Henry v. Tyler

Background

Jean E. Henry, a McKesson shareholder, brought a derivative action—meaning a shareholder suit asserting claims belonging to the corporation—against current and former McKesson executives and directors. She alleged breaches of fiduciary duties of loyalty and care.

Henry advanced two theories. First, she alleged that McKesson participated in or benefited from an illegal generic-drug price-fixing and market-allocation conspiracy, including through its subsidiary NorthStar Rx, and that the defendants breached their duties by allowing that conduct. Second, she alleged that McKesson officers and financial statements made false or misleading statements about the company’s income and the causes of generic-drug price increases, exposing McKesson to liability in a securities-fraud class action.

Henry did not make a pre-suit demand on McKesson’s board. In a derivative action, a shareholder generally must first ask the board to pursue the corporation’s claims, unless the complaint pleads particularized facts showing that making the demand would have been futile. The court previously dismissed Henry’s first amended complaint for failing to adequately plead the antitrust violations underlying her first theory and demand futility as to her second theory, but allowed amendment.

Legal standard

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not state a legally sufficient claim. The complaint had to allege enough facts to make liability plausible, rather than merely possible. The court was required to treat well-pleaded factual allegations as true and draw reasonable inferences for Henry, but it did not have to accept conclusory allegations.

For demand futility, the court applied Delaware law because McKesson is a Delaware corporation. Delaware law required Henry to plead facts specific to each director showing a reasonable doubt that at least half of the board could have exercised disinterested and independent business judgment in responding to a demand, or that a majority of the board faced a substantial likelihood of liability.

Court’s analysis

The court held that the Second Amended Complaint’s price-fixing allegations were substantively almost identical to those in the prior complaint and still did not plausibly allege that McKesson participated in the underlying antitrust violations. The court rejected Henry’s new argument that directors could be liable merely for approving a business plan that profited from another entity’s illegal conduct, even if McKesson itself did not participate in or become liable for that conduct. The court read the cited precedent as involving a company’s own alleged illegal conduct, not the broader theory Henry proposed.

The court separately held that Henry still had not adequately pleaded demand futility for the false-statement theory. The complaint did not provide particularized facts showing that a majority of the board was involved in, prepared, or knew about the alleged misstatements. The court rejected Henry’s assertion that knowledge by the Audit Committee could be attributed to the rest of the board, noting that the complaint did not specifically allege that the information was or necessarily would have been shared with the full board.

The court also found that Henry had not adequately alleged that board members would have known the statements were false, even assuming they knew about the statements. Allegations about the importance of generic-drug pricing to McKesson’s business, general board discussions of pricing and competition, executive knowledge, and broad corporate-governance requirements did not sufficiently establish the individual directors’ knowledge. The court stated that these allegations were too weak, even when considered together.

Disposition

The court granted the defendants’ motion to dismiss. It dismissed the action with prejudice because this was Henry’s third attempt to plead the allegations and she had failed to cure the deficiencies identified in the earlier order. The court also granted the defendants’ requests for judicial notice of McKesson’s Certificate of Incorporation and 2018 Proxy Statement.

Judge

The order was signed by Charles R. Breyer, United States District Judge.