13-2648-cv
Welch v. Havenstein

                           UNITED STATES COURT OF APPEALS
                               FOR THE SECOND CIRCUIT

                                     SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED
BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1.
WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY
MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE
NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY
OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.


        At a stated Term of the United States Court of Appeals for the Second Circuit, held at the
Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York on the
30th day of January, two thousand fourteen.

Present:    AMALYA L. KEARSE,
            ROSEMARY S. POOLER,
            REENA RAGGI,
                        Circuit Judges.
____________________________________

MONTE WELCH, DERIVATIVELY ON BEHALF OF SAIC, INC.,

                              Plaintiff-Appellant,

EDWARD STELLINI, DERIVATIVELY ON BEHALF OF HIMSELF
AND ALL OTHERS SIMILARLY SITUATED, STEPHEN ROBACZYNSKI,
DERITIVELY ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY
SITUATED, LOUISIANA MUNICIPAL POLICE EMPLOYEE'S RETIREMENT
SYSTEM, DERIVATIVELY ON BEHALF OF ITSELF, AND ALL OTHERS SIMILARLY
SITUATED,
                     Plaintiffs,
                        -v-                                                13-2648-cv
WALTER P. HAVENSTEIN, FRANCE A. CORDOVA, A. THOMAS
YOUNG, JERE A. DRUMMOND, THOMAS F. FRIST, JOHN J. HAMRE,
MIRIAM E. JOHN, ANITA K. JONES, JOHN P. JUMPER, HARRY M.J.
KRAEMER, JR., LAWRENCE C. NUSSDORF, EDWARD J. SANDERSON,
JR., LOUIS A. SIMPSON, MARK W. SOPP, KENNETH C. DAHLBERG,
CARL BELL, GERARD DENAULT, DEBORAH H. ALDERSON, SAIC, INC.,
NOMINAL PARTY,
                        Defendants-Appellees.
_____________________________________________________
Appearing for Appellant:       Brett D. Stecker (Christopher L. Nelson, Jeffrey J. Ciarlanto, on
                               the brief), The Weiser Law Firm, P.C., Berwyn, PA.

Appearing for Appellees:       Andrew S. Tulumello (Jason J. Mendro, on the brief), Gibson,
                               Dunn & Crutcher LLP, Washington, D.C., for nominal defendant-
                               appellee SAIC, Inc.

                               Mark Filip, P.C., Kirkland & Ellis LLP, Chicago, IL, W. Neil
                               Eggleston, Beth A. Williams, Emily P. Hughes, Kirkland & Ellis
                               LLP, Washington D.C., for defendants-appellees Walter P.
                               Havenstein, France A. Córdova, A. Thomas Young, Jere A.
                               Drummond, Thomas F. Frist, John J. Hamre, Miriam E. John,
                               Anita K. Jones, John P. Jumper, Harry M.J. Kraemer, Jr.,
                               Lawrence C. Nussdorf, Edward J. Sanderson, Jr., and Louis A.
                               Simpson, join the brief of SAIC, Inc.

                               Lloyd Winawer, Goodwin Procter LLP, Menlo Park, CA, Mark
                               Holland, Mary K. Dulka, Goodwin Procter LLP, New York, N.Y.,
                               for defendant-appellee Kenneth C. Dahlberg, join the brief of
                               SAIC, Inc.

                               Mark H. Tuohey III, Lauren E. Curry, Brown Rudnick LLP,
                               Washington D.C., for defendant-appellee Deborah H. Alderson,
                               join the brief of SAIC, Inc.

                               Eric R. Delinsky, Zuckerman Spaeder LLP, Washington, D.C., for
                               defendant-appellee Mark W. Sapp, join the brief of SAIC, Inc.

       Appeal from the United States District Court for the Southern District of New York
(Oetken, J.).

     ON CONSIDERATION WHEREOF, IT IS HEREBY ORDERED, ADJUDGED,
AND DECREED that the judgment of said District Court be and it hereby is AFFIRMED.

         Derivative plaintiff-appellant Monte Welch appeals from the June 14, 2013 judgment of
the District Court for the Southern District of New York (Oetken, J.), entered pursuant to the
district court’s June 10, 2013 order granting nominal defendant-appellee SAIC, Inc.’s motion to
dismiss. We assume the parties’ familiarity with the underlying facts, procedural history, and
specification of issues for review.

         On appeal, Welch argues that the district court was incorrect in determining that Welch
had not sufficiently pled the futility of a demand on the board of directors prior to initiating this
litigation. Welch principally argues that this is so because, he asserts, his complaint adequately
alleges that a majority of the board of directors are insufficiently “disinterested,” and as such he
could not expect a proper evaluation of his demand. See Aronson v. Lewis, 473 A.2d 805, 814
(Del. 1984) (overruled on other grounds by Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000)).
Reasonable doubt of directors’ disinterest suffices to make out demand futility under Aronson,

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which challenges “a decision of the board of directors.” In re Veeco Instruments, Inc. Sec. Litig.,
434 F. Supp. 2d 267, 274 (S.D.N.Y. 2006) (emphasis in original). Shareholder derivative suits
may also be brought “where the subject of the derivative suit is not a decision of the board.”
Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993). To establish demand futility in such a case,
however, the allegations in the complaint must still “create a reasonable doubt that . . . the board
of directors could have properly exercised its independent and distinterested business judgment
in responding to a demand.” Id.

       The district court noted as follows:

        Plaintiffs’ interpretation of the [c]omplaint attempts to collapse the choice
        between Aronson (designed for board action) and Rales (designed for board
        inaction) into the question whether a [b]oard majority is interested because it
        faces a substantial likelihood of liability due to its conscious decision to remain
        inactive. . . . Plaintiffs’ proposed inquiry focuses on whether the [b]oard’s
        apparent inaction should be treated as a form of board action.

In re SAIC Inc. Derivative Litig., 948 F. Supp. 2d 366, 379 (S.D.N.Y. 2013). Finding no support
for plaintiff’s contention that action is to be inferred from interestedness the district court
determined that the complaint made out claims that targeted the inaction of the board with
respect to its failure to monitor the corporation over the course of the fraud that is at the heart of
this suit, and thus implicated In re Caremark Int’l Inc. Deriviative Litig., which held that “a
sustained or systematic failure of the board to exercise oversight—such as an utter failure to
attempt to assure a reasonable information and reporting system exists—will establish the lack of
good faith that is a necessary condition to liability.” 698 A.2d 959, 971 (Del. Ch. 1996). Because
the complaint makes no particularized allegation that the board took action to approve the
fraudulent conduct, we agree. Therefore we affirm the district court’s determination that the
complaint implicates Caremark claims. And as Welch conceded before us and the district court
that if the claims are in fact Caremark claims, then they must be dismissed, we therefore affirm
the district court’s grant of SAIC’s motion to dismiss as well. Even apart from that concession,
we agree with the district court that the so-called “red flags” alleged in the complaint did not
“support an inference of actual or constructive knowledge on the part of the [b]oard.” In re SAIC
Inc. Derivative Litig., 948 F. Supp. 2d at 391. Nor do we see merit in Welch’s novel contention
that constructive notice should create a presumption of tacit approval. Therefore, the so-called
“red flags” did not expose the director defendants to the substantial likelihood of liability that
would excuse demand. See, e.g., In re Baxter Int’l, Inc., S’holders Litig., 654 A.2d 1268, 1269
(Del. Ch. 1995).

      We have considered Welch’s remaining arguments, and find them to be without merit.
Accordingly, the judgment of the district court hereby is AFFIRMED.

                                                      FOR THE COURT:
                                                      Catherine O’Hagan Wolfe, Clerk




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