Oct. 24, 2014) ....................................................................................32
Kamen v. Kemper Fin. Servs.,500 U.S. 90 (1991)................................................................................................9
Kaplan v. Peat, Marwick, Mitchell & Co.,540 A.2d 726 (Del. 1988) ...................................................................................10
Koppel v. 4987 Corp.,167 F.3d 125 (2d Cir. 1999) ...............................................................................34
La. Mun. Police Emps. Ret. Sys. v. Cooper Indus.,No. 12-cv-1750, 2012 WL 4958561 (N.D. Ohio Oct. 16, 2012) .......................30
Lewis v. Vogelstein,699 A.2d 327 (Del. Ch. 1997) ............................................................................26
Little Gem Life Scis., LLC v. Orphan Med., Inc.,537 F.3d 913 (8th Cir. 2008) ..............................................................................28
Lyondell Chem. Co. v. Ryan,970 A.2d 235 (Del. 2009) .............................................................................19, 20
Malpiede v. Townson,780 A.2d 1075 (Del. 2001) .................................................................................16
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In re Marsh & McLennan Cos., Inc. Securities Litig.,536 F. Supp. 2d 313 (S.D.N.Y. 2007) ..........................................................27, 30
McGowan v. Ferro,859 A.2d 1012 (Del. Ch. 2004), aff’d, 873 A.2d 1099 (Del. 2005) ...................19
McMillan v. Intercargo Corp.,768 A.2d 492 (Del. Ch. 2000) ............................................................................20
McPadden v. Sidhu,964 A.2d 1262 (Del. Ch. 2008) ..........................................................................10
Morefield v. Bailey,959 F. Supp. 2d 887 (E.D. Va. 2013) .................................................................24
Palkon v. Holmes,No. 14-cv-01234, 2014 WL 5341880 (D.N.J. Oct. 20, 2014)............................25
Rales v. Blasband,634 A.2d 927 (Del. 1993) ...................................................................................10
Resnik v. Boskin,No. 09-5059, 2011 WL 689617 (D.N.J. Feb. 17, 2011).....................................34
Resnik v. Swartz,303 F.3d 147 (2d Cir. 2002) .........................................................................27, 31
St. Clair Shores Gen. Emp. Ret. Sys. v. Eibeler,No. 06- cv-688, 2006 WL 2849783 (S.D.N.Y. Oct. 4, 2006) ............................15
Stone ex rel. AmSouth Bancorporation v. Ritter,911 A.2d 362 (Del. 2006) ...................................................................................21
Stoneridge Inv. Partners, LLC v. Sci.-Atlanta,552 U.S. 148 (2008)............................................................................................28
Stricklin v. Ferland,No. 98-3279, 1998 WL 966023 (E.D. Pa. Nov. 10, 1998).................................36
In re Synthes, Inc. S’holder Litig.,50 A.3d 1022 (Del. Ch. 2012) ............................................................................16
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Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera,119 A.3d 44 (Del. Ch. 2015) ..............................................................................14
TSC Industries, Inc. v. Northway, Inc.,426 U.S. 438 (1976)............................................................................................32
Universal Express, Inc. v. U.S. S.E.C.,177 F. App’x 52 (11th Cir. 2006) .........................................................................4
In re Walt Disney Co. Deriv. Litig.,907 A.2d 693 (Del. Ch. 2005), aff’d 906 A.2d 27 (Del. 2006) ....................17, 21
Washtenaw Cnty. Emp. Ret. Sys. v. Wells Real Estate InvestmentTrust, Inc., No. 07-cv-862-CAP, 2008 WL 2302679 (N.D. Ga.Mar. 31, 2008)...................................................................................14, 29, 32, 33
Wayne Cnty. Ret. Sys. v. Corti,No. 3534, 2009 WL 2219260 (Del. Ch. July 24, 2009),aff’d, 996 A.2d 795 (Del. 2010) .........................................................................21
STATUTES
8 Del. C. § 102(b)(7)............................................................................................3, 16
15 U.S.C. § 78u-4(b)(1) ...........................................................................................28
Section 14(a) of the Securities Exchange Act, 15 U.S.C. § 78n ......................passim
OTHER AUTHORITIES
Delaware Court of Chancery Rule 23.1...........................................................8, 9, 36
Federal Rules of Civil Procedure 12(b)(6) .......................................................passim
Federal Rules of Civil Procedure 23.1(b)(3) .........................................................1, 9
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Pursuant to Federal Rules of Civil Procedure 12(b)(6) and 23.1(b)(3),
Nominal Defendant The Home Depot, Inc. (“The Home Depot” or the
“Company”) and the Individual Defendants1 respectfully submit this Memorandum
in Support of their Motion to Dismiss the Verified Consolidated Shareholder
Derivative Complaint (the “Complaint” or “Comp.”). Plaintiffs’ Complaint should
be dismissed for failure to state a claim and failure to make a pre-suit demand on
the Company’s Board.
I. PRELIMINARY STATEMENT
In September 2014, The Home Depot disclosed that it had been the victim of
a criminal cyberattack in which sophisticated hackers used unique, custom-built
malware to evade detection by the Company’s cybersecurity systems. More than a
year later, two alleged stockholders of the Company filed this putative derivative
action, purportedly on behalf of the Company, alleging that senior management of
the Company and certain current and former directors breached their fiduciary
duties and committed waste by allegedly allowing criminals to penetrate the
Company’s payment data systems. Plaintiffs additionally allege that the
1 Francis Blake, Matthew Carey (“M. Carey”), Craig Menear, Ari Bousbib,Gregory Brenneman, J. Frank Brown, Albert Carey, Armando Codina, HelenaFoulkes, Karen Katen, Mark Vadon, Bonnie Hill, and F. Duane Ackerman arecollectively referred to as the “Individual Defendants.” Blake, M. Carey andMenear also are collectively referred to as the “Officer Defendants.”
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Company’s directors violated Section 14(a) of the Securities Exchange Act, 15
U.S.C. § 78n, by omitting material facts from the Company’s 2014 and 2015 Proxy
Statements.
Plaintiffs do not allege that any Individual Defendant was part of the
criminal enterprise that perpetrated the cyberattack, nor do they allege that any
Individual Defendant profited from the attack. Plaintiffs instead suggest that the
Individual Defendants were slow to respond to warning signs following
cyberattacks at other retailers and that they should have taken additional or
alternative measures to enhance the Company’s data security systems.
Plaintiffs’ attempt to blame the Individual Defendants for the criminal acts
of unknown third-parties is both misguided and legally unmeritorious.
First, Plaintiffs failed to comply with their pre-suit demand obligations
under Delaware law, which requires stockholders to either make a demand on the
Board to investigate their claims or to plead particularized facts to show that their
failure to do so is excused as futile.2 Instead, Plaintiffs simply conclude that
2 Plaintiffs acknowledge that The Home Depot is a Delaware corporation.Comp., ¶ 24. Accordingly, under the internal affairs doctrine, the substantivelaw of Delaware applies to this dispute. See Edgar v. MITE Corp., 457 U.S.624, 645 (1982) (“The internal affairs doctrine is a conflict of laws principlewhich recognizes that only one State should have the authority to regulate acorporation’s internal affairs – matters peculiar to the relationships among or
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demand is futile because the named directors face “a substantial likelihood of
liability.” Comp., ¶ 269. As discussed below, this theory of demand futility has
been rejected by the courts except in the “rare case when a plaintiff is able to show
director conduct that is so egregious on its face that . . . a substantial likelihood of
director liability therefore exists.”3 None of the defendants credibly face any such
risk and, accordingly, Plaintiffs cannot meet their threshold pleading burden.
Second, Plaintiffs’ breach of fiduciary duty claims fail as a matter of law.
Duty of care claims against the directors are foreclosed by the Company’s
exculpatory provision set forth in its Charter. See 8 Del. C. § 102(b)(7). Duty of
care claims against the Officer Defendants fail because Plaintiffs do not plead
particularized facts that any officer acted with gross negligence or reckless
disregard of his duties. Finally, duty of loyalty claims based on an alleged failure
of oversight theory fail as a matter of law because Plaintiffs do not plead
particularized facts that any Individual Defendant consciously failed to monitor
the steps undertaken by the Company’s data security experts.
Third, Plaintiffs’ claim for waste is misplaced. Plaintiffs do not plead facts
suggesting that any Individual Defendant irrationally squandered or gave away
between the corporation and its current officers, directors, and shareholders –because otherwise a corporation could be faced with conflicting demands.”).
3 In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 121 (Del. Ch.2009) (emphasis added).
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corporate assets. Instead, the claim is grounded on the untenable assertion that
they can be held liable for the criminal malfeasance of unknown third-parties. The
Complaint is devoid of legal and factual support for this novel theory.
Fourth, and finally, Plaintiffs do not meet the heightened pleading standard
required to state a claim for violations of Section 14(a) of the Securities Exchange
Act of 1934. Plaintiffs have not pleaded, and cannot show, that the alleged
omissions in the Company’s 2014 or 2015 Proxy Statements were material, nor can
they demonstrate that the alleged omissions caused any harm to the Company.
In sum, the Complaint fails to meet the basic pleading requirements for
stating a viable derivative claim under settled law. Accordingly, The Home Depot
and the Individual Defendants respectfully submit that the Complaint should be
dismissed and, because further leave cannot cure Plaintiffs’ failure to comply with
the pre-suit requirements, the dismissal should be with prejudice.
II. STATEMENT OF FACTS AND PROCEDURAL HISTORY
The Home Depot and the Individual Defendants briefly summarize the
allegations in the Complaint relevant to this Motion. In doing so, they accept
properly pleaded factual allegations as true solely for purposes of the Motion.4
4 On a motion to dismiss, the Court may take judicial notice of documents filedwith the SEC or incorporated by reference in the Complaint. See, e.g., Bryantv. Avado Brands, Inc., 187 F.3d 1271, 1278 (11th Cir. 1999); see also Universal
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A. The Parties.
Plaintiffs Mary Lou Bennek and Cora Frohman allege that they have been
stockholders of The Home Depot at all relevant times. Comp., ¶¶ 22, 23. They
purport to assert claims against the Individual Defendants derivatively on behalf of
the Company. Id., ¶ 254.
Nominal Defendant The Home Depot is a Delaware corporation
headquartered in Atlanta, Georgia. Comp., ¶ 24. The Company is the world’s
largest home improvement retailer and sells a wide assortment of building and
home improvement materials, tools, hardware, and other products. Id., ¶ 60.
The Home Depot Board of Directors had twelve members as of the filing of
this action. Comp., ¶ 258. Individual Defendants Bousbib, Brenneman, Brown,
Carey, Codina, Foulkes, Katen, Menear and Vadon are current directors (the
“Current Directors”), id. ¶ 258, and Individual Defendants Ackerman, Blake and
Hill are former directors of the Company. Id. at ¶¶ 25, 36, 37.
Mr. Blake served as the Company’s CEO until November 1, 2014, at which
time Mr. Menear was appointed as CEO and President. Comp., ¶¶ 25, 27. M.
Carey has served as the Company’s Executive Vice President and Chief
Information Officer since September 2008. Id., ¶ 26.
Express, Inc. v. U.S. S.E.C., 177 F. App’x 52, 53 (11th Cir. 2006) (“Publicrecords are among the permissible facts that a district court may consider.”).
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B. The Criminal Cyberattack on the Company.
Over the last several years, third-party criminals have targeted the point-of-
sale systems at several large retailers in order to obtain consumer payment
information and personal data. Comp., ¶ 70. The Home Depot has countered these
third-party threats by maintaining a series of defensive measures and programs that
are systematically monitored, audited, and improved. As part of this process, the
Company’s IT Security team regularly briefs the Board and the Audit Committee
on developments in the field of cybersecurity, emerging threats, potential
vulnerabilities, proposed solutions, and pending upgrades and remediation efforts.
See, e.g., id., ¶¶ 86-88, 97, 99, 103, 116, 120-123, 139, 140-142, 150-153, 155,
157, 158, 160-163, 200, 205-209. Additionally, The Home Depot periodically
retains third-party consultants to assess the Company’s data security and
recommend improvements.5 See, e.g., id., ¶¶ 101, 104, 136. The Company
5 The Company is also subject to third-party review of its adherence to PaymentCard Industry Data Security Standards (“PCI DSS”). Comp., ¶ 79. “[A]nindependent third-party assessor found the portion of [the Company’s] networkthat handles payment card data to be compliant with applicable data securitystandards in the fall of 2013, and the process of obtaining such certification for2014 was ongoing at the time of the Data Breach . . .” See Declaration of CaraM. Peterman in Support of Defendants’ Motion to Dismiss (“Peterman Decl.”),¶ 4 (attaching The Home Depot, Inc. Annual Report (Form 10-K) (March 26,2015) at 18); see also Comp., ¶¶ 89, 261.
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considers these recommendations and methodically remediates identified
vulnerabilities. See, e.g., id., ¶¶ 88, 117, 267.
Notwithstanding these efforts, The Home Depot learned on September 2,
2014 that the Company may have been the victim of a criminal breach of its
payment card data systems. Comp., ¶ 214. The Company immediately
commenced an investigation into the suspicious activity and, after finding that a
breach had occurred, provided identity protection and credit monitoring services at
no cost to customers who had used a payment card at a Home Depot store since April
2014. Id., ¶ 221. The Company further disclosed that the criminal intruder had
utilized a third-party vendor’s user name and password to “enter the perimeter of
the Company’s network. The intruder then acquired elevated rights that allowed it
to navigate portions of the Company’s systems and to deploy unique, custom-built
malware on the Company’s self-checkout systems to access payment card
information ….” Id., ¶ 243. To further protect its customers, the Company
accelerated its “implementation of enhanced encryption of payment data in its U.S.
stores” and began “rolling out EMV chip-and-PIN technology, which adds extra
layers of payment card protection for customers.” Id., ¶¶ 238, 240.
Almost one year after the Company’s initial disclosure of the breach,
Plaintiff Bennek filed a stockholder complaint in this Court, alleging derivative
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claims for breach of fiduciary duty and corporate waste against certain officers and
directors of The Home Depot. See Bennek v. Ackerman, No. 15-cv-2999 (N.D.
Ga.) [D.E.1]. Two months later, Plaintiff Frohman filed a similar complaint,
additionally alleging that the named directors violated Section 14(a) of the
Securities Exchange Act in connection with statements made in the Company’s
2014 and 2015 Proxies. See Frohman v. Bousbib, No. 15-cv-3650 (N.D. Ga.)
[D.E.1]. The two cases were consolidated on January 20, 2016.
III. ARGUMENT
Stockholders seeking to pursue a stockholder derivative action on behalf of a
Delaware corporation must make two separate and independent showings to
survive a motion to dismiss: first, that they either made a demand on the Board or
have pleaded particularized facts to show that such demand would be futile under
Delaware Court of Chancery Rule 23.1; and second, under Rule 12(b)(6), that they
have pleaded sufficient allegations so as to “raise [their] right to relief above the
speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). The
Complaint does not meet either of these independent requirements and should be
dismissed accordingly.
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A. The Complaint Fails to Adequately Plead Demand Futility.
The Supreme Court has long held that “the function of the demand doctrine
in delimiting the respective powers of the individual shareholder and of the
directors to control corporate litigation clearly is a matter of ‘substance,’ not
‘procedure.’” Kamen v. Kemper Fin. Servs., 500 U.S. 90, 96-97 (1991) (court
must apply the demand standard as defined by the State of incorporation).
Therefore, under the internal affairs doctrine, Plaintiffs must show that they have
satisfied the substantive requirements of Delaware Court of Chancery Rule 23.1.
See id.; see also In re Coca-Cola Enters., Inc. Deriv. Litig., 478 F. Supp. 2d 1369,
1375 (N.D. Ga. 2007) (Thrash, J.) (applying Delaware law), aff’d Staehr v. Alm,
269 F. App’x 888 (11th Cir. 2008).6
Delaware Court of Chancery Rule 23.1 requires that a stockholder make a
demand on the Board to investigate potential wrongdoing, or plead facts with
particularity establishing that such demand is excused as futile, prior to filing a
derivative action. Del. Ct. Ch. R. 23.1(a). The standard for pleading demand
futility under Rule 23.1 is more rigorous than the pleading standard under Rule
6 See also Federal Rules of Civil Procedure 23.1(b)(3) (the Complaint must “statewith particularity (A) any effort by the plaintiff to obtain the desired actionfrom the directors or comparable authority and, if necessary, from theshareholders or members; and (B) the reasons for not obtaining the action or notmaking the effort.”).
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12(b)(6). McPadden v. Sidhu, 964 A.2d 1262, 1270 (Del. Ch. 2008). It is “not
satisfied by conclusory statements or mere notice pleading” and allegations of
demand futility “must comply with stringent requirements of factual particularity.”
Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000). This exacting standard flows
from the “cardinal precept . . . that directors, rather than shareholders, manage the
business and affairs of the corporation.” In re Coca-Cola Enters., Inc. Deriv.
Litig., 478 F. Supp. 2d at 1374; see also Kaplan v. Peat, Marwick, Mitchell & Co.,
540 A.2d 726, 730 (Del. 1988) (because a stockholder derivative action “inherently
impinges upon the directors’ power to manage the affairs of the corporation the
law imposes certain prerequisites on a stockholder’s right to sue derivatively.”).
Plaintiffs concede that they did not make a demand on the Board to institute
this action. Comp., ¶ 257. Accordingly, Plaintiffs must plead particularized facts
sufficient to create “a reasonable doubt that, as of the time the complaint [was]
filed, the board of directors could have properly exercised its independent and
disinterested business judgment in responding to a demand.” Rales v. Blasband,
634 A.2d 927, 934 (Del. 1993). Indeed, Plaintiffs must provide detailed director-
by-director factual allegations to show that at least six members of the twelve-
member Board of The Home Depot lack independence or are interested. See
Desimone v. Barrows, 924 A.2d 908, 943 (Del. Ch. 2007) (“[A] derivative
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complaint must plead facts specific to each director, demonstrating that at least
half of them could not have exercised disinterested business judgment in
responding to a demand.”); In re INFOUSA, Inc. S’holders Litig., 953 A.2d 963,
989-90 (Del. Ch. 2007).
Plaintiffs allege claims against nine Current Directors – eight of whom are
outside directors (Comp., ¶ 275) – and seek to circumvent their pleading obligation
with the broad allegation that “[a]ll of the Current Director Defendants are
disqualified from fairly evaluating the derivative claims because they are
responsible for damages suffered by Home Depot as a result of the Company’s
massive Data Breach.” Comp., ¶ 259. Both this Court and the Delaware Courts
have long held that “derivative action plaintiffs do not ring the futility bell merely
by including a majority of the directors as defendants.” In re Coca-Cola Enters.
Deriv. Litig., 478 F. Supp. 2d at 1374 (citing Guttman v. Huang, 823 A.2d 492,
500 (Del. Ch. 2003)); see also Grimes v. Donald, 673 A.2d 1207, 1216 n.8 (Del.
1996) (“Demand is not excused simply because plaintiff has chosen to sue all
directors.”), overruled in part on other grounds by Brehm, 746 A.2d at 244.
Instead, “demand will be excused based on a possibility of personal director
liability only in the rare case when a plaintiff is able to show director conduct that
is so egregious on its face that . . . a substantial likelihood of director liability
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therefore exists.” In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 121
(Del. Ch. 2009) (emphasis added) (quotations omitted).7 The reason for this
“rigorous standard” is obvious: “If a mere allegation of liability on the part of the
directors were enough to demonstrate a disabling self-interest, conclusory
allegations of breach of director duty would eat the rule whole, in a single bite.” In
re Gen. Motors Co. Deriv. Litig., No 9627, 2015 WL 3958724, at *1 (Del. Ch.
June 26, 2015).
Plaintiffs cannot make the requisite showing that the conduct of any Current
Director – let alone a majority of the current Board – was “so egregious” that a
“substantial likelihood” of director liability exists. The Complaint broadly asserts
that the Company’s Directors failed “to oversee and manage risks at Home Depot
related to data security” even as it pleads that the Board (i) was informed that the
Company had complied with PCI standards in 2013; (ii) was regularly updated on
the status of the Company’s data security systems, including through internal audit
reports; (iii) was advised of the timeline for implementing certain enhancements to
those systems; (iv) was apprised of developments in the industry and breaches at
other larger retailers; and (v) was aware that the Company retained third-party
7 See also In re Baxter Int’l. Inc. S’holder Litig., 654 A.2d 1268, 1271 (Del. Ch.1995) (granting motion to dismiss where the court could not “conclude from theface of the complaint that this is a rare case where the circumstances are soegregious that there is a substantial likelihood of liability.”).
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cybersecurity consultants, including “to perform a ‘health check’ on its computer
systems.” See, e.g., Comp., ¶¶ 76, 77, 86, 88, 97, 99, 136, 261. These allegations
belie Plaintiffs’ conclusion that any Individual Defendant faces a “substantial
likelihood” of personal liability.
Plaintiffs’ assertion that the seven members of the Audit Committee and/or
the Nominating and Corporate Governance Committee (“NCGC”) face an
increased risk of personal liability is similarly misplaced. Plaintiffs allege that the
Audit Committee received “regular updates” from management related to
cybersecurity (Comp., ¶¶ 279, 281) and that the NCGC failed “to ensure that the
Board was appropriately constituted and organized to meet its obligations to the
Company and its shareholders.” Comp., ¶ 285. These allegations fall far short of
supporting an actionable claim: “just being a director on the committee where the
alleged wrongdoing is within its delegated authority does not give rise to a
substantial threat of personal liability . . . without supporting allegations of
particularized facts showing bad faith.” In re China Auto. Sys. Inc. Derivative
Litig., No. 7145, 2013 WL 4672059, at *8 (Del. Ch. Aug. 30, 2013) (citation and
quotations omitted); see also In re Coca-Cola Enters., Inc. Deriv. Litig., 478 F.
Supp. 2d at 1378 (“a director is not interested merely by virtue of sitting on an
Audit Committee. . . .”) (citation omitted).
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Moreover, there is no merit to the claim that demand on Mr. Menear – who
joined the Board and was appointed CEO after the 2014 data breach – is excused
solely because he derives his principal income from his position at the Company.
See, e.g., In re Dow Chem. Co. Deriv. Litig., No. 4349, 2010 WL 66769, at *8
(Del. Ch. Jan. 11, 2010) (plaintiff failed to allege demand futility as to director
who simultaneously served as an officer where there was “no reason to doubt [his]
loyalty to that company. [His] interests are aligned with the company and
presumably [he] is able to make decisions in the best interests of company.”); see
also Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 60-61
(Del. Ch. 2015) (A “board’s determination of director independence under the
NYSE Rules is qualitatively different from, and thus does not operate as a
surrogate for, this Court’s analysis of independence under Delaware law for
demand futility purposes.”).
Finally, Plaintiffs make no allegations of demand futility with respect to
their Section 14(a) claims, which they nevertheless purport to bring on behalf of
the Company. Comp., ¶ 302. The demand requirements, however, apply equally
to those claims, and such claims should therefore be dismissed without further
consideration. See, e.g., Washtenaw Cnty. Emp. Ret. Sys. v. Wells Real Estate
Investment Trust, Inc., No. 07-cv-862-CAP, 2008 WL 2302679, at *15 (N.D. Ga.
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Mar. 31, 2008) (dismissing derivative Section 14(a) claims for failure to make a
demand or to adequately plead demand futility); see also St. Clair Shores Gen.
Emp. Ret. Sys. v. Eibeler, No. 06-cv-688, 2006 WL 2849783, at *6 (S.D.N.Y. Oct.
4, 2006) (“[D]erivative claims brought under Section 14(a) are subject to the
demand requirement and the decision as to whether to bring such claims is within
the board’s business judgment.”).
At its core, the Complaint merely alleges in hindsight that the Individual
Defendants should have selected alternative protective measures and should have
acted more expeditiously in implementing those measures. No court has held that
this type of conduct is so egregious on its face that a substantial likelihood of
director liability therefore exists. To the contrary, as discussed in Section B(3)
below, the Courts have consistently rejected creative attempts by stockholders to
expand the failure of oversight theory of derivative liability.
B. The Complaint Fails to Plead an Actionable Claim for Breach ofFiduciary Duty Against Any Individual Defendant.
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests
whether the plaintiff has pleaded sufficient allegations so as to “raise [his] right to
relief above the speculative level.” Twombly, 550 U.S. at 555. The complaint
must “contain sufficient factual matter, accepted as true, to state a claim to relief
that is plausible on its face. A claim has facial plausibility when the plaintiff
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pleads factual content that allows the court to draw the reasonable inference that
the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662,
678 (2009) (internal citations and quotation marks omitted). This “requires more
than labels and conclusions, and a formulaic recitation of the elements of a cause
of action will not do.” Twombly, 550 U.S. at 545. Plaintiffs fail to meet this
standard.
1. The Company’s Certificate of Incorporation Exculpates Duty ofCare Claims Against the Director Defendants.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to eliminate the personal liability of a director for monetary damages
for breach of the duty of care. See 8 Del. C. § 102(b)(7). “The Section 102(b)(7)
bar may be raised on a Rule 12(b)(6) motion to dismiss . . . .” Malpiede v.
Townson, 780 A.2d 1075, 1092 (Del. 2001); see also In re Synthes, Inc. S’holder
Litig., 50 A.3d 1022, 1032 (Del. Ch. 2012) (dismissing duty of care claims where
directors were protected by the § 102(b)(7) exculpatory provision).
Article 9 of The Home Depot’s Certificate of Incorporation provides:
No director of the Corporation shall be liable to theCorporation or its stockholders for monetary damages forbreach of fiduciary duty as a director, except for liability(i) for any breach of the director’s duty of loyalty to theCorporation or its stockholders, (ii) for acts or omissionsnot in good faith or which involve intentional misconduct
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or a knowing violation of law, (iii) under Section 174 ofthe Delaware General Corporation Law, or (iv) for anytransaction from which the director derived an improperpersonal benefit.
See Peterman Decl., ¶ 5. The plain language of this Charter provision precludes
any duty of care claim against the Company’s Directors.
2. Plaintiffs Fail to State a Claim for Breach of the Duty of CareAgainst the Officer Defendants.
Plaintiffs also fail to plead a duty of care claim against M. Carey in his
capacity as a corporate officer.8 “To establish that a corporate fiduciary acted in a
manner that breached the duty of care, a plaintiff must show that the fiduciary
acted with [ ] gross negligence, i.e., ‘reckless indifference to or a deliberate
disregard of the whole body of stockholders or actions which are without the
bounds of reason.’” Caspian Select Credit Master Fund Ltd. v. Gohl, No. 10244,
2015 WL 5718592, *12 (Del. Ch. Sept. 28, 2015) (quoting In re Walt Disney Co.
Deriv. Litig., 907 A.2d 693, 750 (Del. Ch. 2005), aff’d 906 A.2d 27 (Del. 2006)).9
8 Plaintiffs do not make any allegations against Messrs. Menear and Blake thatwould support a duty of care claim. Indeed, at best, they allege only theunremarkable fact that these Officers attended certain committee and Boardmeetings during which cybersecurity was discussed. Comp., ¶¶ 88, 121, 122,142, 153, 208, 209, 276.
9 The fiduciary duties of corporate officers are the same as those of directors.See, e.g., Adams v. Calvarese Farms Maintenance Corp., No. 4262, 2010 WL
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Here, the Complaint demonstrates precisely the opposite: that M. Carey was
actively engaged with the Board, the Audit Committee, third-party cybersecurity
consultants, and his staff regarding the Company’s cybersecurity processes and
procedures. See Comp., ¶¶ 76, 77, 86-88, 97-99, 101 114, 116, 120-122, 136
(alleging that the Company retained a third-party vendor to perform a “health
check” on its systems), 139, 142, 146, 147, 149, 151-153, 155, 158, 160-163
(discussing an “IT & Data Security Business Review” meeting between M. Carey
and the Audit Committee), 200, 206-209, 279. The Complaint further establishes
that M. Carey and his department monitored, identified, and addressed potential
vulnerabilities in the Company’s systems. See, e.g., Comp., ¶¶ 99, 102, 118, 119
(discussing remediation of alleged vulnerability), 136, 142, 144 (alleging that
retailers undergo quarterly scans of their systems), 150, 152 (discussing proposed
data security enhancements). Plaintiffs’ hindsight allegations that M. Carey should
have selected alternative security measures or should have implemented such
measures sooner do not satisfy their obligation to show that he acted with gross
negligence. See Caspian, 2015 WL 5718592 at *12 (dismissing breach of
fiduciary duty claim against corporation’s CFO where, “[r]egardless of whether
[he] could have done more to protect Plaintiffs, the Court [could not] reasonably
3944961, at *18, n.169 (Del. Ch. Sept. 17, 2010)(citing Gantler v. Stephens,965 A.2d 695, 708-09 (Del. 2009)).
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infer” that he acted with gross negligence or a conscious disregard of his duties).
Plaintiffs’ duty of care claim against him should be dismissed accordingly.
3. Plaintiffs Fail to State a Duty of Loyalty Claim Against Any ofthe Individual Defendants.
Unable to establish a claim for breach of the duty of care, Plaintiffs are
relegated to arguing that the Individual Defendants breached their duty of loyalty
to the Company’s stockholders in overseeing data security. This theory requires
Plaintiffs to plead non-conclusory facts showing that the Individual Defendants
were self-interested or acted in bad faith. See Lyondell Chem. Co. v. Ryan, 970
A.2d 235, 239 (Del. 2009); In re Cornerstone Therapeutics Inc., S’holder Litig.,
115 A.3d 1173, 1179 (Del. 2015). Plaintiffs do not allege that any of the Individual
Defendants acted in self-interest, and, indeed, make no allegations regarding
director action.10
Instead, Plaintiffs attempt to plead a breach of duty of loyalty claim by
asserting without any basis that the Individual Defendants acted in bad faith.
10 “[D]irectors are entitled to a presumption that they were faithful to theirfiduciary duties.” Beam v. Stewart, 845 A.2d 1040, 1048 (Del. 2004). Toovercome this presumption, Plaintiffs must plead specific facts demonstratingthat the Directors were self-interested and that their self-interest “materiallyaffected their independence,” McGowan v. Ferro, 859 A.2d 1012, 1029 (Del.Ch. 2004), aff’d, 873 A.2d 1099 (Del. 2005), an onerous burden that Plaintiffsdo not attempt to meet.
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Comp., ¶¶ 198, 210. Bad faith is an extraordinarily high standard and cannot be
satisfied by “conclusory allegations of wrongdoing . . . unsupported by pled facts.”
McMillan v. Intercargo Corp., 768 A.2d 492, 500 (Del. Ch. 2000). Instead,
Plaintiffs are required to plead an “extreme set of facts” showing that the
Individual Defendants “intentionally fail[ed] to act in the face of a known duty to
act, demonstrating a conscious disregard for [their] duties.” Lyondell, 970 A.2d at
243 (citation omitted).
Plaintiffs do not plead an “extreme” set of facts to support their duty of
loyalty claim – in fact, they do not plead any facts supporting a claim of bad faith.
To be sure, Plaintiffs make general allegations that the Individual Defendants
failed “to oversee and manage risks at Home Depot related to data security.” Comp.,
¶ 211. And, they offer the bare conclusion that this failure of oversight amounted to a
“conscious and deliberate disregard for their fiduciary duties.” Comp., ¶ 269.
These conclusory allegations do not support a duty of loyalty claim and Plaintiffs
stretch too far in straining to cabin their allegations into a cognizable legal theory.
Loyalty claims based on alleged failure of oversight are widely recognized
as “the most difficult theory in corporation law upon which a plaintiff might hope
to win a judgment.” In re Caremark Int’l., Inc. Deriv. Litig., 698 A.2d 959, 967
(Del. Ch. 1996). To state such a claim, a stockholder must plead particularized
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facts that the defendants “(a) utterly failed to implement any reporting or
information system or controls or (b) having implemented such a system or
controls, consciously failed to monitor or oversee its operations thus disabling
themselves from being informed of risks or problems requiring their attention. In
either case, imposition of liability requires a showing that [defendants] knew that
they were not discharging their fiduciary obligations.” Stone ex rel. AmSouth
Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006). This represents an
extremely high burden that is not satisfied by conclusory after-the-fact assertions
that the defendants could or should have done more. See Wayne Cnty. Emps.’ Ret.
Sys. v. Corti, No. 3534, 2009 WL 2219260, at *14 (Del. Ch. July 24, 2009), aff’d,
996 A.2d 795 (Del. 2010) (“Bad faith cannot be shown by merely showing that the
directors failed to do all they should have done under the circumstances.”).11
For example, in In re Citigroup, Inc. S’holder Deriv. Litig., 964 A.2d 106
(2009), a stockholder plaintiff alleged that the company’s directors failed to monitor the
risk of its transactions in subprime securities and failed to sufficiently address purported
“warning signs” related to the company’s investment in subprime assets. Id. at 127.
The Court rejected that view and dismissed the complaint after concluding:
11 See also In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 697 (Del. Ch.2005), aff’d 906 A.2d 27 (Del. 2006) (“Delaware law does not – indeed, thecommon law cannot – hold fiduciaries liable for a failure to comply with theaspirational ideal of best practices.”).
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The allegations in the Complaint amount essentially to aclaim that Citigroup suffered large losses and that therewere certain warning signs that could or should have putdefendants on notice of the business risks related toCitigroup’s investments in subprime assets. Plaintiffsthen conclude that because defendants failed to preventthe Company’s losses associated with certain businessrisks, they must have consciously ignored these warningsigns or knowingly failed to monitor the Company’s riskin accordance with their fiduciary duties. Suchconclusory allegations, however, are not sufficient tostate a claim for failure of oversight that would give riseto a substantial likelihood of personal liability, whichwould require particularized factual allegationsdemonstrating bad faith by the director defendants.
Id. at 126-27. In reaching this decision, the Court made clear that “ipse dixit
syllogisms” do not meet the Caremark standard. Id. at 129.
Similarly, in In re General Motors Co. Deriv. Litig., No. 9627, 2015 WL
3958724 (Del. Ch. June 26, 2015), stockholders filed a derivative action against
the company’s board for damages related to faulty ignition switches which had
been known, but were not disclosed, by the company for several years. The
plaintiffs alleged that “the Board lacked a mechanism by which it received
information about safety risks” and further asserted that demand was excused
because “a majority of the Board is disabled from considering demand due to a
substantial likelihood of personal liability in connection with their failure to
oversee GM.” Id. at *2. In rejecting that position, the Court observed:
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Pleadings, even specific pleadings, indicating thatdirectors did a poor job of overseeing risk in a poorly-managed corporation do not imply director bad faith. . .The conduct at issue here, as pled, falls short of an utterfailure to attempt to establish information or reportingsystems, a conscious failure to monitor existingsystems, or conduct otherwise taken in bad faith.Accordingly, I find that there is not a substantiallikelihood of personal liability on the part of a majorityof the Board, excusing demand, and the Motion toDismiss should be granted for failure to comply withRule 23.1.
Id. at *17.
Plaintiffs cannot satisfy the first prong of Caremark – the failure to
implement any reporting systems or controls. Instead, the Complaint pleads that
(i) the Audit Committee was established to assist the Board in reviewing and
monitoring the Company’s compliance programs (Comp., ¶ 49); (ii) the Audit
Committee has “primary responsibility for overseeing risks related to IT and data
privacy and security at Home Depot” (id., ¶ 278); (iii) internal audits were
conducted on the Company’s data security systems (id., ¶¶ 141, 164, 205, 279);
and (iv) the Company’s IT Security and internal audit departments frequently
reported to the Board and Audit Committee regarding cybersecurity issues (id., ¶¶
86-88, 97, 99, 103, 116, 120-123, 139-142, 150-153, 155, 157, 158, 160-163, 200,
205-209). Plaintiffs therefore “cannot proceed on the theory that no oversight
existed, as [they] acknowledge[ed] the presence of the Audit Committee and
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multiple high-level investigations into the Company’s internal controls.” Morefield
v. Bailey, 959 F. Supp. 2d 887, 905 (E.D. Va. 2013) (applying Delaware law).
Plaintiffs also cannot satisfy the second prong of Caremark – pleading
specific facts to show that the Individual Defendants acted in bad faith by
consciously failing to monitor or oversee the operations of the Company’s
reporting system. Caremark, 698 A.2d. at 970. As discussed above, Plaintiffs’
own allegations undermine any claim that the Individual Defendants acted in bad
faith.12 Plaintiffs allege that:
M. Carey “met regularly with Home Depot’s Audit Committee and itsfull Board of Directors and provided the Board with updates regardingHome Depot’s data security systems.” Comp., ¶ 97.
M. Carey additionally briefed the Board on data breaches at other largeretailers. Comp., ¶¶ 76, 77.
Management conducted regular scans and internal audits of theCompany’s cybersecurity systems, and reviewed those results with theAudit Committee and the Board. Comp., ¶¶ 86, 150, 151, 162, 206, 207.
Based on these scans and audits, M. Carey and his departmentplanned and executed remedial measures and “enhancements” to theCompany’s data security systems. Comp., ¶¶ 88, 118, 121, 150, 152,200, 202-206, 230, 238, 239.
12 The attempt to plead increased culpability on the part of the four members ofthe Audit Committee is similarly unavailing as “[m]ere membership on theAudit Committee is not enough for the Court to infer bad faith.” In re ChinaAuto. Sys. Inc. Deriv. Litig., WL 4672059, at *8.
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Third-party consultants were retained to advise the Company on itscybersecurity measures and “to perform a ‘health check’ on itscomputer systems.” Comp., ¶¶ 101, 104, 136.
These allegations negate any assertion that the Individual Defendants acted
in bad faith in breach of their duty of loyalty.13 See In re Goldman Sachs Grp.
S’holder Litig., No. 5215, 2011 WL 4826104, at *23 (Del. Ch. Oct. 12, 2011)
(stockholder failed to show a substantial likelihood of personal liability where the
company maintained an active audit committee and where the directors
implemented a system that they believed would keep them reasonably informed of
the company’s business risks). As in General Motors and Citigroup, supra,
Plaintiffs’ “ipse dixit syllogism” that the Individual Defendants “must” be at fault
simply because the Company suffered losses as the victim of a third-party criminal
attack are insufficient to state a claim for breach of the duty of loyalty. Citigroup, 964
A.2d. at 129; see also Palkon v. Holmes, No. 14-cv-01234, 2014 WL 5341880, at *6
n.1 (D.N.J. Oct. 20, 2014) (noting that plaintiff’s Caremark claims stemming from a
13 Plaintiffs state in conclusory fashion that management made “false andmisleading statements” to the Board regarding the Company’s specificprotective measures. Comp. ¶¶ 154-164. Plaintiffs do not establish, however,that the Individual Defendants had knowledge of any such alleged inaccuraciesand further concede that any purported error was revealed after and as a resultof the data breach. See Comp. ¶¶ 157, 159, 160-163. In any event, thesepurported inaccuracies do not amount to “red flags” which the Boardconsciously ignored, as required for a showing of bad faith. See, e.g., GeneralMotors, 2015 WL 3958724, at *16; Citigroup, 964 A.2d at 128.
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series of data breaches were contradicted by plaintiff’s concession that “security
measures existed when the first breach occurred [and that] the Board addressed such
concerns numerous times.”); cf. In re Heartland Payment Sys., No. 09-cv-1043,
2009 WL 4798148, at *5 (D.N.J. Dec. 7, 2009) (“The fact that a company has
suffered a security breach does not demonstrate that the company did not place
significant emphasis on maintaining a high level of security.”).
C. The Complaint Fails to Plead an Actionable Claim for WasteAgainst Any Defendant.
Plaintiffs incorrectly allege that the Individual Defendants are liable for
waste because they purportedly failed “to implement adequate internal controls to
detect and prevent the Data Breach” and, as a result “the Company has [ ] incurred
substantial costs in connection with the Data Breach.” Comp., ¶ 298.
A “claim of waste will arise only in the rare, unconscionable case where
directors irrationally squander or give away corporate assets.” In re Walt Disney
Co. Deriv. Litig., 906 A.2d 27, 74 (Del. 2006) (dismissing claim related to $110
million severance payment to executive after 14 months of employment); see also
Lewis v. Vogelstein, 699 A.2d 327, 336 (Del. Ch. 1997) (“Most often the claim is
associated with a transfer of corporate assets that serves no corporate purpose or
for which no consideration at all is received.”). A cognizable claim for waste does
not exist against a Board as a result of harm caused by third-party criminal activity.
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The poverty of this claim is further underscored by the absence of
particularized factual allegations supporting the claim. Plaintiffs do not plead any
details concerning the unauthorized transfer of corporate assets by the Individual
Defendants. Nor do they plead any facts suggesting that the Individual Defendants
irrationally squandered corporate assets, including during the investigation and
remediation of the breach. Accordingly, this claim should be dismissed.
D. The Complaint Fails to Plead an Actionable Claim for Violationof Section 14(a).
Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9
promulgated thereunder provide that no proxy statement shall contain any
statement which, at the time and in light of the circumstances under which it is
made, is false or misleading with respect to any material fact, or which omits any
material fact necessary to make the statements therein not false or misleading. See
17 C.F.R. § 240.14-A-9; 15 U.S.C. § 78n(a).
A plaintiff alleging an omission under Section 14(a) must show that the
defendants had a duty to disclose the omitted material fact, and an omission will
therefore violate Section 14(a) only “if either the SEC regulations specifically
require disclosure of the omitted information in a proxy statement, or the omission
makes other statements in the proxy statement materially false or misleading.”
Resnik v. Swartz, 303 F.3d 147, 151 (2d Cir. 2002); In re Marsh & McLennan
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Cos., Inc. Securities Litig., 536 F. Supp. 2d 313, 320-21 (S.D.N.Y. 2007).
Stockholders seeking to bring a derivative action under Section 14(a) must
additionally show harm to the corporation and that “the false or misleading proxy
statement was an essential link in causing the loss-generating corporate actions.”
See Hulliung v. Bolen, 548 F. Supp. 2d 336, 339 (N.D. Tex. 2008); see also
Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc., 595 F. Supp. 2d 1253,
1290 (M.D. Fla. 2009), aff’d 594 F.3d 783, 796 (11th Cir. 2010).
Claims alleging violations of Section 14(a) are subject to the heightened
pleading standards of the Private Securities Litigation Reform Act (the “PSLRA”),
and therefore:
the complaint shall specify each statement alleged tohave been misleading, the reason or reasons why thestatement is misleading, and, if an allegation regardingthe statement or omission is made on information andbelief, the complaint shall state with particularity all factson which that belief is formed.
15 U.S.C. § 78u-4(b)(1) (West); see also Stoneridge Inv. Partners, LLC v. Sci.-
Atlanta, 552 U.S. 148, 165 (2008) (the PSLRA imposes “heightened pleading
requirements and a loss causation requirement upon ‘any private action’ arising
from the Securities Exchange Act”); see also, e.g., Little Gem Life Scis., LLC v.
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Orphan Med., Inc., 537 F.3d 913, 917 (8th Cir. 2008) (applying heightened
pleading standards to Section 14(a) claim).14
Plaintiffs purport to assert Section 14(a) claims arising out of the 2014 Proxy
which solicited a stockholder vote on executive compensation and the election of
directors (Comp., ¶ 185), and the 2015 Proxy which solicited a stockholder vote on
the election of directors and shareholder proposals regarding Chairperson
independence and the requirements to call a special shareholder meeting (Comp., ¶
187) (collectively, the “Transactions”). Plaintiffs broadly assert that the 2014
Proxy “concealed” purportedly “known, specific data security risks” and the 2014
and 2015 Proxies failed to disclose that the Audit Committee Charter had not been
amended in 2012 to explicitly include oversight of IT and data security risks, and
that the committee was therefore acting outside the bounds of its authority (the
“Audit Committee Charter Claim”). Comp., ¶¶ 183, 305.
1. Plaintiffs Fail to Allege that the Purported Omissions Made AnyOther Statements in the Proxies False or Misleading.
Plaintiffs fail to identify with particularity the statements in the 2014 and
2015 Proxies that were allegedly rendered false or misleading by virtue of the
14 Cf. Washtenaw, 2008 WL 2302679, at*9 (dismissing Section 14(a) claims andholding that the heightened pleading requirement applies to Section 14(a) wherethe claim sounds in fraud).
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purported omissions. See Marsh, 536 F. Supp. 2d at 321 (S.D.N.Y. 2007); see also
La. Mun. Police Emps. Ret. Sys. v. Cooper Indus., No. 12-cv-1750, 2012 WL
4958561, at *8 (N.D. Ohio Oct. 16, 2012) (“[T]he plaintiff must identify a precise
‘statement’ in a proxy that is either affirmatively misleading or that is rendered
misleading by the operation of a materially omitted fact.”) (emphasis added).
With respect to the 2014 Proxy, Plaintiffs have not set forth any statement
that was made misleading due to the nondisclosure of “specific threats to [the
Company’s] data security” or the Company’s purported failure to amend the Audit
Committee Charter. In fact, Plaintiffs do not allege that the 2014 Proxy discussed
the Company’s cybersecurity systems in any context whatsoever. See Comp.,
¶ 183 (“The Company’s 2014 Proxy statement made no mention of the Audit
Committee’s purported responsibilities regarding oversight of the Company’s risks
related to data security or IT.”). Without the requisite connection to any statement
in the 2014 Proxy regarding data security, Plaintiffs have not shown that the
directors had a duty to disclose the alleged omissions and have therefore failed to
meet a necessary element of their Section 14(a) claim. See Marsh, 536 F. Supp. 2d
at 323, 325. After all, “[d]isclosure of an item of information is not required . . .
simply because it may be relevant or of interest to a reasonable investor. For an
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omission to be actionable, the securities laws must impose a duty to disclose the
omitted information.” Resnik, 303 F.3d at 151.
Plaintiffs next assert that a general statement in the 2015 Proxy that “[t]he
Audit Committee also has primary responsibility for overseeing risks related to
information technology and data privacy and security” was rendered false or
misleading by the omission that the Audit Committee Charter was not amended in
2012 to specifically include oversight of data security risks. Comp., ¶¶ 186, 189.
Plaintiffs concede, however, that:
The Audit Committee does in fact hold “primary responsibility foroverseeing risks related to IT and data privacy and security at HomeDepot” – regardless of whether the Charter so states (Comp., ¶ 278);
The Audit Committee exercised such oversight during the relevant timeperiod (Comp., ¶¶ 86, 87, 97, 99, 120, 122, 139, 141, 150, 151, 153, 155,200, 205, 206, 207, 209) (alleging numerous Audit Committee meetingsduring which data security was discussed); and
The Company’s Bylaws grant the Audit Committee the ability to“exercise all powers and authority of the Board of Directors in themanagement of the business” (Comp., ¶ 170).15
15 Moreover, the Audit Committee Charter authorizes the Committee to “[d]iscussthe guidelines and policies related to risk assessment and risk management,including the Company’s major financial exposures and the steps managementhas taken to monitor and control such exposures” and to “[p]erform any otheractivities consistent with this Charter, the Company’s By-Laws and applicablelaw as the Committee or the Board deems necessary or appropriate.” SeePeterman Decl. ¶ 6.
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Plaintiffs cannot allege that the Audit Committee exercised primary responsibility
for oversight of data security while claiming that statements to that effect in the
2015 Proxy were false and misleading. The 2015 Audit Committee Charter Claim
therefore must fail. See JPMorgan Chase Deriv. Litig., No. 14-cv-02414, 2014
WL 5430487, at *22 (E.D. Cal. Oct. 24, 2014) (statement that the board was
responsible for oversight of management was not misleading where plaintiffs
conceded that the board in fact maintained such oversight).
2. Plaintiffs Fail to Plead that the Alleged Omissions were Material.
Plaintiffs’ Section 14(a) claims should be dismissed for the additional and
independent reason that they have failed to plead materiality with particularity.
Alleged omissions in a proxy statement are immaterial as a matter of law unless
“there is a substantial likelihood that a reasonable shareholder would consider
[them] important in deciding how to vote” and “disclosure . . . would have been
viewed by the reasonable shareholder as having significantly altered the ‘total mix’
of information made available.” TSC Industries, Inc. v. Northway, Inc., 426 U.S.
438, 449 (1976); see also Washtenaw, 2008 WL 2302679, at *4.
Here, the Complaint does not allege which cybersecurity threats the Board
ought to have disclosed or how such information would have “significantly altered
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the ‘total mix’ of information made available” to stockholders.16 Id. Plaintiffs
similarly do not plead with particularity whether and why a reasonable stockholder
would have considered such information important in deciding how to vote on the
items at issue in the 2014 Proxy, i.e., director elections and approval of executive
compensation. Plaintiffs therefore have failed to meet the heightened pleading
standard required under Section 14(a).
The Complaint also fails to plead materiality with respect to the Audit
Committee Charter Claim. Plaintiffs do not allege that the 2014 or 2015 Proxies
solicited a shareholder vote related to membership on the Audit Committee or its
authority and responsibilities. The election of directors, approval of executive
compensation, and shareholder proposals regarding Chairperson independence and
special shareholder meetings were entirely unrelated to the Audit Committee, its
Charter, or its authority to oversee cyber risks. Whether the Charter was amended
to explicitly include such oversight could not be an “important fact” to any
reasonable investor in deciding how to vote on these unrelated matters, particularly
where, as noted above, the Charter granted wide latitude to the Audit Committee to
oversee the Company’s data security risks.
16 Plainly, the occurrence of the 2014 data breach is not among these alleged“specific threats” since it was not known to the Company and there is no duty todisclose facts that are not known at the time of filing. In re Acceptance Ins.Cos., Inc., Sec. Litig., 352 F. Supp. 2d 928, 937 (D. Neb. 2003).
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3. Plaintiffs Have Not Pleaded that the Alleged Omissions Led tothe Transactions or Caused the Company Any Harm.
In order to state a claim under Section 14(a), a plaintiff must plead with
particularity both “transaction causation” – that the alleged misstatements or
omissions resulted in the stockholders voting for the challenged transaction – and
“loss causation” – an economic loss directly caused by that transaction. Jabil, 594
F.3d at 796-97 (emphasis added) (citing Koppel v. 4987 Corp., 167 F.3d 125, 137
(2d Cir. 1999); see also Resnik v. Boskin, No. 09-5059, 2011 WL 689617, at *3
(D.N.J. Feb. 17, 2011) (a plaintiff may prevail on a Section 14(a) claim only when
he “votes for a specific corporate transaction . . . and that transaction was the direct
cause of the pecuniary injury”).
Plaintiffs here have not pleaded either of these requisite elements. As
discussed above, Plaintiffs have not shown that any of the alleged omissions were
related in any manner to the Transactions or that the alleged omissions were an
“essential link” to effectuating those Transactions. Indeed, Plaintiffs do not allege
that they or any other stockholder would have modified their votes had they known
the information supposedly omitted.
Moreover, Plaintiffs have not pleaded that the Company was harmed by any
alleged omission. To be sure, Plaintiffs allege in a conclusory fashion that the
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Company was “damaged” as a result of the dissemination of the 2014 and 2015
Proxy Statements, which Plaintiffs assert “wasted corporate assets and prevented
shareholders from engaging in a fully informed vote. . . .” Comp., ¶ 307. But
Plaintiffs do not state how the director elections or other Transactions resulted in
any monetary waste. See Jacobs v. Airlift Int’l, Inc., 440 F. Supp. 540, 543 (S.D.
Fla. 1977) (dismissing derivative Section 14(a) claim where the court was “unable
to discern the nature of the injury which may lie at the center of the complaint.”).
And, to the extent Plaintiffs attempt to connect the election of directors with losses
incurred as a result of the data breach, Plaintiffs’ claims fail for several reasons.
As a starting point, courts “uniformly hold that a claim seeking relief for
injuries occasioned by mismanagement or breach of fiduciary duty is not
redressable under the proxy rules simply by virtue of the fact that acts were
committed by directors who would not have been elected but for the proxy
solicitation.” In re Browning-Ferris Indus., Inc. S’holder Deriv. Litig., 830 F.
Supp. 361, 370 S.D. Tex. 1993) (quotations and citations omitted); see also In re
Diamond Foods, Inc. Deriv. Litig., No. 11-05692, 2012 WL 1945814, at *7 (N.D.
Cal. May 29, 2012) (“[T]he re-election of directors who have allegedly
mismanaged the company is insufficient to meet the ‘essential link’ requirement of
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Section 14(a).”).17 Moreover, the Complaint pleads that the data breach was
already underway by the time the 2014 Proxy was issued, and had been disclosed
and remediated well before the 2015 Proxy solicitation was disseminated to
stockholders. Comp., ¶¶ 183, 186. Plaintiffs therefore cannot show that any loss
arising out of the breach was caused by the Transactions. And without that nexus,
they fail to state an actionable claim under Section 14(a).
IV. CONCLUSION
Plaintiffs do not plead an actionable claim against any defendant and did not
comply with the substantive pre-suit filing requirements of Delaware Chancery
Court Rule 23.1. Accordingly, for the reasons set forth herein, the Complaint
should be dismissed with prejudice.
[Signature Page to Follow]
17 Federal Courts are particularly wary of any attempt to “‘dress up’ state lawclaims of corporate mismanagement or breach of fiduciary duty in a ‘Section14(a) suit of clothes’” where, as here, the Section 14(a) claims serve as the solebasis for federal jurisdiction. Stricklin v. Ferland, No. 98-3279, 1998 WL966023, at *5 (E.D. Pa. Nov. 10, 1998); see also Field v. Trump, 850 F.2d 938,947 (2d Cir. 1988) (expressing “disapproval of the use of Section 14(a) andRule 14a-9 as an avenue for access to the federal courts in order to redressalleged mismanagement or breach of fiduciary duty.”).
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Respectfully submitted this 14th day of April, 2016.
/s/ John L. LathamJohn L. LathamGeorgia Bar No. [email protected] M. PetermanGeorgia Bar No. [email protected] & BIRD LLPOne Atlantic Center1201 West Peachtree StreetAtlanta, GA 30309-3424Tel. (404) 881-7000Fax (404) 881-7777
Attorneys for Defendants
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LOCAL RULE 7.1D CERTIFICATION
By signature below, counsel certifies that the foregoing document was
prepared in Times New Roman, 14-point font in compliance with Local Rule 5.1B.
/s/ Cara M. PetermanCara M. PetermanGeorgia Bar No. 866576
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CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on the 14th day of April, 2016, I electronically
filed the foregoing Memorandum in Support of Defendants’ Motion to Dismiss the
Verified Consolidated Shareholder Derivative Complaint with the Clerk of Court
using the CM/ECF system, which will automatically send notification of such
filing upon Counsel of Record as follows:
HOLZER & HOLZER, LLCCorey D. HolzerGa. Bar No. 364698Marshall P. DeesGa. Bar No. 1057761200 Ashwood Parkway, Ste. 410Atlanta, GA 30338Telephone: (770) 392-0090
Liaison Counsel for Plaintiffs
KEN HODGES LAWKenneth B. Hodges IIIGa. Bar No. 3591552719 Buford Highway NEAtlanta, GA 30324Telephone: (404) 692-0488
Counsel for Plaintiff Bennek
FARUQI & FARUQI, LLPStuart J. GuberGa. Bar No. 141879101 Greenwood Ave., Ste. 600Jenkintown, PA 19046Telephone: (215) 277-5770
SCHUBERT JONCKHEERKOLBE & KRALOWEC LLPRobert C. SchubertNoah M. SchubertWillem F. JonckheerMiranda P. Kolbe3 Embarcadero Center, Ste. 1650San Francisco, CA 94111Telephone: (415) 788-4220
Lead Counsel for Plaintiffs
/s/ Cara M. PetermanCara M. PetermanGeorgia Bar No. 866576
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