1

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION

MIDWESTERN TEAMSTERS PENSION
TRUST FUND, OPPENHEIM
KAPITALANLAGEGESELLSCHAFT
MBH, Derivatively on
Behalf of BAKER HUGHES
INCORPORATED,

Plaintiffs,

v. CIVIL ACTION NO. H-08-1809

CHAD C. DEATON, et al.,

Defendants,

- and -

BAKER HUGHES INCORPORATED,
a Delaware corporation,

Nominal Defendant.


MEMORANDUM AND RECOMMENDATION ON
MOTION TO DISMISS

This matter was referred by United States District J udge Vanessa D. Gilmore, for full
pre-trial management, pursuant to 28 U.S.C. 636(b)(1)(A) and (B). (Docket Entry #22).
Defendants, Baker Hughes Incorporated (Baker Hughes), and twenty-five past and present
directors and officers,
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have filed a motion to dismiss Plaintiffs derivative suit under Rules

1
Those directors and officers, and the years of their service, are as follows: Chad C. Deaton (2004-present); Larry
D. Brady (2004-present); Clarence P. Cazalot, J r. (2002-present); Edward P. Djerejian (2001-present); Anthony G.
Fernandes (2001-preent); Claire W. Gargalli (1998-present); Pierre H. J ungels (2006-present); J ames A. Lash (2002-
present); J ames F. Mccall (1996-present); J . Larry Nichols (2001-present); H. J ohn Riley, J r. (1997-present); Charles
L. Watson (1998-present); Michael E. Wiley (1998-2001); Richard D. Kinder (1994-2004); Victor G. Beghini
(1992-2002); J oseph T. Casey (1998-2002); J ames R. Clark (2004-present); Max P. Watson (1998-2001); G.
Stephen Finley (1999-2006); J oe B. Foster (1990-2001); J ay G. Martin (2004-present); Eric L. Mattson (1993-
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12(b)(6) and 23.1 of the Federal Rules of Civil Procedure. Defendants complain that Plaintiffs
have failed, first, to demand that the company bring the suit, and that no good cause for that
failure has been shown. (Defendants Motion to Dismiss [Defendants Motion], Docket Entry
#13). Plaintiffs, Midwestern Teamsters Pension Trust Fund, and Oppenheim
Kapitalanlagegesellschaft MBH (collectively Plaintiffs), have responded in opposition, and
Defendants have replied. (Plaintiffs Opposition to Defendants Motion to Dismiss [Plaintiffs
Response], Docket Entry #24; Defendants Reply Brief in Support of their Motion to Dismiss
[Defendants Reply], Docket Entry #27). After a review of the pleadings, the evidence
provided, and the applicable law, it is RECOMMENDED that Defendants motion be
GRANTED.
BACKGROUND
This case arises from Baker Hughes alleged failure to comply with 15 U.S.C. 78dd-1,
the Foreign Corrupt Practices Act (FCPA), and 15 U.S.C. 78m, the Securities Exchange Act
(the Exchange Act). Under the FCPA, it is unlawful for U.S. companies to bribe any foreign
official in order to obtain or retain business. See 15 U.S.C. 78m, dd-1.
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The act also mandates

1999); Lawrence ODonnell III (1995-1998); Peter A. Ragauss (2006-present); Andrew J . Szescila (2000-2004).
(Plaintiffs; Complaint 19-44).

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15 U.S.C. 78dd-1(a) states that,
It shall be unlawful for any issuer which has a class of securities registered pursuant to section 78l
of this title or which is required to file reports under section 78o(d) of this title, or for any officer,
director, employee, or agent of such issuer or any stockholder thereof acting on behalf of such
issuer, to make use of the mails or any means or instrumentality of interstate commerce corruptly
in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money,
or offer, gift, promise to give, or authorization of the giving of anything of value to

(1) any foreign official for purposes of--

(A)(i) influencing any act or decision of such foreign official in his official capacity, (ii)
inducing such foreign official to do or omit to do any act in violation of the lawful duty of
such official, or (iii) securing any improper advantage; or

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accounting controls for companies subject to either the registration or reporting provisions of the
Exchange Act. See 15 U.S.C. 78m.
3
Baker Hughes is a Delaware corporation governed by the

(B) inducing such foreign official to use his influence with a foreign government or
instrumentality thereof to affect or influence any act or decision of such government or
instrumentality,

in order to assist such issuer in obtaining or retaining business for or with, or directing
business to, any person;

(2) any foreign political party or official thereof or any candidate for foreign political office for
purposes of--

(A)(i) influencing any act or decision of such party, official, or candidate in its or his
official capacity, (ii) inducing such party, official, or candidate to do or omit to do an act
in violation of the lawful duty of such party, official, or candidate, or (iii) securing any
improper advantage; or

(B) inducing such party, official, or candidate to use its or his influence with a foreign
government or instrumentality thereof to affect or influence any act or decision of such
government or instrumentality.

in order to assist such issuer in obtaining or retaining business for or with, or directing
business to, any person; or

(3) any person, while knowing that all or a portion of such money or thing of value will be offered,
given, or promised, directly or indirectly, to any foreign official, to any foreign political party or
official thereof, or to any candidate for foreign political office, for purposes of--

(A)(i) influencing any act or decision of such foreign official, political party, party
official, or candidate in his or its official capacity, (ii) inducing such foreign official,
political party, party official, or candidate to do or omit to do any act in violation of the
lawful duty of such foreign official, political party, party official, or candidate, or (iii)
securing any improper advantage; or

(B) inducing such foreign official, political party, party official, or candidate to use his or
its influence with a foreign government or instrumentality thereof to affect or influence
any act or decision of such government or instrumentality,

in order to assist such issuer in obtaining or retaining business for or with, or directing
business to, any person.

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15 U.S.C. 78m(b)(2)(a-b) requires [e]very issuer which has a class of securities registered pursuant to section
78l of this title and every issuer which is required to file reports pursuant to section 78o(d) of this title shall--

(A) make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the issuer;

(B) devise and maintain a system of internal accounting controls sufficient to provide reasonable
assurances that--

(i) transactions are executed in accordance with management's general or specific
authorization;
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FCPA and the Exchange Act. The company supplies equipment and services to the international
energy industry. (Complaint 2). From the undisputed facts, it appears that, between 1999 and
2007, Baker Hughes discovered, investigated, and reported possible FCPA and Exchange Act
violations by its employees to the Securities and Exchange Commission (SEC), and the
Department of J ustice (DOJ ). (Ex. A and D to Plaintiffs Amended Verified Shareholder
Complaint [Complaint], Docket Entry #34). The company also took steps to improve its
existing compliance program. (Complaint 116, 167, 180). Plaintiffs, however, allege that
these steps were a farce, because the Baker Hughes board knew, but did nothing about, illegal
bribes totaling millions of dollars from the Company to foreign agents and government
officials. (Complaint 5). According to Plaintiffs, Baker Hughes lacked necessary and
sufficient internal controls to ensure FCPA compliance, despite its knowledge of compliance
failures. (Id.) This failure of oversight, Plaintiffs argue, represents a knowing breach of [the
boards] fiduciary duty that has exposed the Company to significant harm. (Id. 10).
As detailed in the Complaint, at least from the late 1990s, Baker Hughes has retained an
FCPA adviser, employed company-wide standards of conduct,
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and instituted an Audit and
Ethics committee (the Audit committee). (Complaint 68, 185; Ex. B to Complaint p. 2).
The Audit committee is responsible for assisting the Board with the Companys compliance
with legal and regulatory requirements, and it also reviews policies and procedures that the
Company has implemented regarding compliance with applicable federal, state and local laws


(ii) transactions are recorded as necessary (I) to permit preparation of financial statements
in conformity with generally accepted accounting principles or any other criteria
applicable to such statements, and (II) to maintain accountability for assets;

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Baker Hughes Business Code of Conduct, implemented in February 2002, states that it is an expansion of
[t]he Baker Hughes standards of conduct [that] have been in place for some time. (Ex. B to Complaint p. 2).
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and regulations, including the Companys Business Code of Conduct and its [FCPA] policies.
(Complaint 184).
In 1999, Baker Hughes discovered and investigated earlier, possible FCPA violations by
its employees in Brazil and India. (Complaint 61). The investigation revealed that, in 1995, the
company sought to merge several Brazilian subsidiaries, and it authorized a $10,000 payment to
help secure government approval of that merger. (Complaint 78-79). In 1998, an Indian
subsidiary authorized a $15,000 payment to an unidentified agent to obtain shipping permits. (Id.
73-76). Plaintiffs complain that Baker Hughes approved both payments without adequate
assurance that payments did not run afoul of the FCPA. (Id. 76, 79). Further, again in 1999,
Baker Hughes discovered that employees in Indonesia had authorized an illicit payment to
government officials in that country to settle a tax dispute. (Complaint 62-72). This payment
was made despite the undisputed fact that both the FCPA adviser, and the companys general
counsel had instructed the employees not to make the payment because it would violate the
FCPA. (Id.). According to the SEC, when the company discovered that the payment had been
made, in disregard of those instructions, Baker Hughes embarked on a corrective course of
conduct. (Ex. A to Complaint: Cease and Desist Order, p. 10). Those corrective actions
included the following:
In particular, the company: attempted to stop the payment . . . engaged outside
counsel to report to the audit committee; voluntarily and promptly disclosed the
misconduct to the Commission and the Department of J ustice; disclosed the
matter to its outside auditors and corrected its books and records . . . asked for and
obtained the resignation of those senior management officials responsible for the
violative conduct; filed a formal objection to the [tax] assessment with the
Directorate General and took steps to determine the correct tax deficiency; paid
$2.1 million to the Indonesian government, which it believed to be the correct tax
assessment; and implemented enhanced FCPA policies and procedures. In
addition, Baker Hughes cooperated with the Commissions investigation,
including declining to assert its attorney-client privilege with respect to
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communications during the relevant time period concerning the Indonesian
transaction.

(Id.). The enhanced FCPA policies included new contracts and hiring procedures for all foreign
agents that the company engaged in the future. (Complaint 116). And, after reporting the
violations to the SEC, Baker Hughes agreed to a Cease and Desist order, which became effective
on September 12, 2001. (Ex. A to Complaint).
The record is clear, however, that while the Cease and Desist order was being finalized, a
former Baker Hughes employee, Octavio Ortega, sued the company, claiming it [had]
endangered him and his family in Colombia by failing to follow through with bribes in that
country. (Complaint 77). Following entry of the Cease and Desist order, two other employees
made allegations against Baker Hughes that likewise implicated the FCPA. Alan Ferguson sued
the company in March 2002, claiming that he had been fired for refusing to bribe a Nigerian
official on behalf of the company. (Complaint 89). Three months later, Michael S. Smith
reported that he too had been fired after he told supervisors that he intended to report a bribe paid
to a military official in Thailand. (Complaint 93). Based on these allegations, the DOJ renewed
its investigation of Baker Hughes. (Complaint 90-91, 94).
It appears that, in response to the Cease and Desist order, the allegations by former
employees, and the governments investigation, Baker Hughes took several steps to improve its
compliance program. In 2002, for instance, the company issued a revised Business Code of
Conduct, which included a section on FCPA compliance entitled, The Bribery of Public
Officials is Strictly Prohibited. (Ex. B to Complaint p. 10). The company also created a Blue
Ribbon Panel to assist Baker Hughes in instituting company-wide FCPA policies and
procedures that would constitute best practices in the industry. (Ex. E to Complaint p. 10). In
2003, Baker Hughes established a Disclosure Control and Internal Control committee
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(DCIC), to oversee a system of disclosure controls designed to provide reasonable assurance
that information required to be disclosed is accumulated and reported in an accurate and timely
manner. (Complaint 180). And, after the government expanded its investigation in August
2003, Baker Hughes conducted a worldwide review of customs procedures in each of its
operating countries; it adopted a revised FCPA compliance policy; and it required company
officers to certify their adherence to the Code of Conduct. (Complaint 94, 167, 172-173).
Notwithstanding those steps, on April 26, 2007, the U.S. brought complaints against
Baker Hughes for various FCPA and Exchange Act violations in Angola, Indonesia, Nigeria,
Kazakhstan, Russia, and Uzbekistan. (Complaint 169; Ex. C to Complaint: 2007 SEC
Complaint). The government alleged that Baker Hughes and its subsidiaries had paid foreign
agents in those countries to secure contracts and shipping licenses, and to settle tax and customs
disputes. (Complaint 95-169). Again, Plaintiffs contend that Baker Hughes approved these
payments without adequate assurance that the money would not go to foreign government
officials, in violation of the FCPA. (Id.). The SEC complaint also noted, however, that, in several
instances, the employees responsible for the payments had acted against the instructions of senior
officials and clear company policy. (Id.). Baker Hughes ultimately agreed to settle the
governments claims for $44 million, a sum that included an $11 million criminal fine, a $10
million civil penalty for violating the Cease and Desist order, and the return of $23 million in
profits from its work in Kazakhstan. (Id.). The settlement also required Baker Hughes to
implement improved compliance and oversight procedures, and to continue its cooperation with
government investigations. (Complaint 175).
Plaintiffs filed this action on J une 6, 2008, and they amended their complaint on J anuary
5, 2009. (Plaintiffs Original Complaint, Docket Entry #1; Plaintiffs Complaint). Plaintiffs suit
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is a shareholder derivative action on behalf of nominal defendant Baker Hughes . . . against
certain of its director and officers seeking to remedy Defendants breaches of fiduciary duties,
which have caused substantial damage to Baker Hughes. (Complaint 1). More specifically,
Plaintiffs claim that Defendants breached their fiduciary duties by not ensuring adequate
oversight of the companys compliance with the FCPA and the Exchange Act. (Id. 10). That
failure, Plaintiffs argue, resulted in the $44 million settlement with the U.S. (Id. 6).
Before this court, Defendants contend that Plaintiffs suit should be dismissed for failure
to state a claim. Defendants argue that Plaintiffs may not file suit on behalf of Baker Hughes
without first demanding that the company itself bring the action, or explaining why a demand to
do so would be futile. Plaintiffs maintain, however, that they are not required to demand that the
Board bring the suit itself, because a majority of the members could not impartially consider that
request. After a review of the pleadings, the evidence provided, and the applicable law, it is
RECOMMENDED that Defendants motion be GRANTED.
STANDARD OF REVIEW
A plaintiffs claim may be dismissed for failure to state a claim upon which relief can be
granted, under Federal Rule of Civil Procedure 12(b)(6). In ruling on a motion to dismiss, the
court must accept the plaintiffs allegations as true, view them in a light most favorable to him,
and draw all inferences in his favor. Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498
(5th Cir. 2000); Lowrey v. Texas A&M Univ. Sys., 117 F.3d 242, 246-47 (5th Cir. 1997). Unless
it appears to a certainty that the plaintiff can prove no set of facts that would entitle him to relief,
the motion must be denied. Hishon v. King & Spalding, 467 U.S. 69, 73 (1984); Conley v.
Gibson, 355 U.S. 41, 45-46 (1957); Collins, 224 F.3d at 498. Generally, in considering a motion
to dismiss for failure to state a claim, a district court must limit its inquiry to the facts stated in
9
the complaint and the documents either attached to or incorporated in the complaint. Lovelace
v. Software Spectrum, Inc., 78 F.3d 1015, 1017 (5th Cir. 1996). In weighing the sufficiency of
the pleadings, it must be emphasized that conclusory allegations or legal conclusions
masquerading as factual conclusions will not suffice to prevent a motion to dismiss. Id.; and
see Collins, 224 F.3d at 498.
Plaintiffs in derivative suits, however, are held to a higher pleading standard under
Federal Rule of Civil Procedure 23.1. That rule requires derivative plaintiffs to plead
particularized facts describing any effort by the plaintiff to obtain the desired action from the
directors . . . and . . . the reasons for not obtaining the action or not making the effort. FED. R.
CIV. P. 23.1(b)(3). Because Rule 23.1 does not specify the applicable substantive standards, the
particularity of a plaintiffs pleadings will be determined by the standards in the state of
incorporation. Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 92-99, 108-109 (1991). In this
instance, Baker Hughes is incorporated in Delaware, and the parties agree that states laws
govern the inquiry here. See id. Under Delaware law, absent exceptional circumstances, the
business affairs of a corporation are to be managed by its board of directors. In re INFOUSA,
Inc. Shareholders Litigation, 953 A.2d 963, 984-985 (Del.Ch. 2007). To preserve the board's
authority over ordinary business decisions, a plaintiff who initiates a derivative action must
either demand that the corporate board take up the litigation itself, or demonstrate that such a
demand would be futile. Id.; Rales v. Blasband, 634 A.2d 927, 932 (Del.1993); Aronson v.
Lewis, 473 A.2d 805, 814 (Del.1984). Under Delaware law, two seminal cases dictate the
demand futility inquiry, Aronson v. Lewis, and Rales v. Blasband. Id. Delaware courts have
summarized these case holdings as follows:
Where a decision of the board is challenged, a plaintiff may demonstrate that
demand was excused if it can be shown that there is reason to doubt either (1) the
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disinterestedness or independence of the board upon whom the demand would be
made, or (2) the possibility that the transaction could have been an exercise of
business judgment. Where the complaint does not address an action taken by the
board, however, or alleges that the board failed to act, the inquiry narrows. The
Court cannot address the business judgment of an action not taken and, therefore,
should concern itself with what is now known as the Rales test: whether as of the
time the complaint is filed, the board of directors could have properly exercised
its independent and disinterested business judgment in responding to demand.
The spirit that clearly animates each test is a Court's unwillingness to set aside the
prerogatives of a board of directors unless the derivative plaintiff has shown some
reason to doubt that the board will exercise its discretion impartially and in good
faith.

Id. at 986; Aronson, 473 A.2d at 811; Rales, 634 A.2d at 934.
Here, Plaintiffs challenge the inaction by the Baker Hughes Board, and so, under Rales,
they must allege particularized facts that raise a reasonable doubt that, at the time the Complaint
was filed, the board of directors could not have properly exercised its independent and
disinterested business judgment in responding to the demand. Rales, 634 A.2d at 934. Under
Delaware law, a plaintiff can show that a given director is personally interested in the outcome of
the litigation with proof that such a director will personally benefit, or suffer, as a result of the
lawsuit. Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1049
(Del.2004). A plaintiff may . . . challenge a director's independence by putting forward
allegations that raise a reasonable inference that a given director is dominated through a close
personal or familial relationship or through force of will, or is so beholden to an interested
director that his or her discretion would be sterilized. Orman v. Cullman, 794 A.2d 5, 25 n. 50
(Del.Ch.2002); Beam, 845 A.2d at 1050 (quoting Grimes v. Donald, 673 A.2d 1207, 1217
(Del.1996)). Further, to demonstrate that a given director is beholden to a dominant director,
plaintiffs must show that the beholden director receives 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
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transaction objectively. Telxon Corp. v. Meyerson, 802 A.2d 257 (Del.2002). This showing
requires a detailed, fact-intensive, director-by-director analysis. In re INFOUSA, 953 A.2d at
985.
DISCUSSION
Plaintiffs contend that a majority of the current Baker Hughes board of directors is not
disinterested for four broad reasons: because they have not filed any lawsuits against any of the
Defendants or others; because they would have to sue themselves; and because Defendants
conduct was so egregious on its face. (Complaint 193(f-h), 194). Plaintiffs also contend that a
majority of Board members are not independent because they have entangling financial
alliances, interests, and dependencies. (Id. 193 (j-k)). Finally, they contend that Defendant
Chad C. Deaton lacks independence because he continues to receive substantial monetary
compensation and other benefits for his work as CEO and Chairman of the Board of Baker
Hughes. (Id. 193 (d)).
The Board has not filed suit already
Plaintiffs first argue that the Board is clearly interested in this litigation, or it would
have filed suit already. (Complaint 194(g)). However, the lone fact that the Board has not
elected to sue before the derivative action was filed should not of itself indicate interestedness.
Richardson v. Graves, 1983 WL 21109, at *3 (Del. Ch. Mar. 7, 1983). Mere inaction on the part
of the board . . . does not relieve plaintiffs of the requirement to make demand. In re INFOUSA,
953 A.2d at 987. Plaintiffs attempt to excuse demand, on this ground, is without merit.
Potential liability
Plaintiffs contend, next, that a majority of the Board is not disinterested because the
underlying facts expose each member to liability for a breach of his fiduciary duty. This alleged
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breach is grounded on the collective failure to adequately oversee the companys compliance
with the FCPA and the Exchange Act. (Complaint 193(b)). Plaintiffs argue that this breach of
their fiduciary duties resulted in the $44 million settlement with the U.S. government, and a
detriment to the shareholders. (Id.). Plaintiffs are emphatic that a majority of the current Board
failed to act in the face of several red flags that highlighted the deficiencies in the companys
oversight program. (Plaintiffs Response p. 12-13). First, Plaintiffs point to the FCPA and
Exchange Act violations themselves. Plaintiffs insist that the Board should have been aware of
these violations because of the 2001 Cease and Desist Order; the allegations in the suits by
former employees; and the various newspaper articles they have cited in their complaint. (Id.).
And, Plaintiffs complain that the Board failed to act despite the government investigation, which
took place from 2002 to 2007. (Id.).
It is true that derivative plaintiffs can raise a reasonable doubt about a given board
members interest in the pending litigation by showing that the action will expose that member to
potential personal liability. See In re INFOUSA, 953 A.2d at 990; Rales, 634 A.2d at 936;
Aronson, 473 A.2d at 815. The mere threat of personal liability, however, is insufficient to render
a director interested in a given transaction. Id. The plaintiffs allegation must show that a
substantial likelihood of liability exists.
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Id. And, most importantly, liability predicated on a
board's failure to exercise oversight "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); see also Stone v. Ritter, 911 A.2d 362, 372 (Del.2006); In re

5
Plaintiffs repeatedly claim that they need only raise a reasonable doubt about a directors disinterestedness, not a
substantial likelihood of success on the merits. (Plaintiffs Response p. 6). However, Plaintiffs conflate two discrete
steps of the Delaware analysis. Plaintiffs are correct that, to excuse demand, they need only raise a reasonable doubt
about the boards ability to impartially consider the demand. Rales, 634 A.2d at 934. But Delaware law is clear that,
because Plaintiffs allege impartiality because of potential liability, reasonable doubt . . . should only be found
where a substantial likelihood of personal liability exists. Wood v. Baum, 953 A.2d 136, 141 n.11 (Del. 2008)
(quoting Aronson, 743 A.2d at 814). The mere threat of liability is insufficient. Aronson, 743 A.2d at 814.
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Citigroup Inc. S'holder Deriv. Litig., 964 A.2d 106, 120 (Del. Ch.2009) (stating that director
oversight claims place an extremely high burden on a plaintiff). To defeat a motion to dismiss,
Plaintiffs must allege particularized facts which demonstrate that the directors "knew that they
were not discharging their fiduciary obligations" and that they failed to act "in the face of a
known duty to act, thereby demonstrating a conscious disregard for their responsibilities."
6

Stone, 911 A.2d at 370. Plaintiffs must further show, as necessary conditions predicate for
director oversight liability, that either (a) the directors utterly failed to implement any reporting
or information system or controls; or (b) having implemented such a system or controls,
consciously failed to monitor or oversee its operations thus disabling themselves from being
informed of risks or problems requiring their attention. Id. Significantly, under Delaware law,
the mere fact that violations occurred does not demonstrate bad faith on the part of a board.
Stone, 911 A.2d at 373. Delaware courts routinely reject the conclusory allegation that because
illegal behavior occurred, internal controls must have been deficient, and the board must have
known so. Desimone, 924 A.2d at 940. [N]o rationally designed system of . . . reporting will
remove the possibility that the corporation will violate laws or regulations. In re
IAC/InterActiveCorp. Sec. Litig., 478 F.Supp. 2d 574, 605 (S.D.N.Y. 2007) (internal quotation
marks omitted).

6
Plaintiffs also consistently argue that they can establish a substantial likelihood of director oversight liability
merely by showing that the Board should have known about the FCPA and Exchange Act violations. (Plaintiffs
Response p. 8). However, in doing so, Plaintiffs fail to distinguish among various standards in the demand futility
inquiry. It is true that a board breaches its duty of loyalty and good faith if it fails to take measures to discover and
prevent violations it should have known about; in other words, if the board failed to discharge its oversight duty in
good faith. See Stone, 911 A.2d at 370. But this simply means that failing to discharge the oversight duty is a breach
of the duty of loyalty. To establish that the board actually did fail to discharge its oversight duty, and, in turn, its
duty of loyalty, the Delaware Supreme Court has stated clearly that plaintiffs must allege particularized facts that
demonstrate that the directors "knew that they were not discharging their fiduciary obligations" and yet failed to act
"in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities." Id.
(emphasis added). In sum, Plaintiffs are correct that they need not show actual knowledge of the violations, but they
are required to show that the Board knew its oversight was inadequate, and deliberately failed to act on that
knowledge.
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The parties have each cited a number of cases in support of their contentions regarding
the potential director liability of the Baker Hughes Board. Plaintiffs, for example, attempt to
analogize the facts of this case to those before the Seventh Circuit
7
in In re Abbott Laboratories
Derivative Sholders Litig., 325 F.3d 795 (7th Cir. 2003). The plaintiffs in Abbott sued the board
of directors, in part, for its failure to ensure that the companys manufacturing process complied
with U.S. Food and Drug Administration (FDA) regulations. Id. at 799-801. Following a
government investigation, Abbott stated publicly that it disagreed with the [FDA] findings of
noncompliance and would fight any legal suit. Id. at 801. On that record, the appellate court
found that the Abbott board had intentionally failed to act in good faith, because it knew of the
violations of law, [yet] took no steps in an effort to prevent or remedy the situation. Id. at 809
(emphasis added). On the other hand, Defendants point to the Delaware case, Guttman v. Huang,
arguing that it is more analogous to the facts here. 823 A.2d 492, 507 (Del. Ch. 2003). In
Guttman, the derivative plaintiffs brought suit against the board of NVIDIA Corporation, in part,
for its failure to oversee and prevent accounting irregularities. Id. at 505-506. Those plaintiffs
alleged that the company released bullish disclosures regarding its results and future prospects,
and that those disclosures were materially misleading because they were premised on improper
accounting. Id. at 494. The disclosures at issue led to an SEC investigation and a significant
drop in stock price. Id. at 495. The Guttman court, applying the Delaware equivalent to Federal
Rule 23.1, found that the plaintiffs had failed to plead any particularized facts to suggest that the
board knew about the improper accounting, and, more importantly, that it failed to act on that
knowledge. Id. at 507. Most significantly, for the court, the plaintiffs had not alleged any
particularized facts about the companys compliance and audit program. Id. For those reasons,

7
Abbot was incorporated under the laws of Illinois, but Illinois case law follows Delaware law in establishing
demand futility requirements. In re Abbott Labs., 325 F.3d at 803.
15
the court held that demand was not excused based on the potential director liability, because it
could only guess about the existence, structure, and adequacy of the companys oversight
program. Id.
On this record, Plaintiffs allegations more closely resemble those in Guttman, rather than
those in Abbott. Here, Plaintiffs argue that the FCPA and the Exchange Act violations
themselves, as detailed in the Cease and Desist Order, the newspaper reports, and the suits by
former employees, demonstrate that the Board consciously failed to discharge its oversight duty.
However, such violations, on their own, do not show that Baker Hughes oversight was
inadequate, or, more importantly, that the Board acted in bad faith. Stone, 911 A.2d at 373. In
fact, the Boards conduct after the Cease and Desist order, and during the governments
investigation, fails to demonstrate a conscious disregard of their oversight duties. Unlike the
board in Abbott, which took no steps to improve compliance, Plaintiffs themselves acknowledge
that Baker Hughes implemented the following policies and procedures between 2002 and 2007: a
revised Business Code of Conduct; a revised FCPA policy; new requirements for hiring foreign
agents who might have connections to foreign governments; and new certification requirements
for officers. (Complaint 87-88, 117, 170-179). During that time, Baker Hughes also conducted
a world wide review of its customs procedures, and created a Blue Ribbon Panel to assist
Baker Hughes in instituting company-wide FCPA policies and procedures that would constitute
best practices in its industry. (Ex. E to Complaint, p. 10). It likewise implemented a Disclosure
Control and Internal Control committee, to oversee a system of disclosure controls designed to
provide reasonable assurance that information required to be disclosed is accumulated and
reported in an accurate and timely manner. (Complaint 168, 180). Further, unlike the Abbott
board, which vowed to fight any FDA action, here, the government agreed to the 2007 settlement
16
based on the fact that Baker Hughes has voluntarily disclosed [the FCPA and Exchange Act
violations]; conducted a thorough investigation of that misconduct and other possible
misconduct; regularly reported all its findings to the [DOJ ]; [and] cooperated in the
Departments subsequent investigation of this matter. (Ex. D to Plaintiffs Complaint, p.3).
From the undisputed facts, it appears that a number of the violations complained of
occurred despite clear company policies and procedures. For example, the SEC found that Baker
Hughes employees authorized the bribe to Indonesian tax officials [d]isregarding the FCPA
advisors instructions, and acting contrary to the advice of the General Counsel. (Complaint
62-72). Finally, just as in Guttman, even though Plaintiffs allude to several aspects of the Baker
Hughes oversight program, including its FCPA adviser, and its Audit and Ethics committee, they
fail to plead particularized facts that demonstrate how these compliance features were
inadequate. Indeed, Plaintiffs state that the Audit and Ethics Committee reviews policies and
procedures that the Company has implemented regarding compliance with applicable federal,
state and local laws and regulations, including the Companys Business Code of Conduct and its
[FCPA] policies. (Complaint 184(d)). But they then leave one to speculate about which
policies and procedures the committee has implemented, and how these policies and procedures
were inadequate. See Guttman, 823 A.2d at 507. The Guttman court, faced with a similar dearth
of information regarding an audit committee, described the inadequacy as follows:
For all I know, the . . . audit committee met six times a year for half-day sessions,
was comprised entirely of independent directors, had retained a qualified and
independent audit firm that performed no other services for the company, was
given no notice of the alleged irregularities by either management or the audit
firm, had paid its audit firm to perform professionally credible random tests of
management's integrity in recording revenue and other important financial data,
and could not have been expected to discover the accounting irregularities, even
when exercising a good faith effort, because discovery required disclosure by
management or uncovering by the auditors of conduct deep below the surface of
the financial statements.
17

Id. In this instance, Plaintiffs conclusory allegations leave one free to imagine either that Baker
Hughes had the most comprehensive compliance program in the industry, or the most deficient.
For these reasons, Plaintiffs have not shown that the Baker Hughes Board failed to act "in the
face of a known duty to act, thereby demonstrating a conscious disregard for their
responsibilities." Stone, 911 A.2d at 370. On this record, then, the directors cannot be said to face
a substantial likelihood of liability that renders them interested in the litigation, thereby
excusing the necessity for a demand that the Board act. Plaintiffs attempt to excuse demand, on
the basis of the directors potential liability, is without merit.
8

Egregious conduct
Before this court, Plaintiffs insist that the Baker Hughes Board is incapable of exercising
independent objective judgment in deciding whether to bring this action because Defendants
conduct was so egregious on its face. (Complaint 193(f), 194). The individual Board
members, Plaintiffs argue, have benefitted, and will continue to benefit, from the wrongdoing
herein alleged and have engaged in such conduct to preserve their positions of control and the
perquisites derived thereof. (Id. 193(f)). Plaintiffs also allege that the directors attempted to
conceal . . . these wrongs from Baker Hughes stockholders, and participated in . . . [the]
waste [of] its valuable assets. (Id. 193(d), 202). However, Plaintiffs allege no facts to support
those contentions. See RULE 23.1. Plaintiffs do not, for instance, describe how each individual
Board member benefited from the FCPA violations, or even identify the particular benefits at
issue. Nor do Plaintiffs allege specific Board decisions that were designed to preserve their

8
Plaintiffs also argue that the current Baker Hughes board members are interested, to the extent that it cannot
consider a request to act, because they are not protected from potential liability by the companys liability insurance,
or the exculpation provision of its charter. (Complaint 193(i); Plaintiffs response, p. 17). However, because
Plaintiffs have not demonstrated the necessary bad faith conduct or potential liability to implicate these provisions,
that argument is irrelevant. (Plaintiffs Response p. 17); Caruna v. Saligman, 1990 WL 212304, at *4 (Del. Ch. Dec.
21, 1990).
18
positions of control, conceal . . . wrongs, or waste . . . valuable assets. (Complaint 193(d),
(f), 202). Because Plaintiffs have failed to state particularized facts to support their allegations,
they have not shown that demand is futile. See In re Citigroup Inc. S'holder Deriv. Litig., 964
A.2d 106, 120 (Del. Ch.2009) (holding that [w]here, as here, a plaintiff does not make a pre-suit
demand on the board of directors, the complaint must plead with particularity facts showing that
a demand on the board would have been futile).
Entanglement
Plaintiffs contend that a majority of the current Baker Hughes Board is not independent
because they have entangling financial alliances, interests, and dependencies. (Complaint
193(j), (k)). In support of this contention, Plaintiffs present several charts and lists that
purportedly show that the directors are beholden to one another through various affiliations
with other companies and social organizations. (Id.). The first of these charts lists other
companies at which at least two current Baker Hughes Board members have served as directors
or officers. (Complaint 193(j)(i)). The next two charts concern the Baker Hughes Foundation,
which three defendant directors have been members of, and the personal charitable foundations
related to Defendants Kinder, Foster, and Watson. (Complaint 193(j)(ii)-(iii)). According to
Plaintiffs, several other Defendants lack independence, because those foundations have made
contributions to charitable and public interest organizations for which the individuals have
served as directors, officers, or trustees. (Id.). Finally, Plaintiffs list various social and charitable
organizations with which current Board members are affiliated. (Complaint 193(k)).
It is true that a plaintiff may challenge a director's independence by putting forward
allegations that raise a reasonable inference that a given director is dominated through a close
personal or familial relationship or through force of will, or is so beholden to an interested
19
director that his or her discretion would be sterilized. Orman v. Cullman, 794 A.2d 5, 25 n. 50
(Del.Ch.2002); Beam, 845 A.2d at 1050 (quoting Grimes v. Donald, 673 A.2d 1207, 1217
(Del.1996)). However, to demonstrate that a given director is beholden to a dominant director,
plaintiffs must show that the beholden director receives 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 merit's of the challenged
transaction objectively. Telxon Corp. v. Meyerson, 802 A.2d 257 (Del.2002). This showing
requires a detailed, fact-intensive, director-by-director analysis. In re INFOUSA, 953 A.2d at
985. It follows, then, that the plaintiff must do more than merely list the affiliations between
directors. Demand is not excused . . . just because directors would have to sue their friends,
family and business associates. In re Walt Disney Co. Derivative Litigation, 731 A.2d 342,
355 (Del.Ch.,1998) (reversed, in part, on other grounds) (quoting Abrams v. Koether, 766
F.Supp. 237, 256 (D.N.J .1991) (applying Delaware law)). In fact, Delaware courts have
suggested that, without more, a board members business and social affiliations outside the
company serve to strengthen the presumption that board members are independent. See Beam ex
rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 833 A.2d 961, 980 (Del.Ch.2003). After
all, the more duties a director owes to other organizations, the more important it is for that
director to have a reputation as an honest fiduciary. Id.
Here, Plaintiffs do no more than list the various business and social affiliations outside of
Baker Hughes that the current Board members enjoy. But that listing is insufficient to establish
that the Board members are not disinterested. In re Walt Disney, 731 A.2d at 355. Plaintiffs have
set out no detailed, fact-intensive, director-by-director analysis to demonstrate how any given
directors position with another organization inherently results in material influence over other
20
directors who happen to be affiliated with the same organization. See In re INFOUSA, 953 A.2d
at 985. In the absence of such an analysis, these affiliations may serve only to increase the
presumption of independence. See Beam ex rel. Martha Stewart, 833 A.2d at 980.
9
Plaintiffs
argument, on this issue, is without merit.
CEO Compensation
Finally, Plaintiffs contend that Board Chairman and CEO, Chad C. Deaton, lacks
independence because the Baker Hughes Compensation Committee has the authority to review
Deatons compensation. (Complaint 193(d)). They argue that, because of this authority, he is
not independent from the other named defendants who sit on that committee, including Mssrs.
Djerejian, Gargalli, J ungles, Nichols, and Riley. (Id.) In the Complaint, however, Plaintiffs
provide no other information about the structure or authority of the Compensation Committee,
nor any details about Deatons compensation package. Again, a plaintiff may challenge a
director's independence by alleging facts that raise a reasonable inference that a given director is
dominated through a close personal or familial relationship or through force of will, or is so
beholden to an interested director that his or her discretion would be sterilized. Orman, 794
A.2d at 25 n. 50; Beam, 845 A.2d at 1050 (quoting Grimes, 673 A.2d at 1217). But here,
Plaintiffs allege no particularized facts to indicate that Deaton could not impartially consider a
demand request. Indeed, on this record, the court is left to guess about the exact discretion and
authority the Compensation Committee exercises over Deatons compensation, and how much
influence the allegedly interested Board members have within that committee. See, e.g., Guttman

9
Plaintiffs urge the court to consider whether these allegations, read in totality with the other detailed factual
allegations of systemic illegality at Baker Hughes, confirm the Board breached its fiduciary duty. (Plaintiffs
Response p.15). As discussed above, the fact that illegality occurred, does not show that the Board breached its
fiduciary duties. Stone, 911 A.2d at 373. This conclusion is not altered by mere allegations, unsupported by
particularized facts, of entangling financial alliances, interests, and dependencies. See, e.g., Khanna v. McMinn,
2006 WL 1388744, at *15 (Del. Ch. May 9, 2006)([T]he piling-on of more and similar conclusory allegations
will not sum to a reasonable doubt.).
21
v. Huang, 823 A.2d 492, 493 (Del. Ch. 2003) (finding that demand futility was not supported by
particularized facts where court could only guess about the structure, procedures, actions, and
authority of a relevant committee). Plaintiffs argument, that demand is excused, in part, because
of Deatons alleged lack of independence, is without merit.
With these pleadings, Plaintiffs have failed to allege particularized facts that show that a
majority of the current Baker Hughes Board is interested in this litigation, or lacks the
independence necessary to consider a demand. The mere fact that Baker Hughes has not filed
suit does not itself indicate that it is interested in this action. See In re INFOUSA, 953 A.2d at
987. Further, the undisputed facts do not show that the directors face a substantial likelihood of
personal liability for their conduct. Finally, Plaintiffs complaint does not demonstrate that
certain directors control Chad Deaton through his compensation, or that the entire Board is
controlled by entangling financial alliances, interests, and dependencies. (Id. 193 (j)).
Because a majority of the current Baker Hughes Board could impartially consider a demand,
Plaintiffs complaint should be dismissed for failure to make that demand.
CONCLUSION
Based on the foregoing, it is RECOMMENDED that Defendants motion be
GRANTED. Plaintiffs have failed to show that a majority of the current Baker Hughes board of
directors could not impartially consider a demand to bring this action. For that reason, their
failure to make demand on the Board should not be excused under Rule 23.1.
The Clerk of the Court shall send copies of the memorandum and recommendation to the
respective parties, who will then have ten business days to file written objections, pursuant to 28
U.S.C. 636(b)(1)(c), General Order 02-13, S.D. Texas. Failure to file written objections within
the time period provided will bar an aggrieved party from attacking the factual findings and legal
22
conclusions on appeal. Douglass v. United Servs. Auto. Ass'n, 79 F.3d 1415, 1428-29 (5th Cir.
1996) (en banc).
The original of any written objections shall be filed with the United States District Clerk,
P.O. Box 61010, Houston, Texas 77208; copies of any such objections shall be delivered to the
chambers of J udge Vanessa D. Gilmore, Room 9513, and to the chambers of the undersigned,
Room 7007.
SIGNED at Houston, Texas, this 7th day of May, 2009.

MARY MILLOY
UNITED STATES MAGISTRATE JUDGE