IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE IN AND FOR NEW CASTLE COUNTY

A.R. DEMARCO ENTERPRISES, INC.,
Individually and Derivatively on behalf of
Ocean Spray Cranberries, Inc.

----------------------Plaintiff,

--------v.  ------------------------------------------------------------------------------------------Civil Action No. 19133NC

OCEAN SPRAY CRANBERRIES, INC., SHERWOOD J. JOHNSON, H. ROBERT HAWTHORNE, DOUGLAS R. BEATON, BENJAMIN A. GILMORE, II, RAY E.  HABELMAN, JEROME J. JENKO, STEPHEN V.  LEE, III, RALPH A. MAY, WILLIAM G.  PIETERSEN, FRANCIS J. PODVIN, MARTIN B.  POTTER, and RAY E. SMITH, JR.

 Defendants.

SUR REPLY BRIEF OF PLAINTIFF IN OPPOSITION TO MOTION OF DEFENDANTS TO DISMISS AND TO STRIKE COMPLAINT

Plaintiff, A.R. DeMarco Enterprises, Inc. ("DeMarco"), respectfully submits this Sur Reply Brief in order to address new issues raised by Defendants. ¹

I. THE ARGUMENT THAT PLAINTIFF HAS CONCEDED ANY POSITION OF DEFENDANTS IS MERITLESS BOTH AS A MATTER OF LAW AND FACT.

The Defendants' Reply Brief focuses on the novel argument that Plaintiff has conceded entire claims because, as the Defendants assert, it did not respond to certain arguments. This position is baseless.

A. Delaware Law Does Not Support Their Concession Claim.

The centerpiece of the Reply Brief is a sweeping statement that the failure to respond to any argument results in the concession of the issue to which the argument is directed. Defendants offer two cases, neither of which even remotely supports the proposition.

In Harbor Fin. Partners Ltd. v. Butler, Del. Ch., Civ. A. No. 16334 & 16336, Lamb, V.C. (June 3, 1998), in the context of a motion for judgment on the pleadings, the Court noted that the plaintiffs did not rebut one of the defendants' arguments made to defeat the claim, but then the Court proceeded to analyze the alternative argument made by plaintiffs to support the claim - i.e., the substance of the claim was not resolved merely because one argument was conceded when an alternative argument was made. Id. at 12-22.

In Seagroves v. Urstadt Prop. Co., Inc., Del. Ch., Civ. A. No. 10307, Jacobs, V.C. (Apr. 1, 1996), the Court merely enunciated the well-founded proposition that on a defendant's motion for summary judgment, a failure of the plaintiff to respond factually with other than mere denials was insufficient to defeat the motion. The Court noted that although the plaintiffs had originally pled ten disclosure claims, they had elected to pursue only four at the motion for summary judgment stage. Id. at 12.

The pertinent inquiry is whether the relief in the motion is opposed, not the failure to contest each constituent argument and sub-argument within a motion where legal bases have been offered sufficient to defeat the relief. An invalid argument does not become valid in the absence of a response, and arguments can be rebutted indirectly when the logic of an argument made by the non-movant is sufficient to vindicate the legal propriety of the claim.

The standard under Rule 12(b)(6) is rigorous and well-defined. The Court must construe all well-plead allegations in favor of the plaintiff. A complaint will be dismissed only if "it appears to a reasonable degree of certainty that the plaintiff will not be entitled to relief under any set of facts that could be proved in support of his claim." In re New Valley Corp_, Del. Ch., Civ.A. No. 17649, at *4, Chandler, C. (Jan. 11, 2001) (internal quotations and citations omitted).

As this Court has stated:

Id. at *4 (quoting Apple Computer, Inc. v. Exponential Technology, Inc., Del. Ch., Civ. A. No. 16315, slip op. at 29, Chandler, C. (Jan. 21, 1999)).

Defendants would substitute for this well-founded jurisprudence the novel proposition that a complaint can be dismissed based upon the failure to respond to an argument even when the argument is irrelevant, fallacious or otherwise legally insufficient to overcome the well-pleaded allegations and the existence of a cause of action based on those allegations. In such a world, motions to dismiss would not be decided by the legal merits but by keeping score on the volleys between the parties.

The illogic of this position is self-evident. Under Defendants' theory, (1) a frivolous argument would prevail if not responded to; (2) if three reasons were advanced to dismiss a claim, the claim would be dismissed if plaintiff responds to only one reason even if the argument suffices completely to validate the claim; or (3) victory could be awarded to a party advancing a position the Court disagrees with, if mov ant can convince the Court to conduct a collateral inquiry into the sufficiency of the reply and persuade the Court that the thrust was not parried. In this system of "tit for tat" advocacy, the Court would return to the era of Charles Dickens, where argumentation formalisms took precedence over legal substance. This is not the law.²

Based on the principle argued throughout the Plaintiff s Answering Brief, that given the objectives and special attributes of Ocean Spray the duties owed by directors to stockholders are focused differently; each count of the Complaint is viable. Indeed, for this reason, the arguments made by Defendants in their Opening Brief entirely missed the mark. Answering Br. at 31-38.³ Thus, the concession argument of Defendants is fatally flawed for this reason alone.

It is only because Defendants have all but failed to address the special attributes of Ocean Spray -- the cornerstone of Plaintiff's claims -- that they can make the concession argument at all. Defendants do little more than rely on Shaw v. Agri-Mark, Inc., Del. Supr. 663 A.2d 464 (1995). This case stands for nothing more than non-shareholders of record are not entitled to an inspection remedy. Id. at 470. While it comes up in the context of a cooperative, the result applies equally to a beneficial holder of the securities of, for example, General Motors. Id. Here, DeMarco does not argue that business corporation law does not apply to Ocean Spray. DeMarco merely says that given the special objectives of cooperatives -- as well as Ocean Spray's objectives under its charter and indeed its own vision of its duties as reflected in its 2001 Annual Report -- the application of the conventional duties attendant to a business corporation must be refocused. The Agri-Mark case in no way abrogates that argument. Indeed, DeMarco's central argument -- that the Board's duties are owed directly to growers and that the programmed attrition is a breach of those duties, given Ocean Spray's failure to achieve its corporate purpose - - is never responded to by Defendants.

In light of the failure of Defendants to address the special attributes of Ocean Spray, the central issue in this litigation -- that Defendants are trying to line their pockets by squeezing out Ocean Spray's less affluent shareholders, only to capture for themselves the buried value of the company when it is ultimately, and inevitably, sold in an extraordinary transaction -takes on greater force. Instead of addressing the impropriety of Ocean Spray's squeeze out, given Ocean Spray's special attributes, the Reply Brief tries to trivialize the matter by claiming that this case is about a difference in management policy protected by the business judgment rule. Reply Br. at 1. But given these special attributes, DeMarco has sufficiently alleged facts showing that demand is excused and the business judgment rule rebutted at this stage of the litigation .⁴ Answering >Br. at 27-40.

Given Ocean Spray's special attributes, and the breach of duties in forcing a squeeze out, two conclusions follow, each of which excuse demand and give rise to a breach of fiduciary duty. First, the grower directors are interested. "[A] director is considered interested when he will receive a personal financial benefit from a transaction that is not equally shared by the stockholders." Orman v. Cullman, Del. Ch., Civ. A. No. 18039, 2002 WL 416957, at *9, Chandler. C. (Mar. 1, 2002) (citations omitted) (emphasis in original).

Here, DeMarco alleges that Ocean Spray has failed to do its job of securing adequate returns for its growers. Given the duties owed to growers, it is a breach of those duties for directors to take actions to squeeze them out -- effectively, allowing the directors to profit from Ocean Spray's own wrong. The Complaint alleges that the directors will receive a personal financial benefit from their plan of programmed attrition not shared equally by stockholders - (1) higher cranberry prices and (2) enhanced concentration of their ownership of Ocean Spray. Indeed, the directors' financial gain actually comes at the expense of the stockholders their actions drive out of business. The Board members who are growers, in making the challenged decisions, would not do so if it would bring about their economic extinction. Inferences and assumptions from factual pleading are completely appropriate at a motion to dismiss stage before discovery has begun. In fact, it is common practice. Orman, 2002 WL 416957, at * 10 ("it is reasonable to assume that director Solomon would personally benefit from the $3.3 million his company would receive if the challenged transaction closed ... [and] ... reasonable to infer that director Solomon suffered a disabling interest when considering how to cast his vote in connection with the challenged merger when the Board's decision on that matter could determine whether or not his firm would receive $3.3 million") (emphasis in original).

2. Defendants claim their argument "[t]hat disclosure of inquiries from other companies is not required" was not responded to. DeMarco addressed this argument by arguing that information on why the Board elected not to consider or pursue third party inquiries was essential to an informed vote on the strategic direction of Ocean Spray. Answering  Br. at 25.

3. Defendants claim their argument "[t]hat the defendants provided all of the information about director nominees required by Delaware law" was not responded to. DeMarco responded to this argument by contesting the legal and factual adequacy of the information on directors nominees that was provided. Answering Br. at 25-26.

4. Defendants claim their argument on "[t]he analysis of alleged predictions that Ocean Spray could accomplish a timely turnaround and that the price of cranberries would recover," was not responded to. DeMarco repeatedly responded by arguing that the stockholders needed and were entitled to information on the prospects of the turnaround plan when shareholders were faced with a choice between turnaround or extraordinary transaction. Answering Br. at 21-23, 25.

5. Defendants claim their argument on the "insufficiency of Count I's conclusory and generalized allegations," which points to certain allegations of the Complaint but ignores the substantive allegations of misrepresentations made, was not responded to. DeMarco detailed the specific and factual allegations of misrepresentation, contained at the Complaint ¶¶ 103-121, thus refuting this argument. Answering Br. at 15-17.

6. Defendants claim their argument on self-flagellation was not responded to. DeMarco responded that the legal principle was inapplicable, as the disclosures required by the duty of disclosure represent only relevant facts that should have been disclosed. Answering  Br. at 25-26.

Count II: Defendants contend at pages 20-21 of the Reply Brief that DeMarco failed to respond to four arguments with respect to Count II of the Complaint. Each was adequately responded to:

1. Defendants claim their argument that "conditions in the cranberry industry fluctuate frequently and significantly enough to preclude the possibility of a Board conspiracy dependent on an extended, multi-year trough in the business," was not responded to. This represents nothing more that the Defendants' factual denial of the alleged conspiracy, and not a legal argument rebutting the legal sufficiency of the claim. If Defendants want to deny these allegations, they could do so by filing an answer; on a motion to dismiss, the Court is to accept them as true. Moreover, DeMarco repeatedly asserted that Ocean Spray failed in its corporate purpose, and that market conditions were the result, at least in part, of Ocean Spray's failure to do its job. In any event, the issue is what Defendants are now doing, in the face of the ruinous economic conditions, and DeMarco has clearly responded by arguing that the factual allegations of the Complaint establish the scheme and conspiracy to unlawfully exploit shareholders to line the pockets of Defendants. Answering Br. at 1, 28-29, 39-40.

2. Defendants claim their argument that the "Cranberry Marketing Order ... could only create director interest if a majority of the Board were comprised of citrus, fresh fruit, or organic growers and the Cranberry Marketing Order materially impacted their interests," was not responded to. DeMarco responded to all claims that the Defendants were not self-interested by arguing the multiple bases for why the Board is interested and lacks independence. Answering Br. at 27-38. This argument includes the existence of the scheme of programmed attrition, a key factor of which is the Cranberry Marketing Order. Id. at 34-38.

3. Defendants claim their argument that "the Equity Quota Provision does not create director interest because it is an existing contractual restriction that governs all the shares of Ocean Spray," was not responded to. This ignores the extensive argument explaining both the financial interest of the Board, Answering Br. at 28-30, and why the equity quota provision affects shareholders differentially. Id. at 30-38.

4. Defendants claim their argument on the "ineffectiveness of unsupported, generalized allegations based on `emoluments,' `joint financial interests and business ties,' the shibboleth of domination and control, or bare allegations of entrenchment," was not responded to. DeMarco responded to the defendants' entire argument that demand was required by arguing the multiple bases for why the Board is interested and lacks independence. Answering 2738. Also, by way of example, the allegation that Hawthorne stated that he did not come to Ocean Spray and bring along key officers "just to sell the company" is more than a bare allegation of entrenchment. Compl. ¶ 126.

Count III: Defendants contend that DeMarco failed to respond to the argument that the refusal to pursue a merger does not state a direct claim, that the directors acted with due care since they had received four consultant reports two years earlier, and that the Board may possess more information than the stockholders. Reply Br. at 21-23.⁵ The contention that these arguments were not responded to absolutely ignores the section of the brief entitled "Count III Asserts Direct Claims," devoted to providing the legal and factual support on the individual nature of the injury suffered by DeMarco and why this is an individual claim. Answering Br. at 40-42.

Count IV: Defendants contend that DeMarco failed to respond to the argument that the Complaint did not adequately plead any agreement in connection with the disclosures at the 2001 annual meeting. Reply Br. at 25. The fact is that the Complaint clearly pleads the agreement, its terms, and its breach. Compl. ¶¶ 112-113. The Defendants simply contest the facts of these allegations -- such argument is not appropriate at this stage when the Court must accept all well-plead allegations.

Count V: The most implausible claim of non-response relates to Count V, the Declaratory Judgment count. The Reply Brief claims that "DeMarco has acknowledged that there is no basis for a declaratory judgment with regard to the vote required to approve a sale of assets." Reply Br. at 25-26. In fact, this argument is moot because the Defendants, and not DeMarco, conceded in their Opening Brief that a simply majority, and not a super-majority is all that is necessary for a sale of assets. Opening Br. at 29; Answering at 45. This is not what the Board told the stockholders before the Resolutions were voted on. Thus, based on this concession the issue is resolved -- in favor of DeMarco -- and is now moot.

Count VI: Defendants assert (in the attached chart only) that DeMarco did not respond to their argument that the Complaint does not identify a specific contractual provision that should be implied in the contract. However, DeMarco responded by citing cases for the proposition that the implied obligation of good faith is deemed part of all contracts. Answering Br. at 40. Moreover, the frustration argument provides a clearly valid legal rationale upholding the claim. Id.

Count VII: Defendants assert (in the attached chart only) that DeMarco did not respond to their argument that the fraud and misrepresentation claim was not plead sufficiently under the heightened standard of pleading of Rule 9(b). DeMarco responded by detailing the Complaint's sufficiently plead allegations as they relate to both Count I and Count VII. Answering 15-17. This enables the Defendants to be informed of charges so as to be able to prepare a defense to them, which is all that is required by Rule 9(b). Chesapeake and Potomoc Tele. Co. of MD v. Chesapeake Utils. Corp., Del. Supr., 436 A.2d 314, 228 (1981).

Thus, DeMarco has dealt with all arguments. Concession - a tangent in any event -- exists only in Defendants' minds.

II. THE REMAINING NEW ARGUMENTS OF DEFENDANTS IN THE REPLY BRIEF ARE SHALLOW AND UNPERSUASIVE.

The Court need not be delayed by the few new arguments made by the Defendants in the Reply Brief. These arguments are briefly treated below.

A. The Defendants Claim For Relief Is Not Irrelevant Or Scandalous Material.

Defendants argue that claims for relief amount to irrelevant or scandalous material. Reply Br. at  2. This proposition is preposterous and devoid of legal support.

B. Full Disclosure Of The Consultant Reports Was Necessary Because Of The Misleading Partial Disclosures.

Relying on one sentence in the 2001 Annual Report that references the consultant reports, Defendants assert that this "is not the situation where directors presented a one-sided or misleading presentation of an underlying report such that the full report would be necessary to place disclosure in its proper context." Reply 11-12 (citing In re Walt Disney Co. Derivative Litig., Del. Ch., 731 A.2d 342 (I998), aff'd in part, rev'd in part on other grounds sub nom., Brehm v. Eisner,Del. Supr., 746 A.2d 244 (2000) and Zirn v. VLI Corp.,Del. Supr., 68I A.2d 1050 (1996)). This argument is purely factual, nevertheless, Defendants ignore that the annual report was not the only partial and misleading presentation on the consultant reports. Rather, Ocean Spray officers presented at the annual meeting "oral summaries" of both the Bain and Merrill reports. Compl.  ¶¶113-116; Answering Br, at 16. As alleged in the Complaint, both of these summaries were inaccurate and contained outright lies -thus making full disclosure necessary under both Disney and Zirn.

The new arguments made by Defendants in their Reply Brief distract the Court's attention from the real issues of the case. The motion to dismiss and to strike should be denied.

By:

Gary W. Lipkin (Bar I.D. No. 4044) Chase Manhattan Centre
1201 North Market Street,
Suite 1400
Wilmington, Delaware 19801
(302) 295-2007
Attorneys for Plaintiff,
A.R. DeMarco Enterprises, Inc.

OF COUNSEL:

H. Robert Fiebach
David M. Doret
Kristine Maciolek
Cozen O'Connor
1900 Market Street
Philadelphia, PA 19103
(215) 665-2000

Dated: April 4, 2002

-------------------

¹ Defined terms shall have the meanings previously defined for them in Plaintiffs Answering Brief. Unpublished decisions are attached hereto. (Ed note: There are five exhibits, totaling 83 pages, which have not been included on Stressline.)

² When the Answering Brief of Defendants is carefully parsed, many arguments made by Plaintiff which are outcome-dispositive have not received response. For example, Defendants have not responded to the argument that cases decided by the courts with respect to corporations in the vicinity of insolvency and in the context of mergers refocus existing directorial duties. Answering Br. at 21, 31-33. Assuming arguendo the premise, what is sauce for the goose is sauce for the gander, Defendants have conceded the merits of Plaintiffs position, and their motion should be denied for this reason alone.