Tuesday, September 01, 2015

Board Members Accused of Coercing Shareholders to Increase Their Compensation Win Appeal

By Matthew Garza, J.D.

Members of the board of directors of mobile technology company QualComm, Inc. were victorious in a legal battle launched by an investor over amendments made by the company’s compensation committee to increase stock options granted to the directors in 2010 and 2011. A Third Circuit panel agreed with a decision of the district court in Delaware that the investor was not excused from making a demand on the board, while also rejecting direct claims that the directors violated the company’s bylaws and other corporate contracts (Kaufman v. Alexander, August 28, 2015, Greenaway, J.)

Derivative claims. In 2010 and 2011, the company’s compensation committee approved increases to the share reserves in its Long–Term Incentive Plan (LTIP) after receiving the approval of stock holders. The investor, Jeffrey Kaufman, claimed that QualComm board members breached their fiduciary duties and various corporate contracts by making materially misleading statements to shareholders in proxy statements to obtain their approval. Kaufman asserted that the majority of the compensation paid to the directors was based on stock options granted through the company’s LTIP, so they were interested in obtaining approval votes from shareholders, and demand was excused.

The directors argued that while the amendments to the LTIP did increase the number of shares available for the compensation plan, the amendments did not alter their compensation. If the share increase had been rejected by shareholders, the company could have used alternative forms of compensation to pay the directors, they argued. The court pointed out that similar charges levied by Kaufman against the Dow Chemical Company were also dismissed in September 2014, although his motion for reconsideration was later granted. That case is currently in mediation.

The board was also not “interested” with regard to the actions of the compensation committee simply because three of the eight board members sat on the board, held the court. To establish demand futility, a majority of the board must be found to be interested.

Direct claims. Another claim made by the investor, which the court said shifted through the course of the litigation, focused on the procedure for calling the LTIP amendments for a vote. The claim started as a breach of fiduciary duty claim and morphed into a breach of contract claim, said the court. Since this breach of contract argument was raised for the first time on appeal, the court did not address it. The court did, however, opine that if it was a direct rather than derivative claim, the compensation committee had the authority to submit the LTIP amendments to a shareholder vote because it had been delegated broad powers by the board to design, implement, and administer all company-wide benefit plans, including equity-based compensation programs.

The last claim, a direct claim that the board members breached the company’s bylaws, compensation committee charter, and the LTIP, was dismissed because the board members were not parties to the contracts. “Directors of a corporation are not parties to a contract simply because the corporation is a party to the contract,” reasoned the court.

The case is No. 14-3293.

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