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SWANSON v. WEIL
United States District Court, D. Colorado.
September 26, 2012.
Thus, under Delaware law, the fact that executives "received substantial salaries during a period when [the company] was performing poorly would not, without more, ordinarily sustain a claim." Prod. Res. Grp., L.L.C. v. NCT Grp. Inc., 863 A.2d 772, 799 (Del. 2004). Consistent with this, pleadings claiming that no person "acting in good faith on behalf of [the company] consistently could approve the payment of between 44% and 48% of net revenues to [the company's] employees year in and year out ... f[e]ll far short of creating a reasonable doubt that the Director Defendants" failed to exercise their business judgment. In Re Goldman Sachs Grp. Inc. S'holder Litig., No. 5215, 2011 WL 4826104, at *13 (Del. Ch. Oct. 12, 2011). Also, the fact that the total compensation paid to the top five executives of a company increased in 2010 due the hire of a new CEO who was awarded "an extremely lucrative contract" has also been held to be unremarkable by the Delaware court, since the board "determined it had to offer an expensive compensation package to attract [the CEO] and ... determined he would be valuable to the Company." Brehm, 746 A.2d at 250, 263-64. I also find persuasive the Davis case from the federal district court in Oregon which applied Delaware law to a 2010 executive compensation program. 2012 WL 104776, at *5. That program "increased the compensation for each executive officer by approximately 60 up to 160 percent" even though the company's "return to shareholders was a negative 7.7 percent" that year. Id. at *2. The court held that the plaintiffs failed to meet their burden with respect to the presuit demand requirement and the claims were dismissed. It noted "that compensation determinations are typically within the business judgment of the board" and found "that the Plaintiffs' allegations regarding the board's compensation decision in this case are not sufficient to overcome the presumption that the board exercised business judgment." Id. at *7. In so finding, it noted that the plaintiffs' "essential position is that if a simple comparison reveals a level of compensation inconsistent with general corporate performance, the business judgment presumption is necessarily overcome, a position that is unsupported by the applicable standards." Id.6 Based on the foregoing authority, I reject Plaintiff's argument that the executive compensation paid in 2010 when a period when the company's stock price was declining and the company's performance was negative excuses a demand on the Janus Board. Plaintiff also asserts, however, that the facts alleged in the complaint demonstrate that the Board acted directly against the best interests of Janus' shareholders and harmed Janus by giving excessive compensation to its senior executives in violation of Janus' own stated pay for performance plan, i.e., that it would reward Janus' executives only if they achieved "strong performance against financial and strategic (non-financial) objectives". (See Compl. ¶¶ 86, 87, 92.) He further asserts that the Board "misrepresented to shareholders that [Janus] supposedly pays for performance while nevertheless granting lavish awards in the face of failure" (Opp'n to Janus' Mot. at 9), and made misrepresentations in Janus' 2011 Proxy. ( Compl. ¶ 87.) This argument is likewise unavailing, both in terms of showing a substantial likelihood of liability as well as creating a reasonable doubt that the challenged transaction is the result of a valid business judgment. First, as noted by Janus, the Proxy states that the Compensation Committee never equated "performance" solely with Janus' share price, but rather based compensation on a number of considerations. (Ex. A to Kim Decl. at 28-73.) Second, while Plaintiff attempts to equate "performance" with Janus' stock price, he ignores the actual metrics for both Company and individual performance. For Janus, these "performance goals and metrics for 2010 focused on [its] success as measured by Company profits, net flows and [its] performance against several strategic initiatives[.]" (Id. at 37-38.) For each individual, the Committee also considered numerous factors. (Id. at 37-38.) Plaintiff has not pleaded particularized facts to raise any doubt that the Committee applied these metrics in good faith in awarding the 2010 compensation, or that the criteria were mischaracterized. I again find the Davis case instructive on that issue. In rejecting a similar argument, Davis noted that "the board's actions do not directly defy or violate any Umpqua bylaw, any shareholder agreement, or any legally mandated disclosure or reporting requirement ... [i]nstead, Plaintiffs rely on a policy, pay for performance, that does not establish a binding standard for compensation." 2012 WL 104776, at *7. That analysis applies equally here. Davis also found that an "allegation that the board violated the pay for performance policy" or that the board made a material misrepresentation with respect to pay for performance "is not sufficient to overcome the business judgment presumption." Id. at *8. While it noted that in specific instances "the presumption may be overcome where a board of directors, although acting within the letter of a stockholder-approved plan, engages in deceptive conduct or misrepresents the true nature of its actions", it found that those facts did not exist in that case and that the plaintiffs did not adequately plead demand futility. Id. It stated on that issue: ... that the board's compensation decision does not square with Plaintiffs' interpretation of the pay for performance policy is not the equivalent of an allegation that the board intentionally misled shareholders that it would follow the policy when, instead, it had no intention of doing so. Again, there must be particularized facts supporting reasonable doubt that the board acted in good faith or upon sufficient information. Here, the complaint's allegations do not dispel the presumption that the board's compensation decision can be attributed to any rational business purpose. For these reasons, the challenged action is protected by the business judgment rule for purposes of presuit demand analysis and Plaintiff fails to meet the second Aronson prong.
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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