SWANSON v. WEIL
CHARLES D. SWANSON, derivatively on behalf of Janus Capital Group Inc., Plaintiff,
v.
RICHARD M. WEIL; STEVEN L. SCHEID; TIMOTHY ARMOUR; PAUL BALSER; G. ANDREW COX; JEFFREY DIERMEIER; J. RICHARD FREDERICKS; DEBORAH GATZEK; LAWRENCE KOCHARD; ROBERT PARRY; JOCK PATTON; GLENN SCHAFER; JONATHAN D. COLEMAN; GREGORY A. FROST; JAMES P. GOFF; and R. GIBSON SMITH, Defendants,
JANUS CAPITAL GROUP INC., Nominal Defendant.
Civil Action No. 11-cv-02142-WYD-KLM.
United States District Court, D. Colorado.
September 26, 2012.
ORDERWILEY Y. DANIEL, Chief District Judge.
I. INTRODUCTION
This is a shareholder derivative action purportedly brought by Plaintiff Charles D. Swanson ["Plaintiff"] on behalf of nominal defendant Janus Capital Group, Inc. ["Janus"] against its directors and certain executive officers. The Amended Verified Shareholder Derivative Complaint [hereinafter "complaint"] asserts claims of breach of fiduciary duty, violation of the Securities Exchange Act of 1934 ["the Exchange Act"], and unjust enrichment. These claims relate to the Janus Board's approval of, and Janus executive officers' receipt of, 2010 executive compensation payments. Plaintiff alleges that these payments were excessive and unwarranted in light of Janus' dismal 2010 financial performance. Plaintiff also alleges that the Board made false and misleading statements in Janus' Definitive Proxy Statement on Schedule 14A ["Proxy"].
There are two pending motions to dismiss before the Court: Nominal Defendant Janus' Motion to Dismiss and the Individual Defendants' Motion to Dismiss. Janus seeks to dismiss the Complaint on the basis that Plaintiff did not make a pre-litigation demand on Janus' Board of Directors and has allegedly failed to meet the stringent requirements for showing how such a demand would have been futile.
The individual Defendants join Janus' motion, and also seek to dismiss the Complaint on the basis that the claims for breach of fiduciary duty, violation of section 14(A) of the Exchange Act, and unjust enrichment fail to state a claim upon which relief can be granted. They assert that "[t]he Complaint is one of over a dozen meritless, cookie-cutter complaints filed across the country in the wake of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), enacted by Congress on July 21, 2010." (Memo. of Law in Supp. of Individual Defs.' Mot. to Dismiss at 1.) Dodd-Frank "requires that public companies hold a non-binding advisory shareholder vote on executive compensation at least once every three years (an advisory "say on pay" vote.) (Id.)
Plaintiff contends in response that his complaint details facts demonstrating that Janus' Board has 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. He argues that not only has he sufficiently pled that Defendants are liable, he has also alleged sufficient facts to establish that demand on the Board is excused as futile (or at least to raise the requisite reasonable doubt that the Board would impartially consider a demand). Finally, Plaintiff argues that he has alleged sufficient facts to support his claims and that the individual Defendants' motion to dismiss pursuant to Rule 12(b)(6) should be denied.
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).