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Lowinger v. Oberhelman

United States District Court, C.D. Illinois, Peoria Division

March 31, 2017

ROBERT LOWINGER and ISSEK FUCHS, derivatively on behalf of CATERPILLAR, INC., Plaintiff,
DOUGLAS R. OBERHELMAN, EDWARD J. RAPP, STEVEN H. WUNNING, and LUIS DELEON Defendants CATERPILLAR, INC., a Delaware Corporation, Nominal Defendant.



         Before the Court are Defendants' Motion to Dismiss, ECF No. 22, Defendants' Motion for Leave to File a Reply in Support of Motion to Dismiss, ECF No. 25, Plaintiffs' Motion for Leave to File Sur-Reply Brief Instanter, ECF No. 28, and Plaintiffs' Motion to Strike Brief and, Alternatively, for Leave to File Proposed Response to Defendants' Supplemental Filing, ECF No. 35. For the following reasons, the motions are GRANTED.

         BACKGROUND [1]

         Caterpillar (or “Company”), a publicly traded Delaware corporation with its principal executive offices located in Peoria, Illinois, is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives.

         The operative pleading in this case names Caterpillar as nominal defendant, in addition to four Individual Defendants: Douglas R. Oberhelman, Edward J. Rapp, Steven H. Wunning, and Luis de Leon.

         The Acquisition & Demand Futility Suits

         On November 10, 2011, Caterpillar issued a joint press release with ERA publicizing its pre-conditional voluntary offer for the purchase of Zhengzhou Siwei Mechanical & Electrical Manufacturing Co., Ltd. (“Siwei”), a manufacturer of hydraulic mining roof supports that was a wholly owned subsidiary of ERA Mining Machinery, Ltd (“ERA”), a Chinese mining equipment company.

         In June 2012, Caterpillar completed the tender offer to acquire ERA and Siwei. In November 2012, Caterpillar announced that it had identified discrepancies between the inventory recorded in Siwei's accounting records and its actual physical inventory during an inventory check at Siwei's facilities, and was launching an internal investigation into Siwei. On January 18, 2013, Caterpillar issued a press release announcing that this internal investigation into Siwei had uncovered “deliberate, multi-year, coordinated accounting misconduct concealed at Siwei” designed to overstate the profitability of Siwei's business. Specifically, Caterpillar's internal investigation identified inappropriate accounting practices involving improper cost allocation that resulted in overstated profit, as well as improper revenue recognition practices involving early and, at times, unsupported revenue recognition. As a result of this misconduct, Caterpillar reported a non-cash goodwill impairment charge of $580 million in the fourth quarter of 2012.

         Oberhelman participated in a conference call on January 28, 2013, in which he stated “I recognize the decision to acquire Siwei happened on my watch and the buck stops at my desk. I am accountable for that acquisition.” Between January and March 2013, several financial news outlets published pieces reporting that there were pre-acquisition “red flags” that the Caterpillar Board should have taken into consideration. The Caterpillar Board, during its investigation of the accounting practices at Siwei, characterized the situation as one in which it had been “deliberately misled” by Siwei managers.

         On March 6, 2013, the first of four shareholder derivative suits alleging demand futility was filed in the Central District of Illinois. All four suits were consolidated by the Court on March 31, 2014. The Court dismissed the Consolidated Complaint on September 28, 2015. An Amended Consolidated Complaint was filed November 12, 2015, and again dismissed for failure to plead demand futility on September 29, 2016, on the basis that plaintiffs failed to raise a reasonable doubt that the Directors were disinterested and independent or that the challenged transaction was otherwise the product of a valid exercise of business judgment. In the meantime, the Court denied Defendants' motion to stay this case on March 28, 2016. ECF No. 21.

         The Demand Process

         On June 25, 2014, Plaintiffs sent a demand letter (“Demand”) to the Caterpillar Board to demand an investigation into the Acquisition and specifically any potential claims of breach of fiduciary duty by Oberhelman, Wunning, Rapp, and de Leon.

         After volleying information requests about Plaintiffs' shareholder status throughout July and August 2014, Sidley Austin sent a letter on Board's behalf, dated August 29, 2014, stating the Board's decision not to pursue the investigation while the other suits were pending in the Central District of Illinois. The letter stated that “because the Company is expending time and resources to defend against the Derivative Litigation plaintiffs' contention that demand on the Board is futile, the Board believes that it is appropriate first to litigate that contention before addressing the demands in your letter.” August 29, 2014 Demand Response, Compl. Ex. F, ECF No. 3-8.

         Plaintiffs' counsel responded on September 30, 2014, indicating that it disagreed with the Board's decision to delay investigation, and that it would consider the Board's failure to promptly investigate as an effective refusal of the Demand. Sept. 30, 2014 Pl.'s Letter Board's attorney, Compl. Ex. G, ECF No. 1-9. Plaintiffs expressed concerns that the ...

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