Charter Twp. of Clinton Police v. Martin

• Decision Date: 17 September 2013
• Docket Number: B241087
• Citation: 162 Cal.Rptr.3d 300
• Court: California Court of Appeals Court of Appeals
• Parties: CHARTER TOWNSHIP OF CLINTON POLICE AND FIRE RETIREMENT SYSTEM et al., Plaintiffs and Appellants, v. Craig L. MARTIN et al., Defendants and Respondents.

162 Cal.Rptr.3d 300

CHARTER TOWNSHIP OF CLINTON POLICE AND FIRE RETIREMENT SYSTEM et al., Plaintiffs and Appellants,

v.Craig L. MARTIN et al., Defendants and Respondents.

B241087

Court of Appeal, Second District, Division 5, California.

Filed September 17, 2013

Affirmed.

Mosk, J., filed concurring and dissenting opinion.

See 9 Witkin, Summary of Cal. Law (10th ed. 2005) Corporations, § 172.

APPEAL from a judgment of the Superior Court of Los Angeles County, Kenneth R. Freeman, Judge. Affirmed. (Los Angeles County Super. Ct. No. BC454543)

Robbins Geller Rudman & Dowd, Travis E. Downs III, Kevin K. Green and Amanda M. Frame, San Diego, for Plaintiff and Appellant Charter Township of Clinton Police and Fire Retirement System.

The Weiser Law Firm and Kathleen A. Herkenhoff for Plaintiff and Appellant Colleen Witmer.

Robbins Umeda, Brian J. Robbins and Shane P. Sanders, San Diego, for Plaintiff and Appellant Daniel Himmel.

Paul Hastings, William F. Sullivan, D. Scott Carlton, Los Angeles; Wachtell, Lipton, Rosen & Katz, Warren R. Stern and Kim B. Goldberg for Defendants and Respondents Craig L. Martin, Noel G. Watson, Joseph R. Bronson, John F. Coyne, Robert C. Davidson, Jr., Edward Fritzky, John P. Jumper, Linda Fayne Levinson, Benjamin F. Montoya, Thomas M.T. Niles, Peter J. Robertson, John W. Prosser, Jr., Thomas R. Hammond, George A. Kunberger, Gregory J. Landry, and Frederic W. Cook & Co., Inc.

Gibson, Dunn & Crutcher, Joel A. Feuer; and Michael M. Farhang, Los Angeles, for Nominal Defendant and Respondent Jacobs Engineering Group Inc.

KRIEGLER, J.

[219 Cal.App.4th 928]

Three plaintiffs ¹ filed the operative consolidated amended shareholder derivative complaint on behalf of nominal party Jacobs Engineering Group, Inc., against multiple defendants, including the individual members of Jacobs's Board of Directors (the Board),² senior Jacobs's executives ³ covered by a May 2010 executive compensation plan adopted by the Board, and Frederic W. Cook & Co., Inc., a consultant to Jacobs on the creation of the compensation plan. The consolidated complaint alleged the Board members violated fiduciary duties by adopting the compensation plan in the face of poor performance by Jacobs, misrepresenting compliance with the plan and company performance in a proxy statement, and failure to alter the plan in response to its rejection by a majority of Jacobs's shareholders in a nonbinding vote. Plaintiffs alleged it was “useless and futile” to file a pre-suit demand on the Board to rescind the plan.

The trial court sustained defendants' demurrer to the consolidated complaint on the grounds that plaintiffs had failed to adequately plead pre-suit demand futility, and alternatively, the complaint failed to state a cause of action under applicable California and Delaware law. Plaintiffs challenge both aspects of the court's order sustaining the demurrer. We agree with the trial court that plaintiffs have failed to allege facts excusing pre-suit demand on the Board with allegations of particularized facts showing wrongdoing by a majority of directors on a director-by-director basis. In reaching this conclusion, we agree with and cite in detail from the recent opinion in

[219 Cal.App.4th 929]

Raul v. Rynd (D.Del., Mar. 14, 2013, C.A. No. 11–560–LPS) 929 F.Supp.2d 333, 2013 WL 1010290 ( Rynd ), which dismissed a complaint containing allegations strikingly similar to those against defendants in this case for failure to allege pre-suit demand futility. Accordingly, we affirm and need not reach the issue of whether plaintiffs have alleged facts sufficient to state a cause of action.

“Dodd–Frank explicitly provides that say-on-pay votes ‘shall not be binding on a company or its board of directors, and ‘may not be construed’ in any of the following ways: (1) ‘as overruling a decision’ by the company or its board of directors; (2) ‘to create or imply any change to the fiduciary duties' of the company or its board of directors; (3) ‘to create or imply any additional fiduciary duties' for the company or its board of directors;’ or (4) ‘to restrict or limit the ability of shareholders to make proposals for inclusion in proxy materials related to executive compensation.’ 15 U.S.C. § 78n–1(c).” ( Rynd, supra,929 F.Supp.2d at p. 338.)

The May 2010 compensation package increased compensation to executives Martin, Prosser, Hammond, Kunberger, and Landry by 27.5, 19.3, 10.3, 16.3, and 18.6 percent, respectively.⁵ Combined compensation for these executives increased from approximately $13.5 million in 2009 to almost $17 million dollars in 2010. The increased executive compensation neither rewarded superior performance nor recognized the consequences for poor performance, contrary to the Board's stated policy, casting doubt upon the Board's loyalty and business judgment.

The Board justified its recommendation in the Proxy by greatly overstating Jacobs' performance compared to self-selected peer companies. The Board misrepresented that: Jacobs's financial performance for the last fiscal year was above the median in growth of its peers, when the company ranked below 90 percent of those companies for fiscal 2010; Jacobs's performance for the last fiscal year was in the median range for net income growth compared to the industry peer group, although net income decline for fiscal 2010 was so large ($153 million) that Jacobs ranked below at least 80 percent of its own self-selected peers; Jacobs's fiscal 2010 return on average shareholders' equity of 8.97 percent was in the median range for its self-selected peer group, but Jacobs's results for fiscal 2010 were well below the numbers for 9 out of 11 self-selected peers and the median 12–month return of equity for Jacobs's peers was actually over 30 percent higher than that of Jacobs as of September 30, 2010; and Jacobs's financial performance for the 2010 fiscal year was above the median of its peer group in return on invested capital, although the one and two-year return on invested capital ranked below at least 63 percent of the members of its peer group.

Institutional Shareholder Services, Inc., (ISS) issued a recommendation advising Jacobs's shareholders to vote against the Board-recommended executive compensation proposal. Contrary to other companies when confronted with an ISS report recommending a no vote in advance of a shareholder

[219 Cal.App.4th 931]

“say-or-pay” vote, Jacobs refused to modify the executive compensation. On January 27, 2011, 55.2 percent of Jacobs's shareholders voted against the Board's 2010 executive compensation program.

Plaintiffs alleged Cook is an executive compensation advisory firm that assisted the Board in its evaluation of the May 2010 executive compensation plan. According to the Proxy, Cook reviewed and made recommendations concerning all of the components of Jacobs's executive compensation program. The 2010 Proxy stated that Cook “serves as an objective, third party counsel on the reasonableness of compensation levels in comparison with those of other similarly situated companies, and the appropriateness of [Jacobs's] compensation program structure.”

The operative complaint contained identical allegations against the 11 Jacobs's directors, with the exception of Martin, who as president and chief executive officer of Jacobs benefited from the May 2010 compensation plan. As to each director, the operative complaint alleged (1) the amount of time the director had served on the Board, and (2) that the director “issued the 2010 Proxy representing that Jacobs's executive compensation practices follow a pay-for-performance policy, and that [Jacobs] performed well for 2010 when compared to its own self-selected peers in terms of revenue growth, net income growth, [return on equity], and [return on invested capital], when clearly it did not. [He or she] also signed Jacobs's 2010 Form 10–K containing Jacobs's diminished 2010 results.”

As to the failure to make a pre-suit complaint to the Board, the complaint alleged a “pre-suit demand upon the Board is a useless and futile action” because “[t]here is doubt that the Board's decision to increase 2010 executive compensation was a protected business judgment, which excuses demand” and “[a] majority of the Board was interested in a demand because there is a substantial likelihood that they will be held liable for their conduct” in failing to fulfill their fiduciary duties of loyalty and good faith, including making the allegedly false and misleading statements.

B. The Proxy Filed with the SEC

1. The December Proxy

The December 2010 Proxy included materials relevant to an advisory vote on executive compensation as required by Dodd–Frank. The Board unanimously recommended a “yes” vote on the May 2010 executive compensation plan.

“Consistent with [Jacobs's] compensation philosophy, our executive compensation program has been designed to promote a performance-based culture

[219 Cal.App.4th 932]

and align the interests of executives with those of shareholders by linking a substantial portion of compensation to [Jacobs's] performance. The program is designed to award superior performance and provide consequences for underperformance. The program is also designed to attract and to retain highly-qualified executives who are critical to the success of [Jacobs].”

To accomplish these goals, “[Jacobs] provides pay that is highly leveraged toward equity in order to align total compensation with shareholder interests.” Demonstrating that the majority component of executive compensation in fiscal 2010 was in equity, approximately: (1) 71 percent of total compensation for the chief executive officer was in equity, 18 percent was in base salary, and 11 percent in short-term incentive; and (2) “53 [percent] (on average) of total compensation for” executives other than the chief executive officer was in equity, 25 percent in base salary, and 14 percent in short-term incentive.

Based on competitive data, Jacobs during...