The opinion of the court was delivered by: Robert W. Gettleman United States District Judge
Judge Robert W. Gettleman
MEMORANDUM OPINION AND ORDER*fn1
Plaintiffs are the City of St. Clair Shores General Employees Retirement System and Madison Investment Trust, on behalf of a class of similarly situated Inland REIT Shareholders ("Shareholders"), who received and were entitled to vote on the proposals contained in Inland REIT's September 10, 2007, proxy statement (the "Proxy"). The Proxy solicited Shareholders' approval for Inland REIT to acquire affiliated entities that performed advisory and management services for Inland REIT (the "Internalization") in exchange for Inland REIT stock valued at $375 million.
Inland REIT is a Maryland corporation with its principal executive offices in Oak Brook, Illinois. The REIT is primarily engaged in the acquisition and ownership of commercial real estate properties, most of which are multi-tenant shopping centers located west of the Mississippi River. As a public unlisted real estate investment trust ("REIT"), Inland REIT is required to register with the Securities and Exchange Commission ("SEC"), entitled to sell to the investing public rather than only to "qualified investors," and is required to file reports with the SEC. Inland REIT shares are unlisted because its securities are not listed on a national stock exchange.
Prior to consummation of the Internalization, Inland REIT had no direct employees and relied on Inland Western Retail Real Estate Advisory Services, Inc. (the "Advisor") and three property management companies (the "Property Managers") to conduct substantially all of its business. The sole purpose of the Advisor, an Illinois corporation formed in 2003, was to serve as the business manager and advisor to Inland REIT. The Advisor was a wholly-owned subsidiary of Inland Real Estate Investment Corporation (the "Sponsor"), which had formed Inland REIT in 2003. The Sponsor is wholly owned by the Inland Group, Inc. (the "Inland Group"). The Inland Group, also based in Oak Brook, Illinois, is a group of companies dealing in real estate-related businesses and controlled by defendants Daniel Goodwin, Robert D. Parks, Robert H. Baum, G. Joseph Cosenza, and Brenda G. Gujral.
The three Property Managers include Inland Southwest Management Corporation, Inland Northwest Management Corporation, and Inland Western Management Corporation, all of which were incorporated in Delaware in 2003, based in Oak Brook, Illinois, and, prior to consummation of the Internalization, owned by defendants Parks, Goodwin, Baum, Cosenza, Gujral, and Grimes. The Property Managers provided Inland REIT with property management services under the terms of separate agreements designated for each property.
The Advisor and Property Managers were acquired by Inland REIT in the Internalization in exchange for consideration valued at approximately $375 million, comprised of 37,500,000 shares of Inland REIT's common stock, representing 7.7% of its total shares outstanding (the "Internalization Consideration").
Defendant KPMG LLP ("KPMG") is a New York-based accounting firm and the independent auditor for Inland REIT, the Advisor, the Property Managers, the Sponsor, and the Inland Group. Defendant William Blair & Company, L.L.C. ("William Blair") is a Chicago-based investment firm that provided an oral and written fairness opinion (the "Fairness Opinion"), which was incorporated into the Proxy, stating that the Internalization Consideration to be paid by Inland REIT was financially fair to Inland REIT and its shareholders.
The Amended Complaint names eleven individuals as defendants (the "Individual Defendants"). Defendants Daniel Goodwin, Chairman and President of the Inland Group, Robert H. Baum, Vice Chairman and Executive Vice President-General Counsel of the Inland Group, G. Joseph Cosenza, a Director and Vice Chairman of the Inland Group, Brenda G. Gujral, Chief Executive Officer of Inland REIT and a longtime Board member of Inland REIT, and Steven P. Grimes, Treasurer and Principal Financial Officer of Inland REIT, collectively profited hundreds of millions of dollars from the Internalization. Defendants Gujral, Robert D. Parks, Frank A. Catalano, Jr., Kenneth H. Beard, Paul R. Gauvreau, Gerald M. Gorski, and Barbara A. Murphy were members of the Board of Directors of Inland REIT (the "Director Defendants"). The latter four -- defendants Beard, Gauvreau, Gorski, and Murphy -- were deemed by the Board to be "independent" directors and appointed to serve on a special committee formed to consider the Internalization and its alternatives (the "Special Committee").
Plaintiffs' seven count amended class action complaint alleges that defendants breached their contractual and common law fiduciary duties owed to the Shareholders and Inland REIT, and secured Shareholder approval of a self-dealing internalization that greatly overvalued the Advisor and Property Managers by issuing the Proxy, which was materially false and misleading. Specifically, the Amended Complaint alleges: a class action claim against Inland REIT, the Advisor, the Property Managers, William Blair, KPMG, and the Individual Defendants asserting a violation of § 14(a) of the Securities Exchange Act, 15 U.S.C. § 78n(a), and Rule 14a-9 promulgated thereunder, 17 C.F.R. § 240.14a-9, (Count I); a class action claim against the Advisor, the Property Managers, the Sponsor, the Inland Group, and the Individual Defendants asserting violations of § 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t(a), (Count II); a class action claim against the Advisor, the Property Managers, the Sponsor, the Inland Group, and the Individual Defendants asserting a breach of fiduciary duty (Count III); a class action claim against the Advisor, the Property Managers, the Sponsor, the Inland Group, the Individual Defendants, KPMG, and William Blair asserting the aiding and abetting of the breach of fiduciary duty (Count IV); a shareholders' derivative claim against the Advisor, the Property Managers, the Sponsor, the Inland Group, and the Individual Defendants asserting a breach of fiduciary duty (Count V); a shareholders' derivative claim against the Advisor, the Property Managers, the Sponsor, the Inland Group, and defendants Goodwin, Parks, Baum, Cosenza, Grimes, and Gujral asserting unjust enrichment (Count VI); and a shareholders' derivative claim against the Advisor, the Property Managers, the Sponsor, the Inland Group, and defendants Goodwin, Parks, Baum, Cosenza, Grimes, and Gujral asserting breach of contract (Count VII).
Defendants have moved to dismiss the amended complaint. They argue that Counts I and II fail to meet the heightened pleading standards set forth in the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b), (the "PLSRA"). Defendants further argue that Counts III through VII should be dismissed because plaintiffs lack standing to assert their common law claims. Specifically, they argue that plaintiffs fail to meet the prerequisites of the demand futility exception under Maryland law to state a derivative claim, or to plead particularized facts to overcome the protections of the Business Judgment Rule. Alternatively, defendants argue that plaintiffs' common law contract claims (Counts III through VII) should be dismissed for failure to state a claim upon which relief can be granted pursuant to Fed. R. Civ. P. 12(b)(6).
The purpose of a motion to dismiss is to test the sufficiency of the complaint, not to rule on its merits. See Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990). In analyzing the motion, the court must accept the well-pleaded allegations as true, and view those allegations in the light most favorable to plaintiff. McMillan v. Collection Professionals, Inc., 455 F.3d 754, 758 (7th Cir. 2006). "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, . . . a plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of the cause of action will not do . . .." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1964-65, 167 L.Ed. 2d 929 (2007). "Factual allegations must be enough to raise a right to relief above the speculative level." Id. at 1965.
II. Securities Exchange Act Claims (Counts I & II)
Plaintiffs allege that defendants prepared and disseminated a materially false and misleading Proxy in violation of Sections 14(a) and 20(a) of the Exchange Act. Defendants argue that plaintiffs' § 14(a) claim fails as a matter of law because plaintiffs do not offer specific facts creating a strong inference of negligence.
A. Section 14(a) - Count I
Section 14(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 14a-9 promulgated thereunder prohibit the solicitation of proxy statements: containing any statement which is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading.
17 C.F.R. § 240.14a-9(a); 15 U.S.C. §78n(a). To state a claim under 14(a), a plaintiff must allege that: (1) the proxy statement contained a material misstatement or omission; which (2) caused plaintiff's injury; and (3) that the proxy solicitation itself, rather than the particular defect in the solicitation materials, was an essential link in the accomplishment of the transaction. Mills v. Electric Auto-Lite Co., 396 U.S. 375, 384-85, 90 S.Ct. 616, 621-22, 24 L.Ed.2d 593, 602 (1970). "An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." TSC Indus. v. Northway, 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757, 766 (1976). In other ...