United States District Court, E.D. Michigan, Northern Division
S.M. LEVINE, Individually and Derivatively on Behalf of THE DOW CHEMICAL COMPANY, Plaintiff,
ANDREW N. LIVERIS, et al, Defendant.
OPINION AND ORDER GRANTING DEFENDANTS' MOTION TO
L. LUDINGTON, UNITED STATES DISTRICT JUDGE
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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”
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 ...