City of Pontiac Police and Fire Retirement System v. Caldwell

Background

City of Pontiac Police and Fire Retirement System, a shareholder of Advanced Micro Devices, Inc. (AMD), brought a shareholder derivative suit. In this type of suit, a shareholder seeks relief on behalf of the corporation. The plaintiff sued AMD’s eight-member Board of Directors, including John E. Caldwell and Lisa T. Su.

The complaint alleged that the Board publicly misrepresented AMD as effectively promoting diversity even though, according to the complaint, no African Americans served on AMD’s Board or executive team. The complaint identified 11 statements from AMD reports, proxy statements, and a press release concerning diversity, inclusion, recruiting, and related efforts. It alleged that the Board violated Section 14(a) of the Securities Exchange Act and Securities and Exchange Commission Rule 14a-9, breached fiduciary duties, and unjustly enriched itself at AMD’s expense.

The plaintiff made no pre-suit demand asking the Board to bring the claims. Instead, it alleged that such a demand would have been futile because the directors faced a substantial likelihood of liability. AMD’s certificate of incorporation contained an exculpatory provision limiting directors’ personal monetary liability for certain fiduciary-duty breaches.

Motion to Dismiss and Judicial Notice

The Board moved to dismiss under Federal Rule of Civil Procedure 23.1. That rule requires a shareholder bringing a derivative action to plead with particularity the reasons for not making a demand on the directors or why a demand would have been futile.

The Board also asked the court to consider 19 exhibits. The court denied without prejudice the request concerning eight exhibits because they were not necessary to resolve the motion. The court granted the unopposed request concerning the remaining exhibits, consisting of Securities and Exchange Commission filings, public AMD documents, and a McKinsey report quoted extensively in the complaint. The court considered those materials to determine what representations AMD made to the market, not whether the factual assertions in those materials were true.

Court’s Analysis

Because AMD is incorporated in Delaware, the court applied Delaware law to determine whether demand was futile, while applying Rule 23.1’s federal pleading requirements. The court explained that, at the pleading stage, the Board’s independence and compliance with the business-judgment rule are presumed. The complaint therefore had to allege particularized facts showing that at least half of the directors knowingly violated a fiduciary duty or consciously disregarded a known duty.

The court held that the complaint did not meet that standard. It found that the complaint did not plead particularized facts about any individual director. Instead, it grouped the directors together and alleged generally that they knowingly caused AMD to make misleading statements. The court stated that Delaware law does not allow one director’s knowledge to be automatically attributed to every other director.

The court also rejected the plaintiff’s reliance on three other cases. It explained that those cases involved detailed allegations that directors received reports, warnings, or audit information identifying repeated violations of law. The complaint here did not identify comparable communications, meetings, reports, or other specific facts showing that any director knowingly violated a fiduciary duty or failed to act despite knowing a duty to act.

The plaintiff abandoned three theories of demand futility: alleged defective internal controls or failure to oversee employees; the theory that naming a director as a defendant was sufficient; and the theory that serving on two Board committees created a substantial likelihood of liability. The court dismissed those abandoned theories and denied leave to amend them, stating that the plaintiff could not revive them through amendment.

Disposition

The court granted the Board’s motion to dismiss with leave to amend as to the demand-futility theories that the plaintiff had not abandoned. The court denied leave to amend as to the abandoned theories. If the plaintiff filed an amended complaint, the court required it to do so within 30 days, to include a redlined comparison with the original complaint, and not to add claims or parties without a stipulation or court permission. The court warned that failure to file an amended complaint or failure to cure the identified deficiencies would result in dismissal of the deficient claims with prejudice.