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Levine v. Liveris

United States District Court, E.D. Michigan, Northern Division

October 19, 2016

S.M. LEVINE, Individually and Derivatively on Behalf of THE DOW CHEMICAL COMPANY, Plaintiff,
ANDREW N. LIVERIS, et al, Defendant.



         On April 4, 2016, Plaintiff S.M. Levine brought this derivative suit on behalf of the Dow Chemical Company (“Dow”). Compl., ECF No. 12. Levine named as Defendants Andrew N. Liveris, the President, CEO, and Chairman of Dow, as well as members of Dow's Board of Directors and several high level officers for Dow. Id. at 5-17. He also names Dow as a nominal defendant. Id. at 5. In the Complaint, Levine asserts four claims: breach of fiduciary duty and waste of corporate assets, unjust enrichment, breach of duty of loyalty, and breach of duty of candor. Id. at 90-93. Levine's claims arise out of the Board's alleged wrongdoing in ignoring, condoning, and/or covering up systemic violations of federal antitrust laws by Dow and repeated misuse of Dow assets by Defendant Liveris. Id. at 2-4. On July 13, 2016, Defendants filed a motion to dismiss, ECF No. 18, alleging that Levine did not properly allege that he satisfied the “contemporaneous ownership” requirement of Fed. R. Civ. Pro. 23.1(b)(1), that Levine did not adequately allege that his demands for the Board to bring suit directly were wrongfully refused, and that Levine's complaint does not state a claim upon which relief can be granted. For the reasons stated below, Defendants' motion to dismiss will be granted.


         When considering a motion to dismiss, a Court must accept the plaintiff's adequately pleaded factual allegations as true. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Accordingly, the veracity of the factual allegations in Levine's Complaint will be assumed. Plaintiff S. M. Levine is and has been a Dow shareholder at all times relevant to the litigation. Compl. at 5. The Complaint does not allege specific dates of ownership or the number of shares owned.

         Defendant Andrew Liveris is the President, CEO, and Chairman of the Board of Directors for Dow. Id. at 6. Levine indicates that Liveris has “complete hegemony” over the company and Board and that he demands “fealty and loyalty to him personally” from all directors. Id. at 6-7. Defendant Jacqueline K. Barton has been a member of Dow's Board since 1993. Id. at 7. She is also a Professor of Chemistry and Department Chair at the California Institute of Technology. Id. Defendant James A. Bell joined Dow's Board in 2005. Id. at 7-8. Bell is Executive Vice President and Chief Financial Officer of the Boeing Company. Id. at 8. Defendant Jeff M. Fettig became one of Dow's Directors in 2003. Id. at 9. He has been Lead Director since 2011. Id. Fettig also serves as Chairman and CEO of Whirlpool Corporation. Id. Defendant Ruth G. Shaw has been a member of Dow's Board since 2005. Id. at 10. Shaw is also a senior executive of Duke Nuclear. Id. Defendant Dennis H. Reilley has been a member of Dow's Board since 2007. Id. He is also Chairman of the Marathon Oil Corporation. Id. Defendant Geoffrey E. Merszei was Executive Vice President of Dow from July 2005 until August 2012. Id. at 11. From 2005 to 2009, he also served as one of Dow's Directors and as Dow's Chief Financial Officer. Id. Defendant Raymond J. Milchovich joined Dow's Board in 2015. Id. He is also Lead Director of the Nucor Corporation. Id. at 12. Defendant Robert S. Miller became one of Dow's Directors in 2015. Id. at 12. Miller is also President and Chief Executive Officer of International Automotive Components Group. Id. Defendant Mark Loughridge has been a member of Dow's Board since 2015. Id. at 13. Defendant James Ringler has been a member of Dow's Board since 2001 and is also Chairman of the Teradata Corporation. Id. Defendant John B. Hess has been a member of Dow's Board since 2006. Id. at 13-14. He is also Chairman and CEO of Hess Corporation. Id. at 14. Defendant Ajay Banga joined Dow's Board in 2013. Id. Banga also serves as Chairman and CEO of MasterCard Corporation. Id. Defendant Paul Polman has been a member of Dow's Board since 2010. Id. at 15. Polman is CEO of Unilever. Id. Defendant Richard K. Davis became one of Dow's Directors in 2015. Id. He is also Chairman and CEO of U.S. Bancorp. Defendant Arnold Allemang has been a member of Dow's Board since 1996. Id. at 16.

         Besides the Director Defendants, Levine also named several Dow officers as Defendants. Defendant Charles J. Kalil is Executive Vice President and General Counsel of Dow. Id. Defendant Jeffrey L. Tate is Dow's Chief Audit Executive. Id. Defendant Howard I. Ungerleider is Dow's Chief Financial Officer. Id. at 17.

         Levine asserts that each individual Defendant either initiated or participated in bad faith in conduct which breached their fiduciary duties. Id. at 18. First, he asserts that the Defendants deceived Dow shareholders regarding their efforts to ensure Dow's compliance with federal antitrust laws and regarding their oversight of Dow's defense in the Urethane Litigation. Id. See In re Urethane Antitrust Litigation, MDL No. 1616, Civil Action No. 04-1616-JWL (D. Kansas). Levine contends that the suit would not have been brought in the first place if adequate internal compliance and antitrust compliance procedures had been in place, and that the action itself should have been settled far earlier in the process. Id. Second, he argues that the Defendants enabled and covered up Defendant Liveris's misuse of Dow's corporate assets. Id. at 19. In fact, Levine indicates that Defendants defended and protected Liveris even after he was publically accused of misusing Dow assets for personal use in a wrongful termination suit brought by a former Dow employee. Id. See Wood v. Dow Chem. Co., 72 F.Supp.3d 777 (E.D. Mich. 2014). Third, Levine argues that Defendants did not legitimately investigate the claims he has made and thus wrongfully rejected his demand that the Board bring suit on behalf of Dow. Id. at 19-20. He further argues that Defendants have wasted Dow's assets by retaining biased counsel and conducting a sham investigation of Levine's allegations. Id. at 20-21. Finally, he asserts that Defendants have violated their duty of candor by disseminating materially false and misleading press releases and financial statements and by not publically disclosing Liveris's misuse of Dow assets and Dow's financial exposure due to the Urethane Litigation. Id. at 21.


         The first of Levine's two primary allegations that the Defendants breached their fiduciary duty to Dow focuses on the Defendants' involvement with alleged price fixing in the urethane market. Dow is a major manufacturer of polyether polyol products, which are used to produce polyurethane polymers. Id. at 24. Levine contends that the nature of the polyether poloyol product market, in connection with similar markets, made it possible for Dow and certain co-conspirators to engage in “anticompetitive collusion” and inflate “prices above competitive levels.” Id. at 25.

         In 2006, Dow was named as a defendant in the Urethane Litigation class action suit, which alleged price fixing in the urethane market. Id. at 30. Dow defended itself for approximately 10 years. Id. On May 15, 2013, judgment was entered against Dow in an amount in excess of $1 billion. Id. After unsuccessfully appealing to the Federal Court of Appeals for the Tenth Circuit, Dow settled the case for $835 million. Id. at 30, 81. Dow also settled with additional plaintiffs who had chosen to not be part of the class action for approximately $450 million. Id. at 30. Dow expended tens of millions of dollars in litigation expenses. Id. All other defendants to the action settled long before Dow did and for significantly less. Id. at 31. Bayer Corp., BASF Corp., and Huntsman International LLC settled the case for $140 million. Id.

         Levine contends that Defendants “abdicated their business judgment and gave virtually unfettered authority to the Company's trial counsel.” Id. He also faults Defendants for not suing Dow's trial counsel “in the wake of its obvious malpractice.” Id. As an example of that malpractice, Levine notes that the “firm had not properly preserved certain Daubert and related objections, ” which resulted in the waiver of those potential arguments. Id. Because of that error, Defendant Kalil asked Dow's trial counsel after the trial to end their representation of Dow. Id. Levine also faults Defendants for allowing “applicable statutes of limitations to run against those of its officers and directors responsible for the underlying violations of federal antitrust laws and those who acquiesced in it.” Id. at 32. Levine further asserts that, after being confronted with the claims and evidence against it, Dow and its counsel “‘stonewalled' at the direction of Defendant Kalil instead of making reasonable efforts to resolve the claims pending.” Id. Because of that, Dow rejected settlement proposals which were significantly below the amount Dow eventually settled for. Id. Levine also asserts that Defendants wrongly covered up Dow's “massive likely liability” and “falsely represented Dow's exposure therein as not material.” Id. at 32-33.


         Second, Levine alleges that Defendants breached their fiduciary duties through their response to allegations and evidence that Defendant Liveris was misusing Dow assets. Id. at 33. As primary support for his allegations on this point, Levine refers to the complaint in Wood v. Dow Chem. Co., 72 F.Supp.3d 777 (E.D. Mich. 2014). That suit was settled in February of 2015. See Wood v. Dow Chem. Co., No. 14-cv-13049, ECF No. 29. In the suit, Ms. Wood, a fraud investigator at Dow, alleged “that the Company's money had financed vacations, sports junkets and other ‘perks' for Defendant Liveris and his family.” Compl. at 34. Those alleged perks included “a safari; hundreds of thousands of dollars for Super Bowl parties; and $13, 000 in uniforms for his son's basketball team.” Id. Levine also alleges that Dow's internal auditors conducted a series of investigations from 2008 to 2013 which revealed potential improprieties in Defendant Liveris's spending. Id. Ms. Wood was fired after alerting her supervisors of the apparent wrongdoing. Id. at 35-36. Levine alleges that Defendant Kalil encouraged Dow's internal auditors to ignore Liveris's questioned expenses after the allegations of wrongdoing arose. Id. at 37.

         Levine faults Defendants for “using Dow's funds to silence Ms. Wood” by settling the case despite the legitimacy of Ms. Wood's claims. Id. at 36. He also protests that Defendants took “no steps to thoroughly investigate [Liveris's] wrongful conduct or to require an accounting by an independent auditor so that Dow could have an independent determination of the extent of such wrongdoing so that Dow can be fully repaid.” Id. Levine acknowledges that Liveris reimbursed Dow $719, 923 for personal expenses charged to the company between 2007 and 2010, but Levine believes that Liveris owes far more to Dow. Id. He also argues that Defendants have breached their fiduciary duty to Dow by giving Liveris a “very generous ‘golden parachute' contract” which entitled Liveris to “approximately $53 million in cash, stock, and tax reimbursement payments.” Id. at 39. Although the Complaint does not specifically identify the event this payment is predicated on, it appears that the compensation will occur after Liveris's retirement, which is itself predicated on completion of a proposed merger between Dow and DuPont. See id.

         Levine further asserts that Defendants breached their duty of candor by not conducting an “independent accounting or public disclosure of the full extent of [Liveris's misuse] of Dow's assets.” Id. at 37. Specifically, Levine asserts that Dow's proxy statements “misrepresented Dow's true state of affairs, particularly with regard to Defendant Liveris' compensation and the ineffectiveness of the Company's financial controls.” Id. at 38. He points to discrepancies between Dow's 2011 proxy statement and the testimony of Mr. Doug Anderson, Dow's former Chief Internal Auditor. Id. at 39. Mr. Anderson testified that the proxy statement wrongly portrayed Dow's investigation into and findings regarding Liveris's spending habits as more routine and less serious than it actually was. Id.


         Levine next alleges, in general terms, that the Defendants individually and collectively breached their fiduciary duties to Dow. Id. at 40. He asserts that Defendants had control, access, and authority sufficient to make them aware of the wrongdoing occurring within Dow. Id. at 42- 43. He also contends that Defendants had a duty to “exercise reasonable and prudent supervision over the management, policies, practices and controls of the business and financial affairs of the Company.” Id. at 43. He particularly asserts that the Defendants violated Dow's Code of Business Conduct and Code of Financial Ethics. Id. at 46-51.


         Prior to bringing suit, Levine made several demands that the Board bring suit. Id. at 66. Levine's first demand letter was sent on March 4, 2013. Id. at 67. In that letter, he requested that the Board bring suit against Dow's officers who were involved in the alleged conspiracy to price-fix, against Dow's in-house counsel for “recklessly” allowing Dow to proceed to trial in the Urethane Litigation, and against Dow's management for their “failure to disclose the egregious conduct” which was the subject of the Urethane Litigation. March 4, 2013 Demand Letter, ECF No. 12, Ex. 4. The Board responded to that demand letter by assigning the matter to the Board's Governance Committee. Compl. at 67. That assignment occurred at the Board's April 10-11, 2013, meeting. Id. Also on April 11, 2013, the Governance Committee reviewed the demand letter and retained counsel, Kenneth J. Nachbar, to conduct a full evaluation of the claim. Id. at 67-68. Levine faults the Governance Committee for retaining counsel so quickly, arguing that no detailed analysis of the counsel's “independence, disinterestedness and objectivity” could have been conducted. Id. at 68. Thus, Levine argues that counsel had been pre-selected. Id. On May 7, 2013, Nachbar indicated to Levine that the investigation would take several months.

         Levine argues that Mr. Nachbar “lacked the independence, disinterestedness and objectivity required under the circumstances.” Id. Mr. Nachbar had previously represented Dow and has “a long history of uniformly recommending the rejection of shareholder demands such as those made by” Levine. Id. Levine alleges that Mr. Nachbar was selected for that very reason, and that Mr. Nachbar concealed the “sham nature” of the investigation by refusing to answer “a number of basic questions.” Those questions included whether the Board considered disqualifying any Directors from serving on the Governance Committee because of the allegations made in the demand letter and whether Mr. Nachbar performed a conflict check before accepting the representation. Id. at 71-73.

         After a judgment of $1.2 billion dollars was entered against Dow in the Urethane Litigation, Levine filed two additional demand letters. Id. at 74. In the demand letter of May 21, 2013, Levine asserted that Dow was wrongly refusing to record the potential liability for the judgment on Dow's financial statements. ECF No. 12, Ex. 5. In the July 30, 2013, demand letter, Levine requested that Dow bring suit against its trial counsel for inadequate representation at trial. ECF No. 12, Ex. 6.

         On August 7, 2013, the Board sent a letter to Levine which explained the reasons why the Board was rejecting his March 4, 2013, demand. ECF No. 12, Ex. 9. In the letter, the Board explained that there “were no viable claims to be brought against any of the Company's former or current officers, directors or employees under Delaware or Michigan law.” Id. at 1. The Board found no evidence that any of Dow's officers or directors were complicit in the alleged price-fixing, failed to exercise oversight over antitrust compliance efforts, or failed to monitor or otherwise mishandled the Urethane Litigation. Id. The Board also explained that even if viable claims against Dow's officers, directors, or employees existed, the claims were likely now barred by the statute of limitations. Id. at 2. It additionally reasoned that any potential recovery would be a “very small fraction” of the amount at issue in the Urethane Litigation, and thus would not be a worthwhile pursuit. Id. The Board further explained that it would not bring suit against the Dow officers, directors, and employees allegedly responsible for the antitrust violations because doing so would involve Dow asserting that antitrust violations had actually occurred, which would “severely undermine” Dow's efforts to overturn the Urethane Litigation judgment on appeal. Id. The Board further referenced “the legal fees the Company would incur” and “the possible reputational harm to the Company from pursuing claims” as factors in its decision. Id.

         Levine discounts the Board's response by arguing that the investigation was biased because “no testimony of any witness was taken under oath and the most material of witnesses were never even interviewed.” Compl. at 76. He argues that the Board's business judgment was inadequate because Mr. Nachbar “cherry-picked” facts, resulting in a “whitewashed” recommendation. Id.

         Levine communicated with Mr. Nachbar on several occasions during the summer and fall of 2013. Id. at 78-79. Mr. Nachbar represented that Levine's July 30, 2013, demand letter was scheduled to be considered by the Board at its mid-December meeting. Id. at 78. On November 28, 2013, Levine sent another demand letter to the Board. ECF No. 12, Ex. 7. In the letter, Levine argued that Mr. Nachbar and his firm had refused to respond to fundamental questions, was biased, and ...

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