United States District Court, N.D. Illinois, Eastern Division
RICHARD KUBERSKI and ERIC L. LAWTON, Derivatively, and on Behalf of Nominal Defendant
JOHN O'ROURKE, JEFFREY MISTARZ, DAVID ASPLUND, GREGORY BARNUM, CHRISTOPHER CAPPS, WILLIAM CAREY, JR., JOSEPH DESMOND, STEPHEN GLICK, PRADEEP KAPADIA, RICHARD KIPHART, DANIEL PARKE and DAVID VALENTINE, Defendants, LIME ENERGY CO., Plaintiff. and LIME ENERGY CO., a Delaware Corporation, Nominal. Defendant. Consolidated with Case No. 13 C 1708
MEMORANDUM OPINION AND ORDER
HARRY D. LEINENWEBER, District Judge.
This is a shareholder derivative action in which Plaintiffs Richard Kuberski ("Kuberski") and Eric L. Lawton ("Lawton"), shareholders of Defendant Lime Energy Co. ("Lime"), seek to sue the members of the Board of Directors, certain former directors, and one officer on behalf of Lime.
I. LEGAL STANDARD
Under a derivative suit a shareholder seeks to enforce a right that belongs to the corporation. A basis principle of corporate governance is to place the decision to initiate litigation in the hands of the board of directors. Accordingly, Federal Rule of Civil Procedure 23.1 requires a plaintiff bringing a shareholder derivative action to state with particularity "any effort by the plaintiff to obtain th desired action from the directors or comparable authority [and] the reasons for... not making the effort." Whether the content of the statement of particularity suffices to permit the shareholders to proceed with the litigation, however, depends on state substantive law. Robert F. Booth Trust v. Crowley, 687 F.3d 314, 316-17 (7th Cir. 2012). Because Lime is incorporated in Delaware, Delaware law determines whether the plaintiffs may litigate derivatively on Lime's behalf, since they made no demand on the Lime Board to bring a suit.
Under Delaware law, plaintiffs like Kuberski and Lawton must make a pre-suit demand of the board of directors, unless "under the particularized facts alleged, a reasonable doubt is created that (1) the directors are disinterested and independent [or](2) the challenged transaction was otherwise the product of a valid exercise of business judgment." Aronson v. Lewis, 473 A.2d 805 (Del. 1984). The test is disjunctive, i.e., if either prong is satisfied, demand is excused. Brehm v. Eisner, 746 A.2d 244, 256 (Del. 2000).
In order to establish the first prong, Plaintiffs must plead with particularity, facts that show that the Board that would be addressing the demand can impartially consider its merits without being influenced by improper considerations, such as an entitlement to receive a personal financial benefit from the challenged conduct which is not equally shared by the stockholders.
The second prong involves the Business Judgment Rule which rule establishes "a presumption that in making a business decision 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. It is an acknowledgment of the managerial prerogatives of Delaware directors. Gantler v. Stephens, 965 A.2d 695, 705 (Del. 2009). A plaintiff must plead sufficient facts with particularity to rebut that presumption, which it can do by showing a director breached the fiduciary duty of loyalty and fails to act in good faith.
Lime is a Delaware corporation that provides clean energy solutions to various entities and commercial businesses. At the time the initial Complaints in this case were filed, Lime's Board was composed of six directors: David Asplund ("Asplund"), Lime's Executive Chairman and former CEO, John O'Rourke ("O'Rourke"), Lime's current CEO, and four outside directors, Gregory Barnum ("Barnum"), Christopher Capps ("Capps"), Stephen Glick ("Glick"), and Richard Kiphart ("Kiphart"). Although Asplund resigned from the Board on March 6, 2013 and has since passed away, under Delaware law, the question of demand futility focuses on the board's composition at the time plaintiff's claims were first brought. Harris v. Carter, 582 A.2d 222, 228-29 (Del. Ch. 1990).
The alleged misreporting of revenue over a two-year period was announced by a Lime Company press release issued on July 17, 2012. The specific periods encompassed the company's consolidated financial statements on Form 10-K for the periods ending December 31, 2010 and December 31, 2012 and quarterly report on Form 10-Q for the period ending March 31, 2012. The statement further stated that the Board's Audit Committee made the determination based on the results of a partial internal review conducted by the Company's management. The statement said that the improprieties may have included the recording of non-existent revenue and the recording of revenue earlier that was appropriate.
On December 27, 2012, the Company issued another press release announcing an expansion of the internal review to include the years ending on December 31, 2008, and December 31, 2009. On January 14, 2013, Lime issued another press release advising that it had received a determination letter from the NASDAQ's Listing Qualification Department, that Lime was non complaint with NASDAQ's listing rules and was in danger of being delisted, although at the time of the Complaint it continued to be listed.
Damages alleged to have been incurred by Lime include expenditure of significant sums of money for legal fees, the loss of reputation and good will, incurring accountant and investigator fees with respect to the internal investigation, and loss of revenues and profits due to any subsequent restatements. Compl. ¶ 215.
As to Defendants Asplund and O'Rourke, the former and the current CEO, the allegations are that as a result of their offices, they lack independence. Further, as such they were "ultimately responsible for the Company's operation, the compilation of financial statements, and internal controls." Thus, "they either participated in or were recklessly unaware of the fraudulent scheme to inflate the Company's earnings and revenue figures, which was intended to make the Company appear more profitable and attractive to investors." Compl. ¶¶ 209-211. Further, they are alleged to be Defendants in related securities fraud class actions. Compl. ¶ 213.
As to Defendant Kiphart, who was Chairman of the Board from 2006 until 2011, and again after May 29, 2012, he is alleged, similar to Asplund and O"Rourke, to have either participated in or was recklessly unaware of the fraudulent schemes. Compl. ¶¶ 214, 215. He is further alleged to dominate and control other board members because he was the largest shareholder (holding more than 40% of Lime's common stock) and because he personally provided substantial financing and liquidity to the company by entering into a revolving credit note with the ...