United States District Court, D. Maryland
FIRE AND POLICE RETIREE HEALTH CARE FUND, SAN ANTONIO, Plaintiff,
DAVID D. SMITH, et al. Defendants, and SINCLAIR BROADCAST GROUP, INC. Nominal Defendant. NORFOLK COUNTY RETIREMENT SYSTEM, Plaintiff,
DAVIDD. SMITH, et al. Defendants, and SINCLAIR BROADCAST GROUP, INC. Nominal Defendant.
CATHERINE C. BLAKE, UNITED STATES DISTRICT JUDGE
are two separate verified shareholder derivative actions,
brought by plaintiffs Fire and Police Retiree Health Care
Fund, San Antonio ("San Antonio") and Norfolk
County Retirement System ("Norfolk"), derivatively
on behalf of Sinclair Broadcast Group, Inc.
("Sinclair"). San Antonio and Norfolk allege
breaches of fiduciary duty by the defendants, including
members of Sinclair's Board of Directors ("the
Board").,  The cases have not yet been consolidated,
but are considered together for the purposes of this
motion. Pending before . the court is the
defendants' motion to dismiss or, in the alternative, for
a stay. The motion has been fully
briefed. Oral argument was heard on November 7,
2019. For the following reasons, the court will deny the
motion to dismiss and deny the motion to stay without
prejudice pending a period of limited discovery.
AND PROCEDURAL HISTORY
a telecommunications conglomerate and the largest owner of
local television stations in the country, is a publicly
traded company with thousands of shareholders. The family of
Sinclair's founder, Julian Sinclair Smith, exercises
significant control over the company. The four Smith
brothers-defendants David D. Smith, Frederick G. Smith, J.
Duncan Smith, and Robert E. Smith-comprise 50 percent of
Sinclair's Board. Additionally, through their ownership
of Sinclair stock, the Smith brothers control approximately
75 percent of shareholder votes. (Sinclair Proxy Statement,
Defs.' Mot. Ex. A at 3,  ECF No. 24-3).
8, 2017, Sinclair entered into a merger agreement to acquire
Tribune Media Company ("Tribune") for $3.9 billion.
To obtain Federal Communications Commission ("FCC")
and Department of Justice ("DO J") Antitrust
Division approval, and to comply with limits on national
ownership, the merger agreement required Sinclair to divest
certain television stations to independent third parties.
Over the next year, Sinclair proposed multiple divestitures
to companies and individuals with close ties to the Smith
family. On July 16, 2018, FCC Chairman Ajit Pai released a
statement expressing concern about the proposed
Sinclair/Tribune merger, noting that "the evidence [the
FCC has] received suggests that certain station divestitures
that have been proposed to the FCC would allow Sinclair to
control those stations in practice, even if not in name, in
violation of the law." (San Antonio Compl. ¶ 91,
Docket No. CCB-18-3670, ECF No. 1; Norfolk Compl. ¶ 120,
Docket No. CCB-18-3952, ECF No. 1). On July 18, 2018, the FCC
voted to refer the proposed merger to an Administrative Law
Judge ("ALP'), based on its belief that
Sinclair's FCC disclosures contained material
misrepresentations. On August 8, 2018, Tribune pulled out of
the merger. The next day, Tribune sued Sinclair in the
Delaware Chancery Court, alleging breach of contract and
claiming over $1 billion in damages.
Antonio and Norfolk filed shareholder derivative actions in
this court on November 29, 2018, and December 21, 2018,
respectively. The complaints allege that the defendants
breached their fiduciary duties to Sinclair and its
shareholders in connection with the failed merger. Defendants
Martin R. Leader and Lawrence E. McCanna filed a motion to
dismiss both derivative complaints pursuant to Federal Rules
of Civil Procedure 12(b)(6) and 23.1 or, in the alternative,
for a stay. The remaining defendants have adopted and joined
facts relevant to the resolution of this motion do not appear
in the complaints. Specifically, the defendants' motion
is premised on their claim that Sinclair's Board created
a Special Litigation Committee ("SLC") to respond
to shareholder concerns before San Antonio and Norfolk filed
their complaints, and that San Antonio and Norfolk's
failure to discuss the SLC in their complaints requires
dismissal. San Antonio and Norfolk, however, sharply contest
the defendants' claims regarding the SLC.
survive a motion to dismiss, the factual allegations of a
complaint "must be enough to raise a right to relief
above the speculative level on the assumption that all the
allegations in the complaint are true (even if doubtful in
fact)." Bell Atlantic Corp. v. Twombly, 550
U.S. 544, 555 (2007) (citations omitted). "To satisfy
this standard, a plaintiff need not 'forecast'
evidence sufficient to prove the elements of the claim.
However, the complaint must allege sufficient facts to
establish those elements." Walters v. McMahen,
684 F.3d 435, 439 (4th Cir. 2012) (citation omitted).
"Thus, while a plaintiff does not need to demonstrate in
a complaint that the right to relief is 'probable,'
the complaint must advance the plaintiffs claim 'across
the line from conceivable to plausible.'"
Id. (quoting Twombly, 550 U.S. at 570).
Additionally, although courts "must view the facts
alleged in the light most favorable to the plaintiff,"
they "will not accept 'legal conclusions couched as
facts or unwarranted inferences, unreasonable conclusions,
or, arguments'" in deciding whether a case should
survive a motion to dismiss. U.S. ex rel. Nathan v.
Takeda Pharm. North Am., Inc., 707 F.3d 451, 455 (4th
Cir. 2013) (quoting Wag More Dogs, LLC v. Cozart,
680 F.3d 359, 365 (4th Cir. 2012)).
motion to dismiss for failure to state a claim, if
"matters outside the pleadings are presented to and not
excluded by the court, the motion must be treated as one for
summary judgment under Rule 56." Fed.R.Civ.P. 12(d).
Conversion of a motion to dismiss to a motion for summary
judgment, however, "is not appropriate when the parties
have not had an opportunity to conduct reasonable
discovery." Zak v. Chelsea Therapeutics Int'l,
Ltd., 780 F.3d 597, 606 (4th Cir. 2015).
Antonio and Norfolk argue that the defendants' motion
should be treated as a motion for summary judgment because
the defendants rely on documents outside the pleadings.
Indeed, this case presents the unusual situation where almost
all the facts relevant to the resolution of the motion are
absent from the complaints. The defendants' motion is
premised on their claim that Sinclair's Board created an
SLC before San Antonio and Norfolk filed suit. Because an SLC
existed at the time the complaints were filed, the defendants
argue, San Antonio and Norfolk failed to comply with the
pleading requirements for derivative complaints set forth in
Rule 23.1, which requires plaintiff shareholders to
"state with particularity: (A) any effort by the
plaintiff to obtain the desired action from the directors or
comparable authority and, if necessary, from the shareholders
or members; and (B) the reasons for not obtaining the action
or not making the effort." Fed.R.Civ.P. 23.1(b)(3). This
so-called "demand requirement" is a
"substantive and pleading prerequisite" in
derivative actions. Werbowsky v. Collomb, 362 Md.
581, 600-01 (2001). The defendants contend that San Antonio
and Norfolk were required to make a demand on the SLC, or
state why such a demand would have been futile. As San
Antonio and Norfolk only pleaded demand futility with respect
to the entire Board, the defendants argue, their complaints
should be dismissed.
complaints are devoid of any discussion of an SLC, but in
their Response, San Antonio and Norfolk sharply contest the
defendants' claims regarding the date of formation,
membership, and scope of authority of the SLC. The
defendants' entire argument for dismissal thus depends on
the court's acceptance of the defendants' factual
assertions regarding the SLC.
defendants support their claims regarding the SLC with
documents attached to their motion to dismiss.
"Consideration of a document attached to a motion to
dismiss ordinarily is permitted only when the document is
integral to and explicitly relied on in the, complaint, and
when the plaintiffs do not challenge [the document's]
authenticity." Zak, 780 F.3d at 606-07
(internal citation and quotation marks omitted). The Fourth
Circuit has "recognized a narrow exception to this
standard, under which courts are permitted to consider facts
and documents subject to judicial notice without converting
the motion to dismiss into one for summary judgment."
Id. at 607. The defendants claim that the court may
take judicial notice of Securities and Exchange Commission
("SEC") filings. (Defs.' Mot. at 5 n.3, ECF No.
24-1). The defendants are only partially
correct. While the court can take judicial notice
of the existence of the SEC filings, it can only
notice facts contained therein '"not subject to
reasonable dispute,' provided that the fact[s] [are]
'generally known within the court's territorial
jurisdiction' or 'can be accurately and readily
determined from sources whose accuracy cannot reasonably be
questioned.'" See Zak, 780 F.3d at 607
(quoting Fed.R.Evid. 201(b)). Even then, "the court must
construe such facts in the light most favorable to the
to the defendants' argument that an SLC existed before
San Antonio and Norfolk filed suit is their claim that
"Sinclair publicly disclosed the formation of the SLC on
November 8, 2018 in its quarterly SEC report."
(Defs.' Mot. at 8, ECF No. 24-1). This fact does not
appear in the complaints. In order to properly consider it,
the court would need to take judicial notice of a statement
made in Sinclair's November 8, 2018, Form 10-Q (the
"November 2018 10-Q"), filed ...