United States District Court, C.D. Illinois, Peoria Division
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.
DARROW UNITED STATES DISTRICT JUDGE
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.
(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.
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
Acquisition & Demand Futility Suits
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.
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.
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.
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.
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.
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.
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 ...