Birch v. Sharer
Filed 6/21/12 Birch v. Sharer CA2/1
California Rules of Court, rule 8.1115(a), prohibits courts
and parties from citing or relying on opinions not certified for publication or
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IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND
APPELLATE DISTRICT
DIVISION
ONE
SHELLY BIRCH,
Plaintiff and Appellant,
v.
KEVIN W. SHARER et al.,
Defendants and Respondents.
B231202
(Los Angeles
County
Super. Ct.
No. BC431411)
APPEAL from
a judgment of the Superior Court
of
County, William F. Highberger, Judge. Reversed with directions.
Rosman
& Germain, Daniel L. Germain; Kessler Topaz Meltzer & Check and
Eric L. Zagar for Plaintiff and Appellant.
Sheppard,
Mullin, Richter & Hampton, Steven O. Kramer and Jonathan D.
Moss for Defendants and Respondents Kevin W. Sharer et al.
Latham &
Watkins, Miles N. Ruthberg, Pamela S. Palmer and Brendan K.
Kelleher for Defendant and Respondent Amgen, Inc.
_________________________________
In this
shareholder derivative action, plaintiff alleged she made a written demand on
the board of directors to remedy the board’s repeated breach of its fiduciary
duty to shareholders and, in response, the board failed to investigate and remedy
the alleged wrongdoing. Plaintiff named
the company as the nominal defendant, and named as individual defendants
fourteen current and former officers and directors. After bringing an unsuccessful demurrer,
defendants filed an answer.
Subsequently,
defendants filed a motion for judgment
on the pleadings, contending they had responded to plaintiff’s demand and
properly refused it, as reflected in letters sent to plaintiff after this
action was filed. The trial court took
judicial notice of the letters and granted the motion on the ground that the
evidence proved the board had taken appropriate steps in response to the
demand. Judgment was entered for
defendants.
On appeal,
plaintiff argues that the trial court not only took judicial notice of the
company’s letters but improperly accepted their contents as true. We conclude the trial court erred in
accepting the letters for the truth of their contents. Further, even if the trial court acted
properly in that respect, the correspondence merely created a factual conflict
in light of the contrary allegations of the complaint. That conflict could not be resolved by way of
a motion for judgment on the pleadings.
Accordingly, we reverse the judgment.
On February 8, 2010, plaintiff
Shelly Birch filed this shareholder derivative action against fourteen current
and former officers and directors on the board of Amgen, Inc. (Amgen). The corporation was named as a nominal
defendant. Birch owns stock in Amgen.
A. Complaint
The
verified complaint contained a single cause of action for
incorporated therein, was a six-page single-spaced letter dated October 29, 2009, from Birch to
Amgen, describing in detail various alleged wrongful acts and omissions of the
officers and directors. The details
described “numerous governmental investigations and private and public
lawsuits†brought against the company.
The alleged wrongful acts and omissions fell into one or more of three
categories: (1) knowing failure to
implement and maintain adequate internal reporting controls to provide the
board with important information; (2) knowing failure to take corrective
action when put on notice that Amgen was violating applicable laws and
regulations; and (3) knowingly violating Amgen’s internal policies and
procedures of governance. The wrongdoing
described in the demand letter was also alleged in the body of the complaint.
The demand
letter concluded: “I hereby demand that
the Board take action against each of the Officers and Directors to recover the
damages described herein for the benefit of the Company and to correct the
deficiencies in the Company’s internal controls that allowed the
“If within
a reasonable period after receipt of this letter, the Board has not commenced
an action as demanded herein, or in the event the Board refuses to commence an
action as demanded herein, [I] will commence a shareholder derivative action on
behalf of Amgen seeking appropriate relief.â€
Near the
end of the complaint, Birch alleged: “On
October 29, 2009, [I]
made a demand (the ‘Litigation Demand’) on the Board. . . .
[¶] . . . The Board has
acknowledged receipt of the Litigation Demand, but, [u]pon information and
belief, has not conducted any investigation of the Litigation Demand, has not
retained any independent counsel or other advisors in connection with the
Litigation Demand, has not formed a committee to consider or investigate the
Litigation Demand, and has not in fact done anything to consider or respond to
the Litigation Demand. Despite being
well aware of the Litigation Demand’s allegations as a result of the
governmental investigations and litigations described in the Litigation Demand
and in this Complaint, the Board, as it has done consistently, has abdicated
its responsibility to take action when put on notice of serious problems with
the Company’s business, operations, and legal compliance. Once again, the Board has failed to act in
good faith.â€
B. Demurrer and Motion for
Sanctions
On June 30, 2010, Amgen filed a
demurrer to the complaint. The
individual defendants filed a notice of joinder in Amgen’s demurrer and
separately filed a demurrer of their own.
Collectively, defendants argued Birch had not alleged with
litigation demand on Amgen’s board of directors and that the board had
defeat the business judgment rule: She
did not allege with particularity that the board had failed to make a
reasonable inquiry in response to the litigation demand or that it had failed
to act in good faith in conducting its investigation.
Amgen also
filed a motion for sanctions (Code Civ. Proc., § 128.7) based on the ground that it had
sent Birch a letter on February 3,
2010 (by email and United States mail) — five days
stating the board of directors was “currently evaluating the matters set forth
in your October 29, 2009 demand
letter.†(Italics added.) The February 3 letter went on to
summarize the contents of Birch’s litigation demand and asked her to contact
Amgen immediately if the February 3 letter did not “fairly reflect†her
allegations. The letter also requested
any additional information that might assist the board in its
investigation. Last, the letter
requested that Birch promptly provide documentation showing when she became an
Amgen shareholder, the period of time she owned the shares, and her current
status as a shareholder.
The
demurrers and motion for sanctions were heard on September 29, 2010. The trial court overruled the demurrers and
denied the motion for sanctions. In a written ruling, the trial court
explained: “Allowing more than three
months to pass from October 29, 2009 to February 3, 2010, and then
only acknowledging receipt of the demand with no substantive response is not
enough, and Birch’s pleading as to the sufficiency of the demand is
sufficient. Inaction as reflected in the
February 3, 2010
letter . . . is enough to satisfy the need to plead wrongful
refusal.â€
C. Motion
for Judgment on the Pleadings
The
trial court ordered defendants to file answers by October 29, 2010. Amgen filed an answer, and the individual
defendants filed a joint answer. One of
Amgen’s former officers filed his own answer.
In its answer, Amgen explained in detail what the board of directors had
done in response to Birch’s litigation demand.
That explanation included a lengthy description of four letters Amgen
sent to Birch; all four were attached as exhibits to the answer. Two of the letters were sent before Birch
filed this action, and two sent thereafter.
On November 15, 2010,
Amgen filed a motion for summary judgment or summary adjudication or, in the
alternative, a motion for judgment on the pleadings. Amgen asserted that Birch had failed to prove
the board of directors had wrongfully refused her litigation demand. As argued, the business judgment rule created
a presumption that, in making business decisions, the directors had acted on an
informed basis and in good faith. Under
the business judgment rule, the only issue to be determined by the trial court
was whether the board had conducted an investigation in a reasonable way and in
good faith. Birch had not established
that the board’s consideration of the litigation demand was unreasonable or not
in good faith. For their part, the
individual defendants filed a notice of joinder in Amgen’s motions.
In
support of the motions, Amgen requested that the trial court take judicial
notice of the four letters attached to its answer. That correspondence consisted of: (1) a November 11, 2009 letter
acknowledging Amgen’s receipt of Birch’s October 29, 2009 litigation
demand and stating the demand was under consideration; (2) the
February 3, 2010 letter previously described, which summarized Birch’s
litigation demand and asked for any additional information that might be
helpful; (3) an April 23, 2010 letter in which Amgen stated the
investigation into Birch’s litigation demand was ongoing and suggested that the
parties postpone any law-and-motion matters until after Amgen had finished its
investigation; and (4) a May 19, 2010 letter, consisting of six
single-spaced paragraphs, explaining what the board of directors had done in
response to Birch’s litigation demand and closing with: “The Board met on May 12, 2010, and after
due consideration, and at the recommendation of the [Governance and Nominating]
Committee, the Board determined in its business judgment that it is not in the
best interests of Amgen to pursue the claims alleged in the Demand against any
of the individuals mentioned in the Demand.
The Board voted to accept the Committee’s recommendation to reject the
Demand.â€
Before
the filing of the motions, Birch had conceded in one way or another that the
four letters were authentic and had been received. In opposing defendants’ alternative motions,
Birch disputed the truth of the letters’ contents, arguing the trial court
could not accept the letters for their truth.
At
the January 31, 2011 hearing on the motions, defendants withdrew the
summary judgment and summary adjudication motions and proceeded with the motion
for judgment on the pleadings. The trial
court stated that its September 29, 2010 order overruling the demurrers
“was ill-considered as a matter of law.
I’ll give you notice that I am reconsidering it and will take that off
the books, recognizing that it was unduly hasty on my part to decide that lapse
of time itself constituted wrongful refusal.â€
With
regard to taking judicial notice of the four letters, the trial court
stated: “So we know that these four
letters were sent. Insofar as they would
assert that a good or thorough investigation [was] done, I will not be taking
[notice of] them for the truth of any such assertion, but just for the fact
that in particular on May 19th of 2010, [a] communication was sent to
Plaintiff’s counsel . . . advising that a decision had been made not
to proceed with the claim that had been tendered to the Board, which is the
same claim that is before this Court to be a derivative suit. [¶] . . . [¶]
“. . .
[T]he question presented at this point, notwithstanding how the complaint is
pled, because the complaint was filed before May 19th of 2010[,] is
whether or not informed of the fact of that communication, where the board
expressed its sentiments about whether or not this derivative suit should be
pursued by Amgen in its own name, under its own control, was that a violation
of the business judgment rule by the board?
“And
not surprisingly, since the [complaint] predates the sending of the
[May 19, 2010] communication, the [complaint] . . . has not yet
been amended to try to attack the wisdom, prudence or process by which that
decision came out [and] says nothing which would in any way, shape or form
speak to the quality or adequacy of the decision communicated on May 19. [¶] . . . [¶]
“But,
in any case, now we know that there was a conscious decision communicated. That much I think I can take judicial notice
of.â€
Addressing
Birch’s counsel, the trial court observed:
“I have to now look at the fully informed record, even though it
obviously forces an effective mutation of your own pleading without your
voluntary consent. . . . Through judicial notice, you are now
stuck with explaining why the [board’s] response is not adequate when you
had — when you filed the complaint . . . .
[¶] . . . [¶] . . . [A]t this point you
probably have to answer what [the board] really did and say why that’s so bad.â€
The
trial court offered Birch an opportunity to amend the complaint, but her
attorney replied, “[W]e made a tactical decision not to amend, and I am willing
to stand by that.â€
By
order dated February 17, 2011, the trial court granted the motion for
judgment on the pleadings and dismissed the action with prejudice. Birch appealed.
II
DISCUSSION
“We review de novo a trial
court’s judgment on an order granting a motion for judgment on the
pleadings.†(Bezirdjian v. O’Reilly (2010) 183 Cal.App.4th 316, 321.)
“‘The
standard for granting a motion for judgment on the pleadings is essentially the
same as that applicable to a general demurrer, that is, under the state of the
pleadings, together with matters that may be judicially noticed, it appears
that a party is entitled to judgment as a matter of law.’ . . .
‘Matters which are subject to mandatory judicial notice may be treated as part
of the complaint and may be considered without notice to the
parties. . . . Matters which are subject to permissive judicial
notice must be specified in the notice of motion, the supporting points and
authorities, or as the court otherwise permits.’ . . . ‘Judgment on
the pleadings does
resolution of questions of witness credibility or evidentiary conflicts. In fact, judgment on the pleadings must be
denied where there are material factual issues that require evidentiary resolution. . . .
In determining whether the pleadings, together with matters that may be
judicially noticed, entitle a party to judgment, a reviewing court can itself
conduct the appropriate analysis and need not defer to the trial court.’†(Bezirdjian
v. O’Reilly, supra,
183 Cal.App.4th at pp. 321–322, citations omitted.) “‘In an appeal from a
as true the facts alleged in the complaint
. . . .’†(
202 Cal.App.4th 1342, 1361.)
As
a preliminary matter, “we review some basic principles regarding shareholder
derivative actions. [Amgen] is
incorporated in the State of Delaware, and [all] parties agree that Delaware
law applies in this lawsuit. ‘A basic
principle of the General Corporation Law of the State of Delaware is that
directors, rather than shareholders, manage the business and affairs of the
corporation. . . . “The exercise of this managerial power is
tempered by fundamental fiduciary obligations owed by the directors to the
corporation and its shareholders.†. . . The decision to bring a law
suit or to refrain from litigating a claim on behalf of a corporation is a
decision concerning the management of the corporation. . . .
Consequently, such decisions are part of the responsibility of the board of
directors.’ . . .
shareholders’ ability to institute an action on behalf of the corporation
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.†. . . [Delaware law] requires that shareholders
seeking to assert a claim on behalf of the corporation must first exhaust
intracorporate remedies by making a demand on the directors to obtain the action
desired, or to plead with particularity why demand is
excused. . . . [¶] The purpose of pre-suit demand is to
assure that the stockholder affords the corporation the opportunity to address
an alleged wrong without litigation, to decide whether to invest the resources
of the corporation in litigation, and to control any litigation which does
occur.’ . . .
decision to refuse a shareholder’s demand:
‘Since a conscious decision by a board of directors to refrain from
acting may be a valid exercise of business judgment, “where demand on a board
has been made and refused, [courts] apply the business judgment rule in
reviewing the board’s refusal to act pursuant to a stockholder’s demand†to
file a lawsuit. . . . The business judgment rule is a
presumption that in making a business decision, not involving self-interest,
the directors of a corporation acted on an informed basis, in good faith and in
the honest belief that the action taken was in the best interests of the
company. . . . “The burden is on the party challenging the
decision to establish facts rebutting th[is] presumption.†. . .
Thus, the business judgment rule operates as a judicial acknowledgement of a
board of directors’ managerial prerogatives.’ . . .
“
rule is not absolute. However, to rebut
the presumption, a plaintiff must plead with particularity facts that create a
reasonable doubt as to the good faith or reasonableness of a board’s
investigation. . . . Mere conclusory allegations are
insufficient. . . . ‘If there is reason to doubt that the board
acted independently or with due care in responding to the demand, the
stockholder may have the basis ex post to claim wrongful refusal. The stockholder then has the right to bring
the underlying action with the same standing which the stockholder would have
had, ex ante, if demand had been excused as futile.’†(Bezirdjian
v. O’Reilly, supra,
183 Cal.App.4th at pp. 322–323, citations & fns.
omitted.) “‘The complaint shall
. . . allege with particularity the efforts, if any, . . .
to obtain the action the plaintiff desires from the directors . . .
and the reasons for the plaintiff’s failure to obtain the action or for not
making the effort.’†(
“Upon
receipt of a demand, the Board of Directors must investigate and evaluate the
charges in order to discharge its duty to the shareholders and manage corporate
affairs responsibly.†(
Corp. (D.Del. 1985) 604 F.Supp. 1106, 1117.) “‘The plaintiff[s] in this case made a demand
upon the board that was refused. In
those circumstances, for this lawsuit to go forward the plaintiffs must allege with particularity facts that create a reasonable
doubt that the corporation’s board of directors wrongfully refused the demand. . . .
In determining whether a demand was wrongly refused, this Court reviews the
board’s decision under traditional business judgment rule standards, which are
the board’s disinterest and independence and the good faith and reasonableness
of its investigation. . . . By making a demand, a
shareholder-plaintiff tacitly concedes the disinterest and independence of the
board. . . . Therefore, in that particular context
faith and reasonableness of the board’s investigation of the claims articulated
in the demand.’†(
(Del. 1997) 701 A.2d 70, 73, italics added, overruled on another point in
746 A.2d 244, 253 & fn. 13.)
In short, “the trial court reviews the board’s decision only for
compliance with the traditional business judgment rule. The only relevant question is whether the
directors acted in an informed manner and
with due care, in a good faith belief that their action was in the best
interest of the corporation.†(
591 A.2d 194, 198, italics added, overruled on another point in
This
appeal presents a classic example of how attorneys on opposite sides of a
dispute can examine the same allegations and come to completely opposite
conclusions. The question on appeal is
straightforward: Did Birch allege facts
with sufficient particularity to defeat the business judgment rule at the
pleading stage? The answer is yes.
At the risk of being
repetitious, the complaint alleged: “On
October 29, 2009, [I] made a demand (the ‘Litigation Demand’) on the
Board. . . . [¶] . . .
The Board has acknowledged receipt of the Litigation Demand, but, [u]pon
information and belief, has not conducted any investigation of the Litigation
Demand, has not retained any independent counsel or other advisors in
connection with the Litigation Demand, has not formed a committee to consider
or investigate the Litigation Demand, and has not in fact done anything to
consider or respond to the Litigation Demand.
Despite being well aware of the Litigation Demand’s allegations as a
result of the governmental investigations and litigations described in the
Litigation Demand and in this Complaint, the Board, as it has done
consistently, has abdicated its responsibility to take action when put on
notice of serious problems with the Company’s business, operations, and legal compliance. Once again, the Board has failed to act in
good faith.â€
The
foregoing language alleged with particularity that defendants did not
investigate the matters raised in Birch’s litigation demand in good faith or in
a reasonable way, nor did defendants respond to the demand with due care or on
an informed basis. The business judgment
rule requires a shareholder to prove a negative, namely, the board
defendants could have investigated
the accusations in her litigation demand, but she also alleged defendants did
not pursue any of them. Although the
last sentence of the quoted paragraph — alleging the board’s lack of good
faith — is a conclusion, the preceding factual allegations support
it. We accept the factual allegations in
the complaint as true. (See
p. 1361.)
In
contrast, we do not accept as true
any of the statements in the letters that were attached to the answer and of
which the trial court took judicial notice.
“A court can properly take judicial notice of the existence of a
document, but can take judicial notice only of the truth of the contents
of documents such as findings of fact, conclusions of law, orders, and
judgments. . . . It is immaterial that if the extrinsic matter
is true it would defeat the cause of action, because a [motion for judgment on
the pleadings] is not concerned with a party’s ability to prove the
allegations of the pleading. . . . [¶]
is thus error to take judicial notice of the terms of an ordinary document
submitted in support or interpret the terms; ‘a court cannot by means of
judicial notice convert a [motion for judgment on the pleadings] into an
incomplete evidentiary hearing in which the [moving] party can present
documentary evidence and the opposing party is bound by what that evidence
appears to show.’†(Jamulians Against the Casino v. Dougherty (2012)
205 Cal.App.4th 632, 638, citations omitted.)
Here,
Amgen’s letters can be used to establish that defendants corresponded with
Birch on four occasions in response to her litigation demand; the letters
cannot be used for any other purpose.
Birch’s concession that the letters were received and are authentic is
inconsistent with the allegation in the complaint that defendants did nothing
in response to her litigation demand.
But that minor inconsistency does not affect the legal sufficiency of
the facts as a whole: Notwithstanding
the admitted receipt of the letters, Birch alleged facts that create sufficient
doubt as to whether defendants conducted a reasonable investigation in good
faith and whether defendants rejected Birch’s litigation demand on an informed
basis. Those facts were adequately
pleaded regardless of when the letters were received — before or after the
complaint was filed — because the allegations were not expressly limited
to a specific period of time. Simply
put, the facts alleged in the original complaint were sufficient to negate the
business judgment rule even after Birch received the May 19, 2010
rejection letter.
Further,
assuming that the contents of the letters could be accepted for the
truth — just as the facts in Birch’s complaint are accepted as true —
the parties would be at a stalemate. The
complaint and the answer would contradict each other on the same issue: the application of the business judgment
rule. Indeed, the contents of the
letters are described in Amgen’s answer, but defendants could not succeed in
dismissing the complaint by arguing that the allegations of the answer are more
credible than the conflicting allegations of the complaint. “‘[J]udgment on the pleadings must be denied
where there are material factual issues that require evidentiary
resolution.’†(Bezirdjian v. O’Reilly, supra,
183 Cal.App.4th at p. 322.)
Amgen’s
reliance on the outcome in Levine v.
Smith, supra, 591 A.2d 194, is misplaced.
In that case, the board’s letter rejecting the plaintiff’s demand was
contents of the letter as true. The
Delaware Supreme Court explained:
“[Plaintiff’s] allegation that the Board ‘did nothing’ is contradicted
by the Board’s letter of reply rejecting [plaintiff’s] demand. The letter, attached to plaintiff’s Amended
Complaint, states, ‘following review of the matters set forth in your
December 11, 1986 [demand] letter, the Board . . . unanimously
determined that an attempt to rescind, or litigat[e] . . . concerning
[the repurchase agreement] is not in the best interests of the
Corporation.’ As the trial court points
out, [the Board’s] letter reply ‘is inconsistent with, and thus diminishes the
force of, plaintiff’s allegation that the Board “did nothing.â€â€™ Further, the Board’s letter response refusing
[plaintiff’s] demand ‘following review of the matters’ which were the subject
of [the] demand letter of December 11, 1986 reflects on its face the
. . . Board’s consideration of [plaintiff’s] demand.
inference to be drawn from this document is that the . . . Directors
did act in an informed manner in addressing [plaintiff’s] demand.†(Levine
v. Smith, at p. 214, fn. omitted.)
In
contrast, Birch chose not to amend her complaint after receiving defendants’
rejection letter. No rule of pleading
required her to do otherwise. As was her
right, Birch stood on the allegations of the original complaint, which were
legally sufficient to defeat the business judgment rule at the pleading stage,
notwithstanding her receipt of Amgen’s letters.
III
DISPOSITION
The judgment is reversed and, on remand, the trial court
shall enter a new order denying the motion for judgment on the pleadings. Plaintiff is entitled to costs on appeal.
NOT TO BE PUBLISHED.
MALLANO,
P. J.
We concur:
CHANEY, J.
JOHNSON, J.
