Smith v. Carrillo

Smith v. Carrillo

Opinion

MEMORANDUM OPINION

November 26, 2019

/s/ Richard G. Andrews

ANDREWS, UNITED STATES DISTRICT JUDGE:

Before me is Defendants' motion to dismiss Plaintiffs' consolidated shareholder derivative action pursuant to Rules 23.1 and 12(b)(6) of the Federal Rules of Civil Procedure. (D.I. 21). Plaintiffs are stockholders of Zion Oil & Gas, Inc. (D.I. 19 at ¶¶25-29). Defendants are comprised of Zion and its directors. (Id. at ¶¶131-70). Plaintiffs bring claims for breaches of fiduciary duty, violations of Section 14(a) of the [*2]  Securities Exchange Act of 1934, and unjust enrichment. (Id. at 1).¹ I have reviewed the parties' briefing in connection with the motion. (D.I. 19, 22, 24, 25). Because I find that Plaintiffs have not sufficiently demonstrated the futility of making a demand on the Zion Board of Directors prior to filing suit, I grant Defendants' motion to dismiss.

I. BACKGROUND

Zion is an oil and gas exploration company founded in 2000 and licensed for petroleum exploration in Israel. (D.I. 19 at ¶94). Zion markets itself through promotions by popular Christian Zionist televangelists and religious leaders (id. at ¶100), and allows the public to purchase its stock through the company's Direct Stock Purchase Plan (id. at ¶3). In February and March of 2018, the company issued a series of statements indicating expectations of positive results from ongoing drilling operations. (Id. at ¶¶113-16, 133-34). Beginning March 26, 2018, a social media user and various news outlets reported that Zion was subject to an SEC investigation based on responses gathered from Freedom of Information Act requests. (Id. at ¶¶126-30, 153). These reports were denied by Zion on March 27, 2018 and May 31, 2018. (Id. at ¶¶131, 148). On [*3]  April 13, 2018, Zion filed a Proxy Statement with the SEC, which contained proposals to Zion's stockholders urging them to re-elect Board members and appoint an independent auditor, and described Zion's compensation policies and Board responsibilities. (Id. at ¶140; D.I. 23-1, Ex. 23). On July 11, 2018, Zion announced that it had received a subpoena from the SEC to produce documents as part of an investigation into the company. (D.I. 19 at ¶157). As of June 30, 2018, Zion had never had any revenues from its oil and gas production.² (Id. at ¶106).

In this shareholder derivative action, Plaintiffs bring claims for breach of Defendants' fiduciary duties as directors and/or officers of Zion, violations of Section 14(a) of the Securities Exchange Act of 1934, and unjust enrichment. (Id. at ¶180). Plaintiffs allege that starting on March 12, 2018, Defendants (1) caused Zion to fail to maintain internal controls, and (2) willfully or recklessly made or caused the company to make false and misleading statements about Zion's business, operations, prospects, and legal compliance. (Id. at ¶17). Plaintiffs allege that, under the direction and watch of the Defendants, and in violation of Section 14(a) of the Securities Exchange [*4]  Act, the 2018 Proxy Statement failed to disclose that: (1) Zion used marketing tactics which violated SEC rules; (2) Zion's data provided no reasonable basis to expect that any of its discoveries would provide a commercially productive oil or gas source; (3) Zion's financial statements obscured that incoming funds were used primarily to compensate officers and directors; (4) Zion was under investigation by the SEC; and (5) Zion failed to maintain internal controls. (Id. at ¶211).

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