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​Litigation involving Plans, Awards, and Shareholder Approval
Backdated Award as Breach of Fiduciary Duty by Board / Code 162(m) Shareholder Litigation

2018.11.14  From Law360:  "Equus Ducks Investor Suit Over Stock Plan Notices. A suit filed by a proposed class of shareholders claiming not enough information was disclosed about an Equus Total Return Inc. stock incentive plan was tossed in Delaware Chancery Court on Tuesday, with a vice chancellor finding the company satisfied its duty to inform stockholders about the plan.  ... Vice Chancellor Joseph R. Slights III ruled Equus and its board "adequately fulfilled their disclosure obligations" by providing information in an annual financial report and proxy statement mailed together to stockholders.  ...  The case is Zalmanoff v. Hardy et al., case number 12912, in the Delaware Court of Chancery."


October 22, 2018  From Law360:  "Equus Investor Says Equity Perk Suit Should Stay Alive.

 A proposed class seeking to undo an approved Equus Total Return Inc. stock incentive plan argued in Delaware Chancery Court on Monday that their complaint claiming not enough information was provided for shareholders about the plan should move forward to trial.


During a hearing in front of Vice Chancellor Joseph R. Slights III in Wilmington, attorney Samuel L. Closic of Prickett Jones & Elliott PA, representing the proposed class, said a trial is warranted to determine whether officers of the closed-end investment company breached their fiduciary duty of disclosure when they proposed and pursued and executive and director equity incentive program in June 2016. Equus had previously moved to have the case dismissed.


Shareholder Samuel Zalmanoff filed a suit against the company and board members in 2016 contending Equus fell short in providing information to stockholders about the incentive program, which was proposed two years after the company notified investors of plans for a reorganization or merger with MVC Capital Inc.


The investor class claims the compensation, which proposes an incentive plan for directors and officers with options to acquire up to 25 percent of the company’s stock at market price or about a 39 percent discount on reported net asset value, is wasteful and unjustified.


2015.Jun.19  Stock Plan Award Limits Violated but Award Rescinded - 9th Circuit Tosses Shareholders Challenge.  Quiksilver stumbled by increasing plan award limits in 2012 without shareholder approval.  But the company rescinded awards made pursuant to that amendment, and thereafter made proper awards under a shareholder-approved 2013 plan.  The 9th Circuit dismissed an associated shareholder derivative action, finding the complaint moot and sensing that the lawsuit was only for fees.  See Stockman v. McKnight, 9th Cir.

2015.03.06. Reasonable Interpretation of Expedia's Stock Plan - Case Dismissed.   in Friedman v. Khosrowshahi, the Delaware Supreme Court affirmed the Court of Chancery’s dismissal of a breach of fiduciary claim relating to an alleged violation of Expedia’s stock incentive plan. The Supreme Court upheld the Court of Chancery’s finding that the complaint failed to allege any violation of the Plan because (1) the board acted on a reasonable interpretation of the Plan’s terms and (2) to the extent the terms of the Plan were ambiguous, the Plan expressly gave the board authority to resolve any ambiguity.


2013.Jan.2  Stock Plan Award Limits: Shareholders Challenge Mindspeed Tech.  While it is common for stock plans to impose per-person limits on award amounts, it is rare to see litigation asserting violations. That has occurred with respect to Mindspeed Technologies, with its board members being struck with claims they breached fiduciary duties by making CEO awards in excess of plan limits.


Performance Awards - Failure to Make.

See Complaint (6/21/2011) for Freedman v. Bruch action in NY County, alleging breaches of fiduciary duty based on the board's failure to make performance goals within the purview of the purpose stated in its shareholder-approved stock plans.

 Shareholder Approval and Code Section 162(m) Claims 

2013.Jul.02  Code 162(m) Litigation Again Avoids Dismissal
A Delaware court has again rejected Qualcomm's effort to dismiss shareholder derivative litigation alleging the company's proxy statement was either false or misleading in representing that shareholder approval would allow plan awards to qualify for an exemption from Code §162(m).  Qualcomm relied on a new development to argue for dismissal, perhaps encouraged because the prior court order described the motion as presenting "a close call."  Qualcomm's new evidence took the form of an "Issue Resolution Agreement" in which the IRS agreed that Qualcomm's 2011 LTIP satisfied Code§162(m)'s requirements for the making of exempt awards. The court nevertheless declined to dismiss the case because the IRS agreement was not final and binding, and therefore became an evidentiary item as opposed to being dispositive.

2013.Jan.14  Code §162(m) Claims Resoundingly Dismissed - DE Supreme Court.  "The decision to sacrifice some tax savings in order to retain flexibility in compensation decisions is a classic exercise of business judgment." So holds Delaware's Supreme Court in Freedman v. Adams. Despite this dismissal of another §162(m)-based action, employers should be mindful of three points. 

  1. Be sure to record a decision on material compensation issues. The quote presented above refers to a "decision" by the board, with the predecessor text of the opinion noting that the board had actually made an affirmative decision. This is critical for defeating shareholder decision and fiduciary litigation, because questionable complaints have advanced when a record demonstrates board recognition of an issue but does not record affirmative action. 
  2. Be mindful in proxy statements. In these days of extensive proxy statement discussions of executive compensation, disgruntled shareholders are searching for company stumbles -- ranging from proposals for plan approval to the justification for award decisions. Well-drafted proxy statements will defuse claims, with Delaware's Supreme Court quoting the Code §162(m) paragraph that explained XTO's decision.
  3. Remain watchful for Code §162(m) Claims. One ground for dismissal in the Freedman case was the absence of an allegation that "any of the bonuses paid to XTO's executives actually would have been deductible under such a [162(m)] plan." Expect future complaints to close that loose end when a proxy statement opens the door. That accentuates the importance of covering the first two items noted above, in order to expeditiously defeat these gadfly lawsuits.


2012.Aug.21  Code §162(m) Claims -- One Dismissed (vs. AK Steel); Others Rise (vs. Caterpillar and Viacom) .  Applying Delaware corporate law, a federal district court in Delaware dismissed claims that directors of AK Steel breached their fiduciary duties in connection with a proxy statement's proposal for approval of stock plans intended to allow for performance-based awards that could qualify for an exemption from Code §162(m).  

>>> One day earlier, Law 360 reported the lawsuit with the headline "$37M Viacom Investor Suit Likely To Flop Despite Novel Tactic". Claims of this kind have been springing from proxy statements when stock plan proposals suggest inadvertently that all awards "will" qualify -- rather than "may" qualify -- for Code §162(m)'s exemption for performance-based compensation.

2012.Mar.30  DE Chancery Dismisses Broad Range of 162(m) Claims; Denies Fee Award.  In Freedman v. Adams, a shareholder brought derivative claims alleging breaches of fiduciary duty and waste due to the failure of XTO Energy's board to structure over $40 million of executive bonuses in a manner that would be deductible under Code Se  §162(m). The Court's decision resoundingly rejects several fiduciary breach and waste claims relating to Code Section 162(m), with two of many notable quotations being: 

  • ... decisions regarding a company's tax policy are not well-suited to after-the-fact review by courts and typify an area of corporate decision-making  best left to management's business judgment, so long as it is exercised in an appropriate fashion.117 This Court rejects the notion that there is a broadly applicable fiduciary duty to minimize taxes, and, therefore the Plaintiff's argument that the board failed to act despite a duty to minimize taxes is unavailing.
    • [Note plaintiff argued that the company could have avoided $40M of lost deductions.]
  • ... the Board's decision falls within the line of cases dismissing executive compensation-related waste claims and concluding that "the size and structure of executive compensation are inherently matters of judgment. 133


2012.Feb.9  Allergan's ex-CEO dismissed from litigation alleging material mis-statements in proxy statement re Code 162(m) compliance invalidates shareholder approval of stock plan.  See New Jersey Building Laborers Pension Fund v. Ball et al., case number 1:11-cv-01153, U.S. District Court, Delaware. 

2011.Aug.4  Copy-cat Shareholder Litigation ... Stock Plan Approval Challenged due to Code §162(m) Description. ConocoPhillips has become the latest target of vexatious shareholder derivative litigation that seeks to invalidate shareholder approval of a new (or amended) stock award plan. Each of these actions argues, unpersuasively, that the underlying proxy statement mis-stated how Code §162(m)'s tax deduction rules would apply to plan awards. See Harvard Blog (2011.Sept.7).

2011.July.1  Qualcomm faced the first of these actions, with its motion to dismiss being denied in Hoch v. Alexander (D.De, 7/1/2011), holding that "The parties dispute, among other things, whether certain treasury regulations apply as well as the meaning of the Proxy Statement. But at this stage, Hoch has properly pled that a material misstatement interfered with the voting rights of shareholders and that the false proxy statement breached Defendants' duties of loyalty and good faith and constituted waste. See Resnik, 2011 WL 1184739, at *12-13."

2011.Mar.30  In Seinfeld v. O'Connor, Delaware's District Court dismissed a shareholder derivative action claiming that the 2009 proxy statement for Republic Services contained false or misleading statements in connection with an annual incentive plan's conformity with Code §162(m).  The court's decision states that --
     (i) "it is plain that the proxy statement does not say what Seinfeld alleges. It does not assert that the EIP will be tax-deductible, only that it is intended to be deductible under IRC § 162(m)" (page 7 of PDF), and 
     (ii) "The regulation contemplates the kind of 'menu-plan' of possible performance measures and goals that Republic used here."Spring-loading Award as Breach of Fiduciary Duty by Board:

In re Tyson Foods (Del.Ch. 2007) - springloading re stock option grants just before positive public announcement.


Strict Enforcement of Plan Terms:

'Sanders v Wang': Why Drafting is Important (commentaries by Bachelder, NY Law Journal, 8/30/2000) -- Stock plan's omission of an anti-dilution adjustment provision for outstanding awards resulted in invalidating such adjustments. Sanders v. Wang (Del.Ch., 1999 Lexis 203, 11/8/99).