Orrock v. Appleton

Decision Date16 July 2009
Docket NumberNo. 35064.,35064.
Citation147 Idaho 613,213 P.3d 398
PartiesScott ORROCK, derivatively on behalf of Micron Technology, Inc., Plaintiff/Appellant, v. Steven R. APPLETON, Wilbur G. Stover, Jr., Michael W. Sadler, James W. Bagley, Robert A. Lothrop, Gordon C. Smith, William P. Weber, Thomas T. Nicholson and Don J. Simplot, Defendants/Respondents.
CourtIdaho Supreme Court

Rossman Law Group, Boise, and Robins Umeda, San Diego, California, for appellant. Mark Umeda argued.

Greener, Burke & Shoemaker, Boise, Douglas W. Greene, Seattle, Washington, and Davie Lansky, Palo Alto, California, for respondents. Barry Kaplan argued.

W. JONES, Justice.

This case stems from a shareholder derivative action filed by Scott Orrock (Orrock) on behalf of Micron Technology, Inc. (Micron) against the officers and directors of Micron. The complaint alleged that some of the officers and directors violated state law, breached their fiduciary duties, abused their control, engaged in gross mismanagement, wasted corporate assets and were unjustly enriched thereby causing substantial loss and damages to Micron. The district court dismissed the action pursuant to I.R.C.P. 12(b)(6) for failure to state a claim upon which relief may be granted. Orrock appeals to this Court.

FACTUAL AND PROCEDURAL BACKGROUND

The complaint generally alleges that members of the Micron board and Micron officers were engaged in a scheme to manipulate the price of Dynamic Random Access Memory (DRAM) products. Orrock brought this derivative action for injuries suffered as a result of breaches of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment, and aiding and abetting thereof. Orrock names Steven R. Appleton (Appleton), Wilbur G. Stover, Jr. (Stover), Michael W. Sadler (Sadler), James W. Bagley (Bagley), Robert A. Lothrop (Lothrop), Gordon C. Smith (Smith), William P. Weber (Weber), Thomas T. Nicholson (Nicholson), and Don J. Simplot (Simplot) as defendants in this action. Prior to filing a shareholder derivative action the plaintiff must demand that the board of the corporation take action. A derivative action may not be maintained unless the plaintiff can show that demand would be futile. The district court found that Orrock had failed to sufficiently plead facts showing that demand on the board would have been futile. Therefore, the district court dismissed this action pursuant to I.R.C.P. 12(b)(6) for failure to state a claim upon which relief may be granted.

The third amended complaint alleged the following facts1 in relation to whether demand on the board would be futile:

Micron is a manufacturer of memory technology and produces DRAM products. DRAM constitutes 95% of Micron's revenue. Appleton, Bagley, Lothrop, Smith and Weber served on the Board during the relevant period.2 These five members constitute a majority of the Board.

A Micron representative, in a 2001 email, stated that Micron would "be increasing prices to all of the [Original Equipment Manufacturer] customers."

The Department of Justice (DOJ) issued a federal grand jury subpoena to Micron demanding documents relating to the pricing and sales of DRAM chips. In response to the DOJ's subpoena Appleton, Bagley, Lothrop, Smith and Weber allowed Micron to alter handwritten notes and other documents relating to the pricing and sales of DRAM products. In November of 2004 Appleton responded to the allegations and investigation by publicly stating that it was "not possible to control prices in [the DRAM] industry" and that the DOJ's investigation was merely "theoretical." Micron would be subject to billions of dollars in liability for any violations of applicable securities and antitrust laws.

Sadler met with CEO's of DRAM manufacturing companies and discussed cutting DRAM production. In October 2001, Sadler traveled to Munich, Tokyo, Taiwan and Seoul. Appleton had knowledge of Sadler's actions. Appleton scheduled a visit to Munich to meet with the CEO's of Infineon and Samsung regarding cut backs in DRAM production.3 In June 2002, Appleton, Bagley, Lothrop, Smith and Weber were aware that Micron was likely involved in the DRAM price-fixing conspiracy based on the DOJ's announcement and investigation into Micron's role and numerous news articles in the Idaho Statesman, the New York Times, and the Wall Street Journal. The Articles collectively contain the following information: (1) the CEO of Dell Computers blamed the skyrocketing prices of memory chips on "cartel-like behavior by a couple of DRAM suppliers;" (2) industry experts believed the DOJ investigation to be focused on "companies artificially pushing prices up;" (3) Micron was being investigated by a grand jury for anticompetitive practices which implied that criminal charges may follow; (4) Micron cut DRAM supply by 20% between September 2001 and March 2002, which is one of the most dramatic cuts made by a DRAM manufacturer; (5) DRAM prices were on average $1.97 each in the fourth quarter of "last year" and $4.50 each in the first quarter of 2002; (6) the vice president of Mosel-Vitelic "confirmed that his company had reached an agreement with Hynix and Samsung Electronics to push up DRAM prices to $3 a chip by stopping dumping of the chip;" and (7) twenty-six class action lawsuits had been filed naming Micron as a defendant with allegations of secrecy and conspiracy to fix memory prices. Micron's Board took no investigatory action in response to these allegations by the news sources. Specifically, Appleton, Bagley, Lothrop, Smith and Weber conducted no investigation as to whether any of Micron's employees were involved in the alleged conspiracy or whether Micron would be subjected to liability if such a conspiracy existed.

Forbes magazine called Appleton the "worst performing boss in America." Forbes listed Appleton's annual compensation based on a six-year average at $7.8 million despite an overall decrease in Micron's stock.

Micron has an on-going business relationship with Lam Research Corporation (Lam) for semiconductor manufacturing equipment and related services. Over a five-year period Micron paid Lam $326.5 million for semiconductor manufacturing equipment and related services. Bagley is the current Executive chairman and former CEO of Lam. Mercedes Johnson (Johnson)4 served as Senior Vice President of Finance for Lam.

Lothrop, Smith and Simplot were business associates at the J.R. Simplot Company which is an agribusiness company. Lothrop served as Senior Vice President from 1986-1991. Smith served in various management positions from 1980-1994, including three years as President and CEO and seven years as CFO. Simplot served as President of Simplot Financial Corporation from 1985-1992, which is a wholly owned subsidiary of the J.R. Simplot Company. Simplot has also worked for the J.R. Simplot Company since 1955 in various capacities, including director.

Smith had access to internal corporate documents, conversations and other non-public information. While in possession of this information Smith sold 10,000 shares of Micron stock for proceeds of $352,400.5 On July 20, 2007, Smith made certain accusatory statements to the Idaho Statesman, such as: (1) Micron is in need of new management and potentially a new Board; (2) this "change at the top" should have been made a long time ago; (3) the Board was not prepared to make any necessary changes; (4) the Board is "very passive" and not "well-informed;" (5) if the Board had been more "aggressive" and "inquiring" any damage caused to Micron due to faulty management could have been avoided; (6) Smith was equally at fault for his failure to timely speak out against Appleton and other members of the Board; and (7) the business relationship between Bagley and Lam is so strong that Bagley would not speak out against Appleton. On July 25, 2007 Smith resigned from the Micron Board.

The Governance and Compensation Committee at Micron reviews and approves the CEO's compensation. This Committee is responsible for: (1) evaluating director and Board committee member compensation, (2) recommending the appropriate level of director compensation, (3) reviewing and approving corporate goals and objectives relevant to the CEO's compensation, (4) evaluating the CEO's performance in light of the goals and objectives, (5) determining the CEO's compensation level, (6) reviewing performance of the individual directors, (7) determining whether a director should be nominated for an additional term, and (8) oversight of the Board's evaluation of it's performance and the performance of management. Lothrop and Weber consist of two-thirds of the Governance and Compensation Committee.

The Audit Committee is responsible for, (1) conducting a quarterly review of the Company's system of internal controls, and (2) periodically reviewing, along with Micron's General Counsel, Micron's compliance with legal and regulatory requirements. Lothrop, Smith and Weber were all members of the Audit Committee at some point during the relevant period.6

Smith and Weber have received an additional $10,000 in compensation for holding positions as chairmen of the Audit Committee and Governance and Compensation Committee. Bagley, Lothrop, Smith and Weber each receive an annual retainer of $50,000.7

Appleton is primarily employed by Micron. Over a five-year period Micron paid Appleton $1,268,128 in bonus compensation, $2,696,114 in salary, $851,900 in restricted stock awards and granted Appleton options to purchase 2,350,000 shares of stock. Compensation for Appleton is determined by the Governance and Compensation Committee.

Orrock further alleged that demand on the individual shareholders of Micron would be futile because, (1) Micron is a publicly held company with over 618 million shares outstanding, (2) such demand would be impossible because Orrock has no means to discover names, addresses or phone numbers of the shareholders, and (3) regardless if...

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6 cases
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    ...895 P.2d 561, 563 (1995). All factual allegations will be considered true, unless they are purely conclusory. Orrock v. Appleton, 147 Idaho 613, 618, 213 P.3d 398, 403 (2009). Where all factual allegations in the pleadings, if true, still fail to meet the elements of a claim showing a plain......
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