Conroy ex rel. Aflac, Inc. v. Daniel P. Amos, Paul S. Amos Ii, Douglas W. Johnson, Charles B. Knapp, Barbara K. Rimer, Elizabeth Hudson, W. Paul Bowers, Joseph L. Moskowitz, Melvin T. Stith, & Aflac, Inc.

Citation: 338 F. Supp. 3d 1309Docket: CASE NO. 4:18-CV-33 (CDL)

Court: District Court, M.D. Georgia; August 31, 2018; Federal District Court

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Plaintiffs, shareholders of Aflac Incorporated, raised concerns about corporate transactions and potential mismanagement, urging Aflac to pursue claims against certain officers and board members for breach of fiduciary duty, unjust enrichment, and violations of the Securities Exchange Act of 1934. After an investigation by a committee of outside directors, which concluded that pursuing the claims was not in Aflac's best interest, Plaintiffs filed a derivative action against current and former officers and directors. Defendants moved to dismiss the action, asserting the independence and good faith of the outside directors' investigation. Plaintiffs opposed the dismissal, claiming the directors were not independent, did not conduct a reasonable investigation, and lacked good faith. The Court granted Defendants' motions to dismiss.

Additionally, the Court addressed a suggestion from Plaintiffs' counsel regarding the potential recusal of the judge due to familial relationships and alleged affiliations with a group known as the "Fish House Gang." The judge clarified that since no formal affidavit for recusal was filed, there was no requirement to refer the issue to another judge. He explained that the Fish House Gang is a social group with no official business or membership fees, and while he has attended gatherings, he does not recall specific interactions with the Defendants. The judge found no basis for recusal, stating that attendance at social events does not create an appearance of bias under 28 U.S.C. 455.

Parrish v. Bd. of Comm'rs of Ala. State Bar establishes that a judge's relationships with defendants, witnesses, and counsel do not inherently question their impartiality, as such associations are typical for district judges. Complete separation from extrajudicial activities is impractical and undesirable, and recusal under 28 U.S.C. 455(b)(1) requires actual personal bias or prejudice, which was not demonstrated in this case. Plaintiffs' counsel's recusal suggestions related to the judge's family ties to the Amoses and AFLAC employees were insufficient, as none identified were within the third degree of relationship, and some were deceased. The judge emphasized a duty to remain unless a valid basis for recusal exists. 

Regarding the shareholder derivative action under O.C.G.A. 14-2-744, a corporation may dismiss such actions if independent directors reasonably investigate claims and determine that proceeding is not in the corporation's best interests. The burden rests on the corporation to prove the independence and good faith of the investigating committee. The court will assess whether AFLAC met this burden based on the existing record. Plaintiffs' counsel requested limited discovery to investigate the independence and good faith of the directors; however, the court determined that the current record is adequate for decision-making and that additional discovery would not likely provide significant new insights.

AFLAC is a holding company offering supplemental insurance through its subsidiary, American Family Life Assurance Company of Columbus. Plaintiffs, former employees and current shareholders, are asserting claims on behalf of AFLAC. The key defendants include Amos, the CEO and chairman, and Amos II, his son and former president, along with several outside directors of AFLAC's board.

In December 2016, Plaintiffs' counsel notified Amos, Amos II, and AFLAC's general counsel of alleged improper business practices by AFLAC employees, detailing five specific fraud allegations: fraudulent recruiting, manipulation of operational metrics, fraudulent underwriting, fraudulent accounting practices, and theft of commissions by sales coordinators. They also alleged retaliation against those who reported these practices and requested to waive arbitration agreements to pursue claims in court.

AFLAC's in-house counsel acknowledged receipt of the dispute notice and stated that an investigation would occur, but later denied the allegations and insisted on arbitration. Subsequently, Plaintiffs sent a similar notice to the outside directors, who indicated they were aware of the allegations and management's efforts to investigate. Plaintiffs claim that the defendants breached their fiduciary duties by inadequately investigating the allegations and failing to implement necessary controls.

AFLAC published its FY2016 Annual Report and 2017 proxy solicitation without disclosing Fraud Allegations prior to being notified by the plaintiffs. The proxy assured shareholders of the board's competence and recommended re-election of the current board members, also omitting the Fraud Allegations. Shareholders reelected the board on May 1, 2017. Plaintiffs allege that these documents were misleading and violated securities laws as they failed to reveal the potential impact of the Fraud Allegations on AFLAC's operations. 

In June 2017, Amos II announced his resignation from the board and as president, subsequently selling over 200,000 shares of AFLAC stock. Plaintiffs claim this constituted insider trading due to Amos II's knowledge of the undisclosed Fraud Allegations. Following his stock sale, AFLAC executed a stock repurchase, allegedly at inflated prices. 

Shortly after the sale, plaintiffs made their First Demand to AFLAC’s counsel, alleging insider trading and breach of fiduciary duty by Amos II, and requested the company to sue him for damages. AFLAC's board formed a special litigation committee (SLC) to investigate these claims, which ultimately decided not to pursue them, leading to the rejection of the First Demand. 

Subsequently, plaintiffs circulated a draft complaint naming several defendants and asserting various claims, including breach of fiduciary duty and insider trading. The SLC recognized this draft as a Second Demand and began its investigation. Meanwhile, plaintiffs initiated litigation in the Southern District of New York, and an article detailing the allegations against AFLAC was published shortly thereafter.

AFLAC's stock declined by 7.5% following allegations made in an article. In response, AFLAC issued a press release and a Form 8-K, both denying the allegations and labeling them as meritless. Subsequently, plaintiffs amended their complaint to include new claims of securities fraud based on alleged false statements in these communications. The Special Litigation Committee (SLC) considered this amended complaint as a third formal demand and issued reports rejecting both the second and third demands. The New York action was transferred to the current court, where defendants moved to dismiss the amended complaint under O.C.G.A. 14-2-744, which permits dismissal based on a corporate committee's recommendations. The court must evaluate if the SLC's findings warrant judicial deference, which hinges on the independence, good faith, and reasonableness of the SLC's investigation. Under Georgia law, to dismiss the action, the court must find that the SLC members are independent and disinterested, meaning they have no personal stakes in the challenged transaction and are not biased by personal relationships. The SLC was formed by AFLAC's board, with members Bowers, Moskowitz, and Stith, who provided declarations affirming their lack of personal interests or relationships affecting their judgments in the matter.

The SLC reports provide details about the qualifications and backgrounds of the SLC members, affirming their independence based on independent counsel's advice. The Court preliminarily finds the SLC members independent, countering the Plaintiffs' claims that Bowers and Stith are biased due to their personal and business ties with Daniel Amos. The Plaintiffs argue that all SLC members are disinterested, facing potential personal liability from claims they should assert. 

Specific accusations include Bowers' previous leadership roles alongside Amos at various organizations, including the Japan America Society of Georgia and Southern Company, as well as his tenure at Georgia Power. Similarly, Stith is noted for his directorship with Amos at Synovus Financial Corporation. Moskowitz's longstanding acquaintance with Amos since the 1980s is also highlighted. Despite these connections, Bowers, Moskowitz, and Stith assert that their past relationships do not compromise their ability to evaluate the Plaintiffs' demands fairly. 

The Court concludes that, despite the members' prior relationships with Amos, they maintain sufficient independence under Georgia law, supported by precedent indicating that less significant relationships do not negate independence. Notably, none of the SLC members have had ties with Amos, outside of AFLAC, since 2011.

The Delaware Supreme Court established that social or business relationships among directors do not automatically negate their independence. Independence is compromised only if a director is more inclined to protect a personal relationship than their reputation. Plaintiffs must demonstrate that the Special Litigation Committee (SLC) members are "beholden" to alleged wrongdoers, which requires evidence of influence that undermines their discretion. The SLC members' prior business ties to Amos do not diminish their independence, as defendants have shown. 

Plaintiffs also argue that the SLC members were biased due to personal interests related to potential liabilities from breach of fiduciary duty claims. While "directorial interest" exists when a decision adversely affects a director personally rather than the corporation, simply being named as a defendant does not automatically indicate interest. Additionally, a director's approval of a corporate action does not negate independence unless they received a personal benefit. 

For independence to be questioned, a director must face a "substantial likelihood" of personal liability if the corporation pursues a demand. The claims against the SLC members do not suggest they acted outside their roles or received unique benefits from the alleged misconduct. The plaintiffs' allegations that all board members violated duties do not independently compromise SLC members' independence. The court also finds that the SLC and its counsel conducted a thorough review of the claims and reasonably concluded that these claims do not pose a significant risk of personal liability for the SLC members, allowing them to evaluate the derivative action independently.

Georgia law permits corporations to exculpate directors from liability for actions taken in their capacity as directors, with specific exceptions outlined in O.C.G.A. 14-2-202(b)(4). AFLAC's charter reflects this by exculpating its directors from liability except in cases involving bad faith, appropriation of corporate opportunities, intentional misconduct, knowing violations of law, unlawful distributions, and conflicts of interest. As such, members of the Special Litigation Committee (SLC) cannot be considered interested parties based on potential personal liability for claims that fall under this exculpatory provision. The Court highlights that only claims falling outside these exceptions can create a substantial threat of personal liability, which would render SLC members interested. The claims brought by the Plaintiffs appear to fall within the exculpatory clause, and even if they did not, the possibility of personal liability was deemed insufficient to classify the SLC members as interested.

The SLC and its independent counsel conducted a thorough investigation into the claims, concluding that fiduciary duty claims related to care and good faith were without merit. They also found that allegations concerning federal securities and proxy violations were unsubstantiated, indicating that AFLAC had no obligation to disclose them. The SLC's extensive investigative process involved reviewing over 600,000 documents, interviewing 24 witnesses, and collaborating with outside counsel, demonstrating a thorough examination of the claims. The findings supported the conclusion that the SLC members faced no substantial threat of personal liability, thereby confirming their disinterest in the matters at hand.

The Court affirmed that the Special Litigation Committee (SLC) conducted a thorough investigation of all allegations made by the Plaintiffs, including those indirectly related to their derivative claims. Citing precedent from the Georgia Court of Appeals, the Court determined that the SLC's findings were reasonable and conducted in good faith. Key issues raised by the Plaintiffs included alleged conflicts of interest involving SLC counsel, late disclosures of prior associations with an individual named Amos, and the decision not to interview former employees who made Fraud Allegations.

The Plaintiffs relied on the case Stepak v. Addison to argue that the SLC’s counsel was conflicted. In Stepak, a conflict arose when a law firm representing both the company’s board and its inside directors investigated allegations against those same directors. The Eleventh Circuit ruled that the investigation was unreasonable due to this conflict. However, the Court distinguished this case from Stepak, noting that the SLC's investigation was not compromised by conflicting interests because the original dispute notice did not call for legal action against the Amoses or the board. Instead, it focused on alleged retaliation against sales associates and requested the waiving of arbitration agreements to allow those associates to pursue claims against AFLAC. Thus, the interests of all parties involved were aligned, mitigating the risk of an impartial investigation.

Plaintiffs' demands for action against Defendants prompted AFLAC's board to establish a Special Litigation Committee (SLC) to evaluate the situation independently, thereby creating a divergence in interests between AFLAC and its legal counsel, Alston & Bird. The SLC was authorized to retain independent counsel, which conducted the investigation into the derivative demands, ensuring no conflict of interest from Alston & Bird's obligations to other clients. While Alston & Bird provided electronic documents and assisted with search terms, it did not control the investigation's information flow; the board ensured the SLC had access to all necessary information and required cooperation from all AFLAC personnel.

The SLC's independent counsel approved the search terms and requested additional searches, while AFLAC supplied relevant emails and computer data. When certain emails were missing, the SLC reached out to the Plaintiffs' counsel for assistance. Plaintiffs criticized the SLC's investigation for not interviewing specific witnesses and for the SLC members' prior undisclosed professional relationships with an individual named Amos. Although the initial declarations claimed no impairing relationships, supplemental declarations later clarified that SLC members had previously served with Amos in other organizations. These relationships predated the SLC's formation and were deemed not to compromise the members' independence.

The Court previously ruled that these past associations did not affect the SLC's impartiality, and the late disclosure was likely due to a determination that the relationships were irrelevant to their current duties. Plaintiffs also argued that the SLC's failure to interview certain witnesses rendered the investigation unreasonable.

Plaintiffs argue that the Special Litigation Committee (SLC) failed to interview sales associates who submitted a dispute notice, despite their alleged personal knowledge of the misconduct related to Plaintiffs' fraud claims. The SLC had access to the dispute notice detailing these allegations and deemed that interviewing the associates would likely yield no new material information. The SLC conducted a thorough and good faith investigation with independent counsel, and Plaintiffs' counsel's belief that more could have been done does not alter this conclusion. The SLC ultimately determined that pursuing the claims was not in AFLAC's best interest, and the court found the SLC to be independent and its investigation reasonable. As a result, the court dismissed the action in its entirety based on O.C.G.A. 14-2-744. Additionally, Plaintiffs' counsel sent a draft complaint demanding settlement from AFLAC, which led to AFLAC's subsidiary filing for arbitration due to existing arbitration agreements. The court enforced these agreements, ordering the associates to submit their claims to arbitration. The court's analysis referenced the original complaint to understand the contents of the draft complaint and noted similarities to Delaware law regarding director independence and demand futility, which were relevant to assessing the SLC's good faith and reasonableness.