NECA-IBEW PENSION FUND v. COX
NECA-IBEW PENSION FUND, Derivatively on Behalf of CINCINNATI BELL, INC., Plaintiff,
PHILLIP R. COX, et al., Defendants.
Case No. 1:11-cv-451.
United States District Court, S.D. Ohio, Western Division.
September 20, 2011.
ORDER DENYING DEFENDANTS' MOTION TO DISMISS
TIMOTHY S. BLACK, District Judge.
This civil lawsuit presents the question, among others, whether a shareholder of a public company may sue its directors for breach of the duty of loyalty when the directors grant $4 million dollars in bonuses, on top of $4.5 million dollars in salary and other compensation, to the chief executive officer in the same year the company incurs a $61.3 million dollar decline in net income, a drop in earnings per share from $0.37 to $0.09, a reduction in share price from $3.45 to $2.80, and a negative 18.8% annual shareholder return.
Normally, a board of directors is protected by the "business judgment rule" when making decisions about executive compensation, and courts "will not inquire into the wisdom of actions taken by a director in the absence of fraud, bad faith, or abuse of discretion." Radol v. Thomas, 772 F.2d 244, 257 (6th Cir. 1987). However, the business judgment rule is a presumption that may be rebutted by a plaintiff with factual evidence that board members acted disloyally, i.e., not in the best interests of the company or its shareholders. See, e.g., Koos v. Cent. Ohio Cellular, Inc., 641 N.E.2d 265, 272 (Ohio Ct. App. 1994). Under the recently enacted federal law, The Dodd-Frank Wall Street Reform Act, publicly traded companies must include a separate shareholder resolution to approve executive compensation in their proxies at least once every three years. See 15 U.S. Code § 78n-1(a) (2010). Pursuant to that requirement, the Cincinnati Bell Board included a shareholder resolution in its March 21, 2011 proxy seeking shareholder approval of the 2010 executive compensation. The Board recommended that the shareholders vote in support of the resolution. On May 3, 2011, 66% of voting shareholders voted against the 2010 executive compensation.1
Citing, inter alia, the overwhelming rejection by shareholders of 2010 executive compensation, plaintiff filed this lawsuit alleging that the Cincinnati Bell Board breached its fiduciary duty of loyalty when it decided to approve large pay raises and bonuses to its top three officers in a year when, according to plaintiff, the company performed dismally. The directors and officers, in turn, have filed their motion to dismiss the lawsuit.
A. Standard of Review