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SWANSON v. WEIL
United States District Court, D. Colorado.
September 26, 2012.
I also note that the result of the advisory say on pay vote cannot rebut the business judgment presumption because it occurred after the Board approved the 2010 executive compensation. Delaware law forbids using events subsequent to the challenged action to second guess a board's business judgment. See In Re Cox Radio S'holders Litig., No. CIV. A 4461, 2010 WL 1806616, at *14 (Del. Ch. May 6, 2010), aff'd, 9 A.2d 475 (2010); Litt v. Wycoff, No. Civ.A. 19083, 2003 WL 1794734, at *9 (Del. Ch. March 28, 2003). As noted in McCarthy, the outcome of a say on pay vote, "which was not known when the challenged decisions were made, does not suggest that in making those decisions, the directors failed to act on an informed basis, in good faith, and in the honest belief that the decisions were in [the company's] best interests." 2011 WL 4386238, at § III.B.2.a. Delaware law also makes clear that shareholder disagreement with a board's business judgment does not suffice to state a breach of fiduciary duty. Directors "may take good faith actions they believe will benefit stockholders, even if they realize that the stockholders do not agree with them." In re Lear Corp. S'holder Litig., 967 A.2d 640, 655 (Del. Ch. 2008). This is true even where "many, presumably most, shareholders would prefer the board to do otherwise than it has done." Paramount Commc'ns Inc. v. Time Inc., Civ. A. Nos. 10866, 10670, 10935, 1989 WL 79880, at *30 (Del. Ch. July 14, 1989), aff'd, 571 A.2d 1140 (Del. 1989); see also Am. Int'l Rent A Car, Inc. v. Cross, No. 7583, 1984 WL 8204, at *3 (Del. Ch. May 9, 1984) (no per se breach of fiduciary duty "for the Board to act in a manner which it may believe is contrary to the wishes of a majority of the company's stockholders"). This is because "directors, rather than shareholders, manage the business and affairs of the corporation." Aronson, 473 A.2d at 811. Plaintiff further alleges that demand on the Board should be excused "as each of the directors has been named as a defendant in this action. ..." (Compl. ¶ 87), and that "a majority of the Board either was at fault for the misconduct described herein and/or is liable for the misconduct described herein." (Id. ¶ 93.) As such, Plaintiff claims that "the Board members are disabled as a matter of law from objectively considering any pre-suit demand, rendering demand futile and excused." (Id.) I find that these allegations are conclusory and are insufficient to meet the demand requirement. "In Delaware mere directorial control of a transaction, absent particularized facts supporting a breach of fiduciary duty claim, or otherwise establishing the lack of independence or disinterestedness of a majority of directors, is insufficient to excuse demand." Aronson, 473 A.2d at 817. The Aronson court noted that demand requirements "would be rendered meaningless if "any board approval of a challenged transaction automatically connotes `hostile interest' and `guilty participation' by directors. Id. at 814. Further, the "mere threat" of personal liability by a director in the derivative action does not render a director interested. Seminaris, 662 A.2d at 1354. Again I find the Davis case persuasive on this issue. "The implicit premise of the plaintiffs' argument in Davis was "that the self-interest sufficient to trigger demand futility is present whenever board members face the possibility of a lawsuit filed against them in response to a decision or other board action." Davis, 2012 WL 104776 at *5. The court noted that under the plaintiff's reasoning "the fact that presuit demand is itself suggestive of impending liability is sufficient to create the type of self-interest that triggers the demand futility exception." Id. Davis rejected that argument, stating: This would permit every derivative action plaintiff to argue that demand is futile and need not be made because no board would be able to act objectively in evaluating a presuit demand. Such a result would effectively erase the demand requirement and negate its purpose. 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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