Full opinion text
ORDER GRANTING MOTIONS TO DISMISS; ORDER GRANTING MOTION TO COMPEL ARBITRATION PHYLLIS J. HAMILTON, District Judge. The motions of nominal defendant Veri-Sign, Inc. (“VeriSign”) and the twenty-two individual defendants for an order dismissing the consolidated amended complaint, and the motion of defendant KPMG LLP (“KMPG”) for an order compelling arbitration came on for hearing before this court on May 23, 2007. Plaintiffs appeared by their counsel Francis M. Gregorek, Marisa C. Livesay, Stephen R. Basser, and John L. Haurssler; VeriSign appeared by its counsel Christopher H. McGrath, Brian Davis, and Thomas Zaccaro; the individual defendants appeared by their counsel Steven Kaufhold; and KPMG appeared by its counsel Dale E. Barnes and Stephanie L. Thomases. Having read the parties’ papers and carefully considered their arguments and the relevant legal authority, and good cause appearing, the court hereby GRANTS VeriSign’s motion and KMPG’s motion, and GRANTS the individual defendants’ motion in part and DENIES it in part. BACKGROUND This is a shareholder derivative action brought on behalf of nominal defendant VeriSign (“the Company”) against certain former and current officers and directors of VeriSign and against its independent auditor, asserting violations of state and federal law, based on alleged backdating of stock option grants. VeriSign, which was founded in April 1995, is a Delaware corporation with its principal place of business in California. VeriSign provides Internet-related digital infrastructure, including communications services and content services, as well as products and services that protect online and network interactions. VeriSign is also the authoritative directory provider of all .com, .net, .cc, and .tv domain names. According to its website, VeriSign processes as many as 18 billion Internet interactions and supports more than 100 million phone calls a day. Named plaintiffs Ruthy Parnés and Port Authority of Allegheny County Retirement and Disability Allowance Plan for Employees Represented by Local 85 of the Amalgamated Transit Union allege that defendants granted millions of dollars’ worth of backdated options on ten dates between October 30, 1998, and February 21, 2002, to certain high-level VeriSign executives, in violation of the Company’s shareholder-approved stock option plans. A stock option granted to an employee or director of a company allows the employee or director to purchase company stock at a specified “exercise” or “strike” price, for a specified period of time. When an employee or director exercises an option, he or she purchases stock from the company at the exercise price, regardless of the market price of the stock on the date the option is exercised. Such stock options are generally granted in order to create incentives for employees and directors to boost profitability and the company’s stock value. If the persons responsible for the pricing and/or approval of a stock option grant retroactively base the exercise price for the option on a day when the market price was lower than the price on the day the option is actually granted, the employee or director pays less and the company gets less money for the stock when the option is exercised. Backdating option grants is not per se illegal, assuming it is permitted under the tax laws and the company’s bylaws and/or shareholder-approved stock option plans. What may be unlawful is a company’s failure to disclose the backdating or to report the proper compensation expense in its financial statements and other public filings. According to plaintiffs, VeriSign had three stock option plans in effect during the time that the allegedly backdated options were granted. The 1998 Equity Incentive Plan (“the 1998 Plan”), as amended, “provides for the granting of incentive stock options (‘ISOs’) to employees as administered by the Board.” The 1998 Plan specifies that “the Exercise Price of an ISO will be not less than 100% of the Fair Market Value of the share on the date of the grant.” CAC ¶ 66(a). The 1998 Plan is “administered by the Compensation Committee, which ‘determines the persons who are to receive Awards, the number of shares subject to each Award and the terms and conditions of each such Award.’ ” CAC ¶ 67. The 1998 Directors Stock Option Plan (“the 1998 Directors Plan”), as amended, “provides for the granting of non-qualified stock options ... to certain non-employee members of the VeriSign Board of Directors, as administered by the Board.” The 1998 Directors Plan specifies that “[t]he exercise price of an Option shall be the Fair Market Value ... of the shares, at the time that the Option is granted.” CAC ¶ 66(b). The 2001 Stock Incentive Plan (“2001 Plan”) “provides for the granting of non-qualified stock options to officers, consultants, independent contractors and advis-ors of the Company as administered by the Board, or a Committee thereof.” The 2001 Plan provides that “[t]he exercise price of an Option ... may not be less than the par value of the shares on the date of the grant.” CAC ¶ 66(c). In the period between late 2005 and June 2006, a series of articles appeared in major U.S. publications including The Wall Street Journal and Forbes, regarding the backdating of options granted to senior executives, directors, and employees at public companies. The articles reported the unusually high returns received on those options, and noted that a suspiciously large number of options were ostensibly granted at times when stock prices were at periodic lows, followed by sharp increases in price. On June 26, 2006, VeriSign received a grand jury subpoena from the United States Attorney for the Northern District of California requesting documents relating to VeriSign’s stock option grants and practices. The following day, VeriSign issued a press release stating that the Company intended to cooperate with the U.S. Attorney’s office in connection with the subpoena. VeriSign also reported that it had received an informal inquiry from the Securities and Exchange Commission requesting documents relating to the Company’s stock option grants and practices, and that it was voluntarily responding to the request and intended to cooperate fully with the SEC. VeriSign added, however, that prior to receiving either of those requests, its Board of Directors, assisted by independent legal counsel, had commenced an internal review and analysis of the Company’s historical stock option grants, which internal review was continuing. The first complaint in the present consolidated shareholder derivative action was filed on July 5, 2006. Plaintiffs did not make a demand on VeriSign’s Board of Directors before filing suit. The Verified Consolidated Amended Shareholder Derivative Complaint (“CAC”), filed November 20, 2006, alleges nineteen causes of action, sixteen of which (first through thirteenth, and seventeenth through nineteenth) assert claims against some or all of the twenty-two individual defendants, and three of which (fourteenth through sixteenth) assert claims against VeriSign’s outside auditor, KPMG. Plaintiffs divide the twenty-two individual defendants into two groups — nine “option defendants,” alleged to have received backdated options; and thirteen “director defendants,” members of VeriSign’s Board of Directors at various times during the period 1998 to the present. Plaintiffs assert that the director defendants, at the behest of the option defendants, improperly backdated the option grants to make it appear as though the grants had been made on dates when the market price of VeriSign stock was lower than the market price on the actual grant dates. Plaintiffs assert that options purportedly granted on three dates in 1998 (October 30, December 15, and December 18), on two dates in 2000 (August 1 and December 29), on four dates in 2001 (March 15, May 2, August 1, and September 6), and on one date in 2002 (February 21) were backdated. Plaintiffs assert that the alleged backdating violated the terms of the Company’s shareholder-approved option plans, and also resulted in option grants with lower exercise prices, which improperly increased the value of the options granted, and improperly reduced the amount the defendants had to pay the Company upon exercise of the options. They also claim that VeriSign failed to record the proper compensation expense, and now faces potential tax and accounting consequences. The option defendants are Stratton D. Sclavos, Quentin P. Gallivan, Richard A. Yanowitch, Dana L. Evan, Arnold Schaef-fer, Diana S. Keith, Robert J. Korzeniew-ski, Anil H.P. Pereira, and F. Terry Kre-mian. Stratton D. Sclavos (“Sclavos”) served as President and Chief Executive Officer (“CEO”) and as a director of VeriSign from July 1995 until May 2007. In December 2001, he was named Chairman of the Board. Sclavos was allegedly also a member of VeriSign’s Compensation Committee from 1999 through 2002. Plaintiffs assert that Sclavos received six backdated option grants — a grant dated October 30, 1998, for 400,000 shares at the exercise price of $7.67; a grant dated December 15, 1998, for 400,000 shares at the exercise price of $12.31; a grant dated December 29, 2000, for 100,000 shares at the exercise price of $74.19; a grant dated May 2, 2001, for 100,000 shares at the exercise price of $59.40; a grant dated August 1, 2001, for 1,225,000 shares at the exercise price of $55.94; and a grant dated February 21, 2002, for 600,000 shares at the exercise price of $22.71. Plaintiffs also allege that between May 19, 1998 and December 16, 2005, Sclavos sold approximately 2,661,473 shares of VeriSign common stock for proceeds of over $206 million. Quentin P. Gallivan (“Gallivan”) served as VeriSign’s Executive Vice-President of Worldwide Sales, from 1997 through 2005. Plaintiffs allege that Gallivan received six backdated option grants — a grant dated October 30, 1998, for 180,000 shares at the exercise price of $7.67; a grant dated August 1, 2000, for 125,000 shares at the exercise price of $151.25; a grant dated December 29, 2000, for 50,000 shares at the exercise price of $74.19; a grant dated March 15, 2001, for 35,000 shares at the exercise price of $34.00; a grant dated September 6, 2001, for 90,000 shares at the exercise price of $34.16; and a grant dated February 21, 2002, for 100,000 shares at the exercise price of $22.71. Plaintiffs assert that between May 20, 1998 and November 25, 2005, Gallivan sold approximately 720,705 shares of VeriSign common stock for proceeds of over $53 million. Richard A. Yanowitch (“Yanowitch”) served as VeriSign’s Executive Vice President of Internet Services from approximately 1996 to 2001. Plaintiffs assert that Yanovitch received one backdated option grant — a grant dated October 30, 1998, for 180,000 shares at the exercise price of $7.67 — and that between May 19, 1998 and August 29, 2000, Yanowitch sold 608,156 shares of VeriSign common stock for proceeds of over $67 million. Dana L. Evan (“Evan”) joined VeriSign in May 1996 and was the Executive Vice-President of Finance and Administration and the Chief Financial Officer (“CFO”) until approximately July 2007. Plaintiffs allege that Evan received six backdated option grants — -a grant dated October 30, 1998, for 240,000 shares at the exercise price of $7.67; a grant dated August 1, 2000, for 125,000 shares at the exercise price of $151.25; a grant dated December 29, 2000, for 25,000 shares at the exercise price of $74.19; a grant dated March 15, 2001, for 40,000 shares at the exercise price of $34.00; a grant dated September 6, 2001, for 90,000 shares at the exercise price of $34.16; and a grant dated February 21, 2002, for 100,000 shares at the exercise price of $22.71. Plaintiffs also assert that between May 19, 1998 and February 14, 2006, Evan sold approximately 654,743 shares of VeriSign common stock for over $62 million in proceeds. Arnold Schaeffer (“Schaeffer”) joined VeriSign in January 1996 and served for some period of years as Executive Vice-President of Engineering. Plaintiffs allege that Schaeffer received one backdated option grant — a grant dated October 30, 1998, for 360,000 shares at the exercise price of $7.67 — and that between May 19, 1998 and November 19, 1999, Schaeffer sold approximately 172,529 shares of Veri-Sign common stock for proceeds of over $14.5 million. Diana S. Keith (“Keith”) joined VeriSign as Director of Customer Services in June 1996, and was promoted to Senior Vice-President of Customer Advocacy in August 1998. She left VeriSign in approximately 2001. Plaintiffs assert that Keith received one backdated option grant — a grant dated August 1, 2000, for 50,000 shares at the exercise price of $151.25. Robert J. Korzeniewski (“Korzeniew-ski”) joined VeriSign in 2000 and is the Executive Vice-President of Corporate Development and Strategy. Plaintiffs allege that Korzeniewski received three backdated option grants — a grant dated March 15, 2001, for 35,000 shares at the exercise price of $34.44; a grant dated September 6, 2001, for 90,000 shares at the exercise price of $34.16; and a grant dated February 21, 2002, for 100,000 shares at the exercise price of $22.71. Plaintiffs also assert that between August 1, 2000 and February 14, 2006, Korzeniewski sold approximately 239,150 shares of VeriSign common stock for over $14 million in proceeds. Anil H.P. Pereira (“Pereira”) served as Executive Vice-President and General Manager of the Enterprise/Services Provider Division of VeriSign from 1997 to 2003. Plaintiffs allege that Pereira received two backdated option grants — a grant dated March 15, 2001, for 35,000 shares at the exercise price of $34.44; and a grant dated September 6, 2001, for 50,-000 shares at the exercise price of $34.16. Plaintiffs also assert that between January 31, 2001 and November 29, 2001, Pereira sold approximately 84,600 shares of Veri-Sign common stock for over $4.5 million in proceeds. F. Terry Kremian (“Kremian”) served as Executive Vice-President and General Manager, Finance and Administration, and CFO of VeriSign from December 2001 through 2003.. Plaintiffs allege that Kre-mian received one backdated option grant — a grant dated February 21, 2002, for 180,000 shares at the exercise price of $22.71. The director defendants are thirteen current or former directors of VeriSign, all of whom signed 10-Ks with allegedly false financial statements, and some of whom are alleged to have been members of the Compensation Committee, the Audit Committee, or the Nominating and Corporate Governance Committee at various times, including at the time of the backdated option grants; to have sold VeriSign stock during the relevant time period; or to have been “implicated” in options backdating at other companies. However, none of the director defendants is alleged to have received backdated VeriSign options. The director defendants are D. James Bidzos, William Chenevich, Kevin R. Compton, David J. Cowan, Michelle Guthrie, Scott G. Kriens, Len J. Lauer, Roger H. Moore, Edward A. Mueller, Gregory L. Reyes, William A. Roper, Louis A. Simpson, and Timothy Tomlinson. D. James Bidzos (“Bidzos”) served as CEO of VeriSign from April 1995 to July 1995, as Chairman of the Board from April 1995 to December 2001, as Vice Chairman of the Board from December 2001 to August 2007, and presently serves as Chairman of the Board. He served on the Compensation Committee for an undetermined period of time. Plaintiffs allege that between August 5, 1998 and May 22, 2001, Bidzos sold approximately 6,353,466 shares of VeriSign common stock for proceeds of over $570 million. William Chenevich (“Chenevich”) has been a member of the Board of VeriSign since the Company’s founding in 1995. He was a member of the Compensation Committee for some undetermined period of time. Plaintiffs allege that between November 24, 1999 and February 10, 2004, Chenevich sold approximately 9,188 shares of VeriSign common stock for proceeds of over $400,000. Kevin R. Compton (“Compton”) served on the VeriSign Board from February 1996 until March 2005, and was a member of the Audit Committee from 1998 through 2002. David J. Cowan (“Cowan”) was a member of the VeriSign Board and served on the Compensation Committee for some undetermined period of time. Plaintiffs allege that between October 27, 1998 and August 5, 2003, Cowan sold approximately 682,068 shares of VeriSign common stock for proceeds of over $31 million. Michelle Guthrie (“Guthrie”) has served as a member of the VeriSign Board since December 2005, and is currently a member of the Compensation Committee. Scott G. Kriens (“Kriens”) has been a member of the VeriSign Board since January 2001. He was a member of the Compensation Committee in 2001 and 2002, and is currently a member of the Nominating and Corporate Governance Committee. Len G. Lauer (“Lauer”) was a member of the Board and the Compensation Committee from February 2004 until July 2006. Roger H. Moore (“Moore”) has served as a member of the VeriSign Board since February 2002. He served on the Compensation Committee in 2002. Edward A. Mueller (“Mueller”) joined the VeriSign Board in March 2005, was appointed to the Compensation Committee effective August 1, 2006, and was elected Chairman of the Board in May 2007. He resigned from the Board in August 2007. Gregory L. Reyes (“Reyes”) was a member of the VeriSign Board from April 2001 until July 2006. He served on the Compensation Committee for an undetermined period of time. William A. Roper (“Roper”) has been member of the VeriSign Board since November 2003. He is currently President and CEO of VeriSign (having replaced Sclavos), and previously served on the Nominating and Corporate Governance Committee and on the Audit Committee. Plaintiffs allege that between August 4, 2000 and November 30, 2000, Roper sold approximately 32,050 shares of VeriSign common stock for proceeds of over $3.87 million. Louis A. Simpson (“Simpson”) has been a member of the VeriSign Board since May 2005, and currently serves as Chair of the Compensation Committee. Timothy Tomlinson (“Tomlinson”) was a member of the VeriSign Board from April 1995 through May 2002, and served as Secretary of the Company from April 1995 until October 2000. Plaintiffs allege that between August 6, 1998 and November 13, 2001, Tomlinson sold approximately 93,306 shares of VeriSign common stock for proceeds of over $10.9 million. The option defendants and the director defendants are referred to collectively as the “individual defendants.” In addition, the seven option defendants and five director defendants who sold shares of Veri-Sign stock at various times during the period between 1998 and 2006 are referred to as the “insider selling defendants.” The insider selling defendants are Sclavos, Gal-livan, Yanowitch, Evan, Schaeffer, Korzen-iewski, Pereira, Bidzos, Chenevich, Cowan, Roper, and Tomlinson. The 116-page CAC pleads nineteen causes of action — thirteen state law claims asserted against some or all of the individual defendants, three state law claims asserted against KMPG, and three federal securities claims asserted against some but not all of the individual defendants. Plaintiffs allege (1)a claim of breach of fiduciary duty and/or aiding and abetting, against all the individual defendants, alleging that they colluded in a scheme to backdate option grants and cover up their misconduct; (2) a claim of improper accounting, against all the individual defendants, in connection with alleged backdating of option grants; (3) a claim of unjust enrichment, against the option defendants, in connection with receipt of backdated option grants and proceeds received through exercising options; (4) a claim for rescission, against the option defendants, alleging that backdated option grants were invalid under terms of VeriSign’s shareholder-approved stock option plans; (5) a claim of constructive fraud, against all individual defendants, alleging aiding and abetting in the making of misrepresentations to VeriSign’s shareholders; (6) a claim of corporate waste, against all individual defendants, based on allegation that they were unjustly enriched at the expense of the Company; (7) a claim of breach of contract, against the option defendants, based on their alleged breach of employment agreements with VeriSign and violation of the Company’s shareholder-approved stock option plans; (8) a claim under California Corporations Code § 25402, against the insider selling defendants, for selling VeriSign common stock while in possession of material, adverse, undisclosed information about the Company; (9) a claim under California Corporations Code § 25403, against the director defendants, alleging that they controlled the insider selling defendants’ sale of Veri-Sign stock; (10) a claim of gross mismanagement, against all individual defendants, based on the allegation that they abdicated their responsibilities and fiduciary duties with regard to prudently managing the assets and business of the Company; (11) a claim for restitution, against the option defendants, based on the assertion that VeriSign has a right to recover any of the proceeds received by these defendants as a result of their exercise of the allegedly backdated options; (12) a claim for restitution, against defendants Sclavos, Kremian, and Evan; (13) a claim of breach of fiduciary duty, against the director defendants, for failing to bring suit against KPMG; (14) a claim of negligence/professional malpractice, against KPMG, based on the allegation that KPMG failed to perform audits in accordance with GAAS; (15) a claim of breach of contract, against KPMG, based on the allegation that KPMG breached its contract with VeriSign; (16) a claim of aiding and abetting breach of fiduciary duty, against KPMG, based on the assertion that KPMG aided and abetted VeriSign’s officers and directors in breaching their fiduciary duties, in that KPMG knew about and participated in the alleged director and officer misconduct; (17) a claim under § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, against the director defendants and defendant Evan, based on the allegation that these defendants disseminated and approved financial statements, in the Company’s Form 10-K filings for fiscal years 1998 through 2005, which did not disclose the Company’s alleged option backdating practices; (18)a claim under § 14(a) of the Securities Exchange Act and Rule 14a-9 promulgated thereunder, against defendants Scla-vos, Gallivan, Yanowitch, Evan, Schaeffer, Korzeniewski, Pereira, and Kremian (all the option defendants except Keith), based on allegations that the Company’s proxy statements, issued in connection with the Company’s annual meetings in 1999, 2001, 2002, and 2003, falsely reported the option defendants’ compensation (because of misrepresentations regarding the option grants); (19)a claim under § 20(a) of the Securities Exchange Act, against Evan, Kremian, and the director defendants, based on the allegation that they were controlling persons of VeriSign, and caused VeriSign to engage in unlawful conduct. Nominal defendant VeriSign now seeks an order dismissing the CAC pursuant to Rule 12(b)(6), arguing that plaintiffs have not sufficiently pled particularized facts demonstrating that a pre-filing demand on VeriSign’s Board would have been futile. The individual defendants seek an order dismissing the claims asserted against them pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6), arguing that all claims are time-barred; that plaintiffs fail to plead the elements of an Exchange Act § 10b(5) or Rule 10b-5 claim; that plaintiffs cannot state a claim under § 14(a) of the Exchange Act or Rule 14a-9; that the § 20(a) claim must be dismissed because the § 10(b)(5) claim is defective; and that certain state law claims are derivative of other claims or fail to state a claim. KPMG seeks an order compelling arbitration of the claims asserted against it, and an order dismissing it from this action or staying the claims asserted against it pending completion of the arbitration. DISCUSSION A. Motions to Dismiss 1. Legal Standard A motion to dismiss under Rule 12(b)(6) tests for the legal sufficiency of the claims alleged in the complaint. Ileto v. Glock, Inc., 349 F.3d 1191, 1199-1200 (9th Cir.2003). 'Although its review is generally limited to the contents of the complaint, the Court may consider documents refer-encéd extensively in the complaint and documents that form the basis of a plaintiffs claim. United States v. Ritchie, 342 F.3d 903, 908-09 (9th Cir.2003); see also No. 84 Employer-Teamster Joint Council Pension Trust Fund v. America West Holding Corp., 320 F.3d 920, 925 n. 2 (9th Cir.2003). To survive a motion to dismiss for failure to state a claim, a complaint generally must satisfy only the minimal notice pleading requirements of Federal Rule of Civil Procedure 8(a)(2), which requires that the complaint include a “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). Specific facts are unnecessary — the statement need only give the defendant “ ‘fair notice of what the claim is ... and the grounds upon which it rests.’ ” Erickson v. Pardus, — U.S. -, -, 127 S.Ct. 2197, 2200, 167 L.Ed.2d 1081 (2007) (quoting Bell Atlantic Corp. v. Twombly, — U.S. -,-, 127 S.Ct. 1955, 1964-65, 167 L.Ed.2d 929 (2007)). All allegations of material fact are taken as true. Id. However, a plaintiffs obligation to provide the grounds of his entitlement to relief “requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do” — rather, the allegations in the complaint “must be enough to raise a right to relief above the speculative level.” Bell Atlantic, 127 S.Ct. at 1964-65 (citations and quotations omitted). A motion to dismiss should be granted if the complaint fails to proffer enough facts to state a claim for relief that is plausible on its face. See id. at 1966-67. Where a complaint includes allegations of fraud, Federal Rule of Civil Procedure 9(b) requires more specificity, including an account of the “time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentations.” Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir.2007) (citation and quotation omitted). “To comply with Rule 9(b), allegations of fraud must be specific enough to give defendants notice of the particular misconduct which is alleged to constitute the fraud charged so that they can defend against the charge and not just deny that they have done anything wrong.” Bly-Magee v. California, 236 F.3d 1014, 1019 (9th Cir.2001) (citation and quotations omitted). In dismissing for failure to state a claim, “a district court should grant leave to amend even if no request to amend the pleadings was made, unless it determines that the pleading could not possibly be cured by the allegation of other facts.” Doe v. United States, 58 F.3d 494, 497 (9th Cir.1995) (citations omitted); see also Swartz, 476 F.3d at 765; Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir.2003). 2. VeriSign’s Motion Nominal defendant VeriSign seeks an order dismissing the CAC on the ground that plaintiffs failed to make a demand on the directors prior to filing suit on July 5, 2006, and that the CAC fails to allege demand futility with particularity as required by Federal Rule of Civil Procedure 23.1. VeriSign also asserts that plaintiffs lack standing because the CAC does not specify the dates they purchased stock in VeriSign, and therefore does not establish that they satisfy the “contemporaneous ownership” requirement. The court agrees with VeriSign and finds that the motion must be GRANTED. Plaintiffs have not alleged particularized facts establishing that a demand on Veri-Sign’s Board would have been futile, and have not adequately alleged that they have standing to bring this action on VeriSign’s behalf. a. Shareholder Derivative Actions A shareholder does not have standing to sue in an individual capacity for injury to the corporation. William Meade Fletcher, et al., 13 Fletcher Cyclopedia of the Law of Private Corporations, § 5939 (2007). Such an action must be brought as a derivative action — “an equitable remedy in which a shareholder asserts on behalf of a corporation a claim not belonging to the shareholder, but to the corporation.” Id. Once the action — if filed in federal court— has been characterized as direct or derivative, the applicable procedural rules are determined by federal law. Sax v. World Wide Press, Inc., 809 F.2d 610, 613 (9th Cir.1987). Under Federal Rule of Civil Procedure 23.1, a shareholder seeking to vindicate the interests of a corporation through a derivative suit must either first make a demand on the corporation’s directors, or plead particularized facts showing why such a demand would have been futile. See Fed. R.Civ.P. 23.1. All plaintiffs’ claims in the present action are derivative, requiring a demand on VeriSign’s Board, or a particularized showing of demand futility. State law — not Rule 23.1 — establishes the circumstances under which demand would be futile. Thus, because VeriSign is a Delaware corporation, Delaware law governs the issue of whether plaintiffs’ failure to make a pre-suit demand on VeriSign’s Board is excused. See In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970, 989-90 (9th Cir.1999) (citing Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991)). Delaware law provides two demand-futility tests, as set forth in Aronson v. Lewis, 473 A.2d 805 (Del.1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del.2000); and Rales v. Blasband, 634 A.2d 927 (Del.1993). When the alleged wrong is the result of a business decision by the whole board of directors, a court should employ the Aron-son test, which evaluates whether, under the particularized facts alleged, a reasonable doubt is created 1) that the directors are disinterested and independent, or 2) that the challenged transaction was otherwise the product of a valid exercise of business judgment. Aronson, 473 A.2d at 812. When, however, the board members who approved the challenged act have since changed, or when the challenged act does not constitute a business decision by the board, a court should employ the Rales test, which determines whether the particularized factual allegations create a reasonable doubt that, as of the time the complaint was filed, a majority of the board as constituted at that time could have properly exercised its independent and disinterested business judgment in responding to a demand. Rales, 634 A.2d at 934. In short, [T]he right of a stockholder to prosecute a derivative suit is limited to situations where the stockholder has demanded that the directors pursue the corporate claim and they have wrongfully refused to do so or where demand is excused because the directors are incapable of making an impartial decision regarding such litigation. Id. at 932. In the present case, plaintiffs’ demand-futility allegations must be examined under the Rales test. While plaintiffs allege that the members of the Board as of July 5, 2006, were not disinterested and independent, and also assert that the granting of backdated options can never be the product of a good faith exercise of business judgment—thus apparently invoking the Aronson test—the facts as pled show that a majority of the Board members that would have considered the demand were not involved in any decision to backdate the option grants. Thus, the second prong of the Aronson test is inapplicable. b. Analysis As indicated above, the demand futility is analyzed under the Rales test based on the composition of the board at the time the lawsuit is initiated, as that is the board on which demand would be made. See Harris v. Carter, 582 A.2d 222, 228 (Del.Ch.1990). When the present action was commenced on July 5, 2006, Veri-Sign’s Board consisted of eleven directors: Sclavos, Bidzos, Chenevieh, Guthrie, Kriens, Lauer, Moore, Mueller, Reyes, Roper, and Simpson. To prove that demand would have been futile, plaintiffs must show that a majority of those eleven directors are not disinterested or independent. The court finds that the motion must be GRANTED. As VeriSign notes in its reply brief, the issue raised in this motion is not the propriety or legality of backdating options, but whether plaintiffs, by pleading particularized facts in the CAC, have overcome the presumption of good faith afforded to directors. Plaintiffs have not alleged particularized facts showing that demand would have been futile because there is a reason to doubt either the disinterestedness and independence of a majority of the Board. i. Whether the directors are disinterested Directorial “interest” exists whenever divided loyalties are present, or where the director will receive a personal financial benefit from a transaction that is not equally shared by the stockholders, or when a corporate decision will have a “materially detrimental impact” on a director but not the corporation or its stockholders. Rales, 634 A.2d at 936. Plaintiffs allege that Sclavos is interested because he received a financial benefit from the transaction in the form of backdated options; that all the directors are interested because they either “authorized, approved, ratified or ... failed to rectify” the backdated option grants, or participated in the other wrongs alleged; that the directors who served on the Compensation Committee are interested because they enabled the Company to issue backdated option grants; that directors who authorized the filing of proxy statements in support of their nomination as directors, or who signed VeriSign’s 10-Ks, are interested, because the proxy statements and financial statements in the 10-Ks failed to disclose that the option grants had been backdated, and any suit to remedy the wrongs complained of could expose those directors to suit; and that the members of the Board are interested because they did not take action to recover the option defendants’ “ill-gotten gains.” VeriSign notes that only one of the eleven directors — Sclavos—is alleged to have received any backdated option grants, and argues that the remaining Board members cannot be shown to have received any personal benefit from the alleged wrongdoing. In particular, VeriSign argues that six of the eleven directors could not have been involved in the alleged backdating of option grants, because five — Roper, Lauer, Mueller, Simpson, and Guthrie — did not join VeriSign’s Board until well after the last backdating of options is alleged to have occurred, and a sixth — Moore— joined the Board only in February 2002, at the conclusion of the alleged backdating. Thus, VeriSign argues, this group of six directors constitutes a “disinterested” majority, fully capable of determining whether this action is in the best interests of the Company. VeriSign contends that the motion can be granted on that basis alone. VeriSign also argues that plaintiffs’ boilerplate allegations that the directors “participated in” or “approved of’ the purported wrongdoing are insufficient to establish that they are not disinterested; and similarly, that plaintiffs’ conclusory allegations regarding service on the Compensation Committee and the Audit Committee, or regarding failure to assert claims against certain defendants, are insufficient to show an inability to evaluate a shareholder demand. VeriSign argues further that plaintiffs’ claims that the directors are not disinterested because they could be sued for securities fraud or similar claims are not sufficient, as allegations that directors cannot be expected to sue themselves have repeatedly been rejected by the courts as insufficient to establish demand futility. Receipt of personal financial benefit Plaintiffs allege that Sclavos is “interested” because he received a personal financial benefit in the form of backdated option grants, CAC ¶ 185(a); and contend that the directors who are “insider sellers” — • Sclavos, Bidzos, Chenevich, and Roper— are “interested” because they benefitted financially from selling VeriSign stock while in the possession of insider knowledge concerning the purported backdating scheme. A director’s interest may be shown by demonstrating “a potential personal benefit or detriment to the director as a result of the decision.” Beam v. Stewart, 845 A.2d 1040, 1049 (Del.2004). The personal benefit must arise “from the challenged transaction.” Rales, 634 A.2d at 933. Directors who receive backdated stock options receive a personal benefit that is not shared by the shareholders. See In re Zoran Corp. Derivative Litig., 511 F.Supp.2d 986, 1002 (N.D.Cal.2007); In re CNET Networks, Inc. Shareholder Derivative Litig., 483 F.Supp.2d 947, 958 (N.D.Cal.2007). If a plaintiff can plead with particularity that a director knowingly received backdated grants, that director will be considered interested. In re Zo-ran, 2007 WL 1650948, at *8. Accordingly, based on the allegation that Sclavos received backdated option grants between 1998 and 2002, the court finds that plaintiffs have arguably established that Scla-vos was “interested” and incapable of fairly evaluating a demand made on the Board. Corporate insiders sell company stock as a matter of course, and there is no per se rule that makes a director “interested” based solely on generalized allegations that he or she sold company stock while in possession of material, non-public information. See Guttman v. Huang, 823 A.2d 492, 502 (Del.Ch.2003). [Such a rule] would create the same hair-trigger demand excusal that Aron-son and Rales eschewed. The balanced approach that is more in keeping with the spirit of those important cases is to focus the impartiality analysis on whether the plaintiffs have pled particularized facts regarding the directors that create a sufficient likelihood of personal liability because they have engaged in material trading activity at a time when (one can infer from particularized pled facts that) they knew material, non-public information about the company’s financial condition. Id. (emphasis added). Here, plaintiffs allege that Sclavos sold VeriSign stock on various dates between 1998 and 2005, CAC ¶ 178; that Bidzos sold stock on various dates between 1998 and 2001, CAC ¶ 169; that Chenevich sold stock on various dates between 1999 and 2004, CAC ¶ 170; and that Roper sold stock on various dates in 2000, CAC ¶ 176. Apart from the listing of sales of specific numbers of shares of VeriSign stock on specific dates, the CAC’s only allegations regarding insider selling are the eoncluso-ry assertions that “by reason of their high executive and/or directorial positions within VeriSign,” all the insider defendants “had access to highly material information regarding the Company, including the information set forth [in the CAC] regarding the true adverse facts of VeriSign’s option backdating, improper accounting, and false financial statements,” CAC ¶ 222; and that all the insider selling defendants sold Company stock “while in the possession of materially adverse non-public information regarding the Company,” CAC ¶ 167. With the possible exception of Sclavos, these allegations of insider selling are insufficiently particularized to establish that the directors are incapable of objectively considering a demand. For example, plaintiffs plead no facts as to Bidzos, Chenevich, or Roper individually, establishing that they had knowledge of options backdating at VeriSign. Nor, as to any of these four directors, do plaintiffs plead particularized facts showing that they had any knowledge of any irregularities in the Company’s financial statements. Moreover, as to Roper, the facts pled in the CAC establish that he was not even present at VeriSign as an employee or a director when he sold shares of Company stock in 2000 (or when the alleged backdating occurred). Potential liability for civil or criminal securities fraud Plaintiffs allege that all the directors “authorized, approved, [or] ratified” the backdating of stock option grants, and have been named as defendants in this lawsuit, CAC ¶ 185(b); that the members of the Compensation Committee “and the Board by its approval of’ the Committee’s recommendations, “enabled” or “permitted” the Company to backdate options granted to the option defendants, thereby breaching their fiduciary duties to the Company; and that the backdating of options was unlawful, CAC ¶ 185(c), (d). Plaintiffs also assert that all the directors authorized the filing of proxy statements in support of their election as directors, which failed to disclose that the option defendants’ options had been backdated; and “authorized the disclosures relating to shareholder approved option plans which misrepresented that the options carry the stock price of the day of the award,” CAC ¶ 185(f); and signed the Company’s annual Form 10-Ks for fiscal years 1998 through 2005, which included financial statements that failed to account for the backdated stock options, CAC ¶ 185(g). Plaintiffs claim that all the members of the Board are “hopelessly conflicted” because any suit by the Board to remedy the wrongs complained of in the present action would expose the members of the Board to suits for proxy violations and securities fraud. CAC ¶ 185(f), (g). The argument that demand should be excused because the directors would otherwise have to sue themselves, thereby placing the conduct of the litigation in hostile hands and preventing its effective prosecution, has been made to, and dismissed by, numerous courts. See, e.g., Aronson, 473 A.2d at 818. It is true that the basic test of demand futility evolved because “[w]here the board’s actions cause the shareholder complaint, ‘a question is rightfully raised over whether the board will pursue these claims with 100% allegiance to the corporation, since doing so may require that the board sue itself on behalf of the corporation.’” Ryan v. Gifford, 918 A.2d 341, 352 (Del.Ch.2007) (quoting Sanders v. Wang, 1999 WL 1044880, at *4 (Del.Ch., Nov. 8, 1999)). However, a plaintiff may not “bootstrap allegations of futility” by pleading that “the directors participated in the challenged transaction or that they would be reluctant to sue themselves.” Blasband v. Rales, 971 F.2d 1034, 1049 (3rd Cir.1992). “Unless facts are alleged with particularity to overcome the presumptions of independence and a proper exercise of business judgment, in which case the directors could not be expected to sue themselves, a bare claim of this sort raises no legally cognizable issue under Delaware corporate law.” Aronson, 473 A.2d at 818. Thus, the mere threat of personal liability for approving a questioned transaction, standing alone, is insufficient to challenge the disinterestedness of directors. Ryan, 918 A.2d at 355. A plaintiff can overcome the presumption of director disinterestedness only with particularized facts indicating that the director’s actions were “so egregious that a substantial likelihood of directorial liability exists.” In re Silicon Graphics, 183 F.3d at 990 (quoting Aronson, 473 A.2d at 805). A showing that the potential for liability rises to a “substantial likelihood” requires particularized factual allegations “detailing the precise roles that these directors played at the company, the information that would have come to their attention in these roles, and any indication as to why they would have perceived the [wrongdoing].” Guttman, 823 A.2d at 503. Here, however, plaintiffs fail to plead particularized facts raising a reasonable doubt that a majority of the Board face a substantial likelihood of liability. For example, plaintiffs’ generalized allegations that the director defendants breached fiduciary duties are insufficient to demonstrate that any director engaged in conduct that resulted in a substantial risk of personal liability. In re Silicon Graphics, 183 F.3d at 990. In addition, as explained below in the discussion of the substantive claims, the cause of action alleging false or misleading proxy solicitations is time-barred, and plaintiffs fail to plead fraud with particularity in any of their substantive causes of action. Having failed to state a claim for proxy violations or securities fraud, plaintiffs cannot use those causes of action as a basis for alleging demand futility. As for the stock option grants, plaintiffs make only the conclusory assertion that all the directors “authorized, approved, [or] ratified” the backdating. It is true that “[a] director who approves the backdating of options faces at the very least a substantial likelihood of liability,” and that “[backdating options qualifies as one of those ‘rare cases [in which] a transaction may be so egregious on its face that board approval cannot meet the test of business judgment.’ ” Ryan, 918 A.2d at 355-56 (quoting Aronson, 473 A.2d at 815). However, the CAC alleges no particularized facts supporting such a claim, and provides no explanation as to which of the directors are alleged to have “authorized” the backdated grants, which are alleged to have “approved” the backdated grants, or which are alleged to have “ratified” the backdated grants — or what form such authorization or approval or ratification supposedly took. In this case, as noted by VeriSign, six of the eleven directors could not have been involved in authorizing or approving the backdating because any decision to issue backdated grants took place before the commencement of their tenure on the Board. Moreover, “[i]t is no answer to say that demand is necessarily futile because ... the directors ... approved the underlying transaction.” Brehm, 746 A.2d at 257 n. 34. As for “ratifying” backdated grants, that could mean any number of things — “post hoc approval, willingness to participate in a coverup, or knowing that the grants were backdated, or any number of transgressions.” In re CNET, 483 F.Supp.2d at 963. Plaintiffs suggest that under Ryan, a mere allegation that a company granted backdated options is sufficient to excuse demand. However, the facts in Ryan are distinguishable from the facts in the present case. In that case, six directors sat on the board, but the three-member compensation committee, not the entire board, approved the backdated options. The court nevertheless found that the decision to grant backdated options could be imputed to the entire board, because one-half of the current board members (the three committee members) had approved each challenged transaction. Thus, the court applied the Aronson test, and found that the allegations of “knowing and intentional violations of the stock option plans” raised a reason to doubt that the challenged transactions could result from a valid exercise of business judgment. Ryan, 918 A.2d at 354. In addition, the court found that demand would be futile under the Rales test, because the three directors who served on the compensation committee and approved the backdating faced “at the very least a substantial likelihood of liability.” Id. at 355. Here, by contrast, the CAC contains no particularized allegations stating which director or directors approved which grant, or when such grant was approved and how it was backdated — and no allegations showing how or why a particular director would know that the options were backdated. Moreover, while it is not clear from the CAC whether the Board approved the option grants, it appears that a majority of the current members of the Board were not directors at the time of the alleged backdating. Service on Board committees Plaintiffs allege that the Board’s Compensation Committee, Audit Committee, and Nominating and Corporate Governance Committee “set the policies which permitted the backdating of options to occur.” CAC ¶ 90. Among other things, plaintiffs assert that the Compensation Committee was responsible for setting salaries and other compensation of the executive officers, and administering the stock option and other employee equity and bonus plans, CAC ¶ 92, and that the Compensation Committee “granted” the stock options to the option defendants, CAC ¶ 117. They assert further that the Audit Committee was obligated to exercise oversight over the Company’s financial reporting and controls, CAC ¶ 95; and that the Nominating and Corporate Governance Committee was charged with considering the performance and qualifications of each potential Board nominee, and with annually reviewing the performance of the Board, CAC ¶ 101. Of the Board as constituted as of July 5, 2006, plaintiffs assert that Sclavos, Bidzos, Chenevich, Reyes, Lauer, and Simpson were members of the Compensation Committee at various times, CAC ¶¶ 9, 44, 46, 52, 55, 58, 93; that Chenevich, Kriens, Muller, and Roper were members of the Audit Committee at various times, CAC ¶¶ 46, 51, 54, 56, 96; and that Bidzos and Kriens were members of the Nominating and Corporate Governance Committee at various times, CAC ¶¶ 51, 100. Plaintiffs assert that the Board “should have been aware” that VeriSign used different measurement dates when computing compensation costs for certain stock option grants; and claim that under the charters and policies of these three Committees, the directors had an obligation to investigate the difference in measurement dates and recorded dates of option grants. CAC ¶ 102. These allegations are wholly insufficient to support a claim of demand futility. First, as previously discussed, the CAC is not consistent in alleging the dates of service of various directors on the Compensation Committee. That is a minor point, however, except insofar as it reflects the CAC’s lack of organizational integrity. More significant is the fact that of the eight directors alleged to have served on one or more of the three Committees, four — Lauer, Mueller, Roper, and Simpson — -joined the Board after the end of the alleged backdating. Thus, their membership in the various Committees does not create a reasonable doubt that those four directors are disinterested. In addition, plaintiffs plead only conclusory allegations regarding Committee service. “Mere membership on a committee or board, without specific allegations as to defendants’ roles and conduct, is insufficient to support a finding that the, directors were conflicted.” In re CNET, 483 F.Supp.2d at 963. Here, the CAC alleges no facts explaining the role, if any, that each director played in the alleged wrongdoing, in terms of his service on one or more of the Committees. Most notably, the court was unable to locate any reference in the CAC to a connection between the activities of the Nominating and Corporate Governance Committee and the members thereof, and the alleged wrongdoing. It also appears that plaintiffs have attempted to blur the distinction between the Compensation Committee (responsibility for administering and approving option grants) and the Audit Committee (different responsibilities, but no role in option awards). The CAC also provides no basis for inferring that the members of the Audit Committee had any knowledge of the alleged backdating, or any knowledge of deficiencies in the Company’s public filings. Failure to take action Plaintiffs allege that a demand on the Board would have been futile because the directors “through abdication of duty, permitted the wrongs alleged herein to have occurred,” CAC ¶ 185(h); because the directors have not “recommended that any defendant be relieved of his or her duties as director,” CAC ¶ 185(j); and because the directors “did not require that the [ojption [defendants immediately disgorge all of their ill-gotten gains from their improper manipulation of their stock option grants, did not require them to return all unexecuted stock options to the Company, and did not require them to disgorge their bonuses and equity-based compensation to the Company, ... [and] did not take any other action, including commencing legal proceedings, to protect the interests of the Company,” CAC ¶ 185(k). Such boilerplate allegations that the directors are not independent because they failed to act or assert claims against certain defendants are not sufficient to establish demand futility, for two reasons. First, plaintiffs make this argument with regard to the entire Board, and not as to the individual directors. Thus, it cannot be used to support an assertion that a particular director was “interested” or conflicted. Second, as VeriSign notes in its moving papers, such allegations essentially constitute an attempt to plead a claim of “failure of oversight.” When pled as a separate cause of action, such a claim is “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” In re Caremark Int’l, Inc. Derivative Litig., 698 A.2d 959, 967 (Del.Ch.1996). Such a claim requires a showing, for example, that a company’s board of directors or a board committee met only sporadically or devoted patently inadequate time to its work, or that the board or a committee had clear notice of wrongdoing and simply chose to ignore that evidence. See Guttman, 823 A.2d at 505-07. Here, the CAC pleads no particularized facts showing how or when any of the directors knew of the alleged option backdating practices in question, or that they intentionally backdated any option grants. Moreover, plaintiffs’ assertion that the Board has taken no action is contradicted by VeriSign’s announcements, in June 2006 and after, that it was conducting an internal review of the options grants, with the assistance of independent legal counsel. ii. Whether the directors are independent Directorial “independence” exists when a director’s decision is based on “the corporate merits of the subject before the board” rather than on “extraneous considerations or influences.” Aronson, 473 A.2d at 816. When lack of independence is charged, the plaintiff must allege particularized facts showing either that the board is dominated by an officer or director who is the proponent of the challenged transaction, or that the board is so under his influence that its discretion is “sterilize[d].” Rales, 634 A.2d at 936. If a director is considered “controlled” by another, interested, director, he or she is lacking in the independence necessary to consider the challenged transaction objectively. A controlled director is one who is dominated by another party, whether through close personal or familial relationship or through force of will. A director may also be considered “controlled” if he or she is beholden to the allegedly controlling entity, as when the entity has the direct or indirect unilateral power to decide whether the director continues to receive a benefit upon which the director is so dependent or is of such subjective material importance that its threatened loss might create a reason to question whether the director is able to consider the corporate merits of the challenged transaction objectively. Telxon Corp. v. Meyerson, 802 A.2d 257, 264 (Del.2002) (citation omitted). Plaintiffs argue that because Sclavos is President and CEO of the Company, he cannot be considered to be acting independently, considering his considerable financial stake in maintaining his current offices and position. Plaintiffs also allege in the CAC that the members of the Board are personally and professionally entangled with certain of the other defendants, or are implicated in stock option backdating at other companies, and are therefore lacking in the independence necessary to consider or take necessary and proper action on the Company’s behalf. VeriSign argues that none of these allegations is sufficient to establish lack of independence. VeriSign asserts that plaintiffs have pleaded no particularized facts demonstrating that any single director has or had control over any other director, and submits that the vague allegations of “friendship” or business relationships are not sufficient to excuse demand. VeriSign also notes that many of the allegations do not even claim any sort of relationship between the directors mentioned, but rather simply indicate that they had some sort of overlapping tenure at a particular company. VeriSign contends that the fact that several directors also sit together on the boards of other companies does not itself establish lack of independence. Similarly, VeriSign contends that boilerplate allegations that directors are not independent because they have served as directors or employees at other companies where option backdating issues purportedly have arisen are insufficient. VeriSign notes that plaintiffs provide no specifics whatsoever regarding those defendants’ alleged “implication” in other options backdating, and make no connection between events at other companies and events at VeriSign. Sclavos’ position as President and CEO Plaintiffs argue in their opposition to VeriSign’s motion that Sclavos’ position as President and CEO of VeriSign, and the fact that he receives substantial financial compensation from his position, are sufficient to raise a reasonable doubt regarding his independence from other board members. Plaintiffs claim that Sclavos cannot be considered to be acting independently, considering his substantial financial stake in maintaining his current offices and position. Because plaintiffs did not include these assertions in their demand futility allegations, the court need not consider them here. The court simply notes that demand futility cannot be pled merely on the basis of allegations that directors were paid for their service, and acted or would act to preserve their positions. Grobow v. Perot, 539 A.2d 180, 188 (Del.1988), overruled on other grounds by Brehm, 746 A.2d 244. Some Delaware courts have held that where a director’s position in the corporation provides him his principal employment and salary, it might be reasonable to infer that a director’s ability to impartially consider a demand is compromised. See, e.g., In re Limited, Inc., 2002 WL 537692, at *5 (Del.Ch., March 27, 2002) (where a director also serves as a high-ranking executive, with a substantial compensation package, “[i]t is reasonable to infer that compensation of this magnitude is material.... [A]s a general matter, compensation from one’s principal employment is ‘typically of great consequence’ to the employee’ ”). Here, however, the CAC alleges no particularized facts establishing that Sclavos lacks independence based on his executive compensation. Personal relationships Plaintiffs allege, based on a report in the San Jose Mercury News, that Reyes and Sclavos are personally involved with each other because they are friends. CAC ¶ 191(b). Plaintiffs also claim that Reyes, Sclavos, and Compton have been part owners of the San Jose Sharks (professional ice hockey team) during the same or overlapping time periods since 2002. CAC ¶ 191(3). When a complaint alleges lack of independence based on a relationship between directors, the court must review the complaint to see whether it states with particularity facts indicating that the director’s independence may reasonably be doubted—either because of “financial ties, familial affinity, a particularly close or intimate personal or business affiliation, or because of evidence that in the past the relationship caused the director to act non-independently vis á vis an interested director.” Beam, 845 A.2d at 1051. However, mere allegations that directors move in the same social circles, or a characterization that they are friends, is not sufficient to negate a director’s independence for demand excusal purposes. Id. at 1051-52; see also Litt v. Wycoff, 2003 WL 1794724, at *4 (Del.Ch., March 28, 2003) (allegation of mere personal friendship with interes