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Fire and Police Retiree Health Care Fund v. Smith

United States District Court, D. Maryland

December 9, 2019

FIRE AND POLICE RETIREE HEALTH CARE FUND, SAN ANTONIO, Plaintiff,
v.
DAVID D. SMITH, et al. Defendants, and SINCLAIR BROADCAST GROUP, INC. Nominal Defendant. NORFOLK COUNTY RETIREMENT SYSTEM, Plaintiff,
v.
DAVIDD. SMITH, et al. Defendants, and SINCLAIR BROADCAST GROUP, INC. Nominal Defendant.

          MEMORANDUM

          CATHERINE C. BLAKE, UNITED STATES DISTRICT JUDGE

         These 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").[1], [2] The cases have not yet been consolidated, but are considered together for the purposes of this motion.[3] Pending before . the court is the defendants' motion to dismiss or, in the alternative, for a stay.[4] The motion has been fully briefed.[5] 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.

         FACTUAL AND PROCEDURAL HISTORY

         Sinclair, 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, [6] ECF No. 24-3).[7]

         On May 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.

         San 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 the motion.

         Many 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.

         STANDARD OF REVIEW

         To 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)).

         On a 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).

         ANALYSIS

         I.

         San 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.[8] 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).[9] 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.

         The 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.

         The 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.[10] 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 plaintiffs." Id.

         Central 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 ...


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