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SWANSON v. WEIL
United States District Court, D. Colorado.
September 26, 2012.
In response, Plaintiff points out Janus stated in the Proxy that the Company's "pay for performance" policy is designed to "provide a strong and direct link between pay and both Company and individual performance." (See Compl. ¶¶ 50, 61, 97.) Additionally, the Board represented that "the compensation of our most senior executives, those who have the greatest ability to influence Janus' performance, should be primarily based on Company and individual performance — an approach that reinforces the alignment of interests between our executives and our public and fund shareholders." (Id. ¶¶ 50, 97; see also Ex. A to Kim Decl. at 33.) The complaint alleges that rather than adhere to Janus' performance-based executive compensation plan, the Board awarded Weil, Coleman, Frost, Goff and Smith substantial bonuses for their underperformance. (Compl. ¶¶ 3-4, 51-56.) It is also alleged that the Board drastically increased executive compensation in the aggregate by 41% for 2010, including more than $20 million to Weil upon his appointment on or about February 1, 2010, $10 million of which he received before even performing a single duty. (Id.) The total compensation award of $40 million represented approximately 30% of Janus' net income and 2% of its average market value during 2010. (Id. ¶¶ 3, 12. ) Further, it is alleged that the Board increased compensation notwithstanding the fact that Janus' stock price declined by 7% in 2010 and underperformed the Dow Jones by 16% in 2010 at the hands of these executives. (Compl. ¶ 4.) The price of Janus' stock has not recovered and was down more than 50% from 2009. (Id. ¶ 2.) Weil admitted in a May 2011 article entitled "Janus CEO Weil faces uphill climb in 2nd year on job" that "[w]e know that we haven't yet delivered the results that we need to deliver." (Id. ¶ 58.)2 As required by Dodd-Frank, the Proxy included a resolution asking Janus shareholders to cast a non-binding advisory vote in favor of Janus' 2010 executive compensation. (Compl. ¶ 6.) At the annual shareholder meeting on April 29, 2011, a majority of Janus shareholders voted against the approval of the 2010 executive compensation. (Id. ¶ 7.) Plaintiff asserts that Janus' shareholders soundly rejected the Board's 2010 executive compensation plan, with approximately 59.89 million shares voted against the compensation recommended by the Board. (Id.) The Board has not since rescinded Janus' 2010 executive compensation. (Id. ¶ 10). III. ANALYSIS Fed. R. Civ. P. 23.1 establishes the procedural requirements for bringing a shareholder action in federal court. It requires a complainant to "state with particularity" 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." Id. Here, Plaintiff did not make a demand on Janus' Directors as he argues that such a demand would have been futile. To determine the substantive law applicable to a failure to make a demand on directors in a derivative action, federal courts must "apply the demand futility exception as it is defined by the law of the State of incorporation." Kenny v. Koenig, 426 F.Supp.2d 1175, 1180 (D. Colo. 2006) (quotation omitted). Since Janus is incorporated in Delaware, "Delaware law will determine whether [Swanson is] ... excused from the demand requirement." Id. In support of their arguments regarding whether the futility exception applies, both parties cite the case of Aronson v. Lewis, 473 A.2d 805 (Del. 1984), overruled in part on other grounds by Brehm v. Eisner, 746 A.2d 244, 246 (Del. Supr. 2000). In Aronson, the Delaware Supreme Court stated that "[a] cardinal precept of the General Corporation Law of the State of Delaware is that directors, rather than shareholders, manage the business and affairs of the corporation." Id. at 811. It further noted that "[t]he existence and exercise of this power carries with it certain fundamental fiduciary obligations to the corporation and its shareholders." Id.
1. While Janus and the Individual Defendants have referred to documents outside the pleadings in connection with their motions, I can consider these documents without converting the motions into motions for summary judgment. Janus' Proxy filed with the Securities and Exchange Commission ["SEC"] on March 16, 2011 (Ex. A to Kim Declaration) may be considered because the complaint refers to this document and it is central to the claims. See Utah Gospel Mission v. Salt Lake City Corp., 425 F.3d 1249, 1253-54 (10th Cir. 2005). Further, I may take judicial notice of the authenticated certificates filed with the Delaware Secretary of State (Exs. B-C to Kim Declaration) as they as public records. Tal v. Hogan, 453 F.3d 1244, 1264-65 & n. 24 (10th Cir. 2006).
2. The complaint further alleges that an article in the New York Times on June 18, 2011, entitled "Paychecks as Big as Tajikistan" (the "NY Times Article"), stated that Janus "topped the list" of companies that compensated executives irrespective of performance, noting Janus was the worst offender of companies examined. (Id. ¶ 12.) Moreover, it is alleged that in 2009, Glass, Lewis & Co. ranked Janus' CEO as being the 15th most overpaid CEO in the country. (Id. ¶ 13.)
3. Weil himself was not a member of the Compensation Committee.
4. Plaintiff has, in fact, alleged a number of conclusory allegations in support of his assertion that demand is excused based on futility. For example, he alleges that demand is excused as "a majority of the Board either was at fault for the misconduct described herein and/or is liable for the misconduct described herein", and are thus "disabled as matter of law from objectively considering any pre-suit demand. ..." (Compl. ¶ 93.) Further, he alleges that "the Board has openly demonstrated its hostility to this action" and that "the directors have exhibited antipathy towards the relief sought herein. ..." (Id. ¶¶ 88, 95.)
5. As to futility, the court stated, "[g]iven that the director defendants devised the challenged compensation, approved the compensation, recommended shareholder approval of the compensation, and suffered a negative shareholder vote on the compensation, plaintiff has demonstrated sufficient facts to show that there is reason to doubt these same directors could exercise their independent business judgment over whether to bring suit against themselves for breach of fiduciary duty in awarding the challenged compensation. Id. at *4. The court concluded, "at the dismissal stage, that plaintiffs' allegations create a reasonable doubt that the challenged transaction is the result of a valid business judgment, and, accordingly, the directors possess a disqualifying interest sufficient to render pre-suit demand futile and hence unnecessary." Id.
6. Similarly, in Teamsters Local 237 Additional Sec. Benefit Fund v. McCarthy, No. 2011-cv-197841, 2011 WL 4836230 (Ga. Sup. Ct. Sept. 16, 2011), a case applying Delaware law, the court found that demand was not excused where the company gave pay raises in 2010 to its four most highly compensated executives, even though it suffered a net loss of $34 million and annual share price return of -17.23%, both of which plaintiffs alleged fell below industry averages.
7. I also agree with the Individual Defendant that Plaintiff has failed to show loss causation in connection with his Exchange Act claim. See Dominick v. Marcove, 809 F.Supp. 805, 807 (D. Colo. 1992) ("To prove that a proxy misstatement caused a shareholder's damages the proxy solicitation must have been the essential causal link in accomplishing the proposed action".). To show loss causation, the proxy must solicit "votes legally required to authorize the action proposed." Va. Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1102 (1991); see also Dominick, 809 F. Supp. at 807 (essential link cannot be proven where approval by minority shareholders not legally required to authorize transaction). Here, the advisory non-binding `say on pay" votes solicited by the Proxy were not legally required to authorize the award of the executive compensation, the only loss Plaintiff claims. Plaintiff does not dispute this. Instead, he argues the Proxy was the "essential link" that caused the "harm of a misinformed shareholder vote on executive compensation." (Opp'n to Indiv. Def.'s Mot. at 18.) But there is no such "harm" because the vote was purely advisory — no corporate action was authorized. In addition, Plaintiff fails to explain how the allegedly misleading statements tainted the vote given that shareholders voted against the proposal. In other words, Plaintiff has failed to plead that misrepresentations in the Proxy caused the loss. See Gen. Elec. Co. v. Cathcart, 980 F.2d 927, 932-33 (3d Cir. 1992); Britton v. Parker, Nos. 06-cv-01797, 06-cv-1922, 06-cv-02017, 2009 WL 3158133, at *11 (D. Colo. Sept. 23, 2009).
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