Freedman v. Redstone

• Decision Date: 16 July 2013
• Docket Number: Civ. No. 12-1052-SLR
• Parties: ROBERT FREEDMAN, Plaintiff, v. SUMNER M. REDSTONE, PHILIPPE P. DAUMAN, THOMAS E. DOOLEY, GEORGE S. ABRAMS, ALAN C. GREENBERG, SHARI REDSTONE, FREDERIC V. SALERNO, BLYTHE J. MCGARVIE, CHARLES E. PHILLIPS, JR., WILLIAM SCHWARTZ, ROBERT K. KRAFT, and VIACOM INC., Defendants.
• Court: U.S. District Court — District of Delaware

ROBERT FREEDMAN, Plaintiff, v. SUMNER M. REDSTONE, PHILIPPE P. DAUMAN, THOMAS E. DOOLEY, GEORGE S. ABRAMS, ALAN C GREENBERG, SHARI REDSTONE, FREDERIC V. SALERNO, BLYTHE J. MCGARVIE, CHARLES E. PHILLIPS JR., WILLIAM SCHWARTZ, ROBERT K. KRAFT, and VIACOM INC., Defendants.

Civ. No. 12-1052-SLR

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE

Dated: July 16 , 2013

Joseph J. Farnan, ill, Esquire, and Brian Farnan, Esquire of Farnan LLP, Wilmington, Delaware. Counsel for Plaintiff. Of Counsel: Alexander Arnold Gershon, Esquire, Michael A. Toomey, Esquire, and Daniel E. Bacine, Esquire of Barrack, Rodos & Bacine.

Jon Abramczyk, Esquire, and John P. DiTomo, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware. Counsel for Defendants. Of Counsel: Stuart J. Baskin, Esquire, and Jaculin Aaron, Esquire of Shearman & Sterling LLP.

MEMORANDUM OPINION

Dated: July 16 , 2013

Wilmington, Delaware

ROBINSON, District Judge

I. INTRODUCTION

Shareholder Robert Freedman ("plaintiff") filed the instant suit against nominal defendant Viacom Inc. ("Viacom") and the eleven individual members (the "director defendants") of its board of directors ("the Board"), asserting derivative and direct claims related to the manner in which Viacom's board, through its compensation committee ("the Committee"), determined incentive compensation for three senior executives ("the executives"), who also serve as directors. (D.I. 1) The gravamen of plaintiff's complaint is that the incentive compensation at issue violated Viacom's 2007 Senior Executive Short-Term Incentive Plan ("the 2007 Plan") and that a similar 2012 Senior Executive Short-Term Incentive Plan ("the 2012 Plan") was subsequently approved by an invalid shareholder vote.

Specifically, plaintiff's derivative claim, brought on behalf of Viacom against the director defendants, alleges breach of fiduciary duty, waste, and unjust enrichment arising from the committee's implementation of the 2007 Plan and the executives' acceptance of the allegedly excessive compensation. (Id. at ¶¶ 50-53) The direct claim alleges that shareholder approval of the 2012 Plan was improper under I.R.C. § 162(m) because only one class of shareholders was permitted to vote on it. (Id. at ¶¶ 54-59) Plaintiff seeks damages in excess of $36 million on behalf of Viacom; an injunction in favor of Viacom against the director defendants from paying excessive compensation under the 2012 Plan; and a new shareholder vote on the 2012 Plan, with the participation of all Viacom shareholders. (Id. at Prayer for Relief ¶¶ A, B, C)

Currently before the court is a motion to dismiss filed by Viacom and the directordefendants (collectively, "defendants"). (D.I. 5) The motion to dismiss avers that neither the derivative nor the direct claim states a cause of action under Federal Rule of Civil Procedure 12(b)(6) and that the derivative claim also fails to meet the pleading requirements for demand futility under Federal Rule of Civil Procedure 23.1. The court has jurisdiction over the matter pursuant to 28 U.S.C. §§ 1331, 1332, 1340, and 1367.

II. BACKGROUND

A. The Parties

Plaintiff, a citizen of Pennsylvania, avers that he has been a holder of Viacom class B common stock continuously since December 31, 2005. (Id. at ¶¶ 1, 5; D.I. 10) Plaintiff filed the instant suit against defendants on August 17, 2012.

Viacom is an entertainment content corporation organized under the laws of the State of Delaware and with its principal place of business in the State of New York. (D.I. 1 at ¶ 4) It is a publicly traded company and, as of July 15, 2012, had outstanding 51,152,571 shares of class A common stock and 463,435,375 shares of class B common stock. (Id.) Viacom's certificate of incorporation does not grant class B common stock any voting power. (Id. at ¶ 56; D.I. 6, ex. C) The eleven director defendants - Sumner M. Redstone, Philippe P. Dauman, Thomas E. Dooley, George S. Abrams, Alan C. Greenberg, Shari Redstone, Frederic V. Salerno, Blythe J. McGarvie, Charles E. Phillips, Jr., William Schwartz, and Robert K. Kraft - are all citizens of states other than Pennsylvania. (D.I. 1 at ¶ 1)

B. The 2007 Plan

For a publicly held corporation, compensation of the chief executive officer andthe four highest compensated executive officers in excess of $1 million is typically not tax-deductible; however, I.R.C. § 162(m) provides an exception, under which certain performance-based compensation is tax deductible.¹ Under I.R.C. § 162(m) and thecorresponding Department of Treasury regulations, such performance-based compensation must be based on the attainment of one or more pre-established, objective performance goals that are determined by a compensation committee comprised solely of at least two outside directors. See I.R.C. § 162(m)(4)(C)(i); Treas. Reg. § 1.162-27(e)(2)(i). "The terms of the objective formula or standard must preclude discretion to increase the amount of compensation payable that would otherwise be due upon attainment of the goal." Treas. Reg. § 1.162-27(e)(2)(iii)(A). The terms of the remuneration must also be disclosed to shareholders and be approved "by a majority of the vote in a separate shareholder vote." I.R.C. § 162(m)(4)(C)(ii).

The 2007 Plan was approved by a shareholder vote on May 30, 2007. (D.I. 1 at ¶ 10) Plaintiff avers that, since 2008, Viacom has paid annual incentive compensation under the plan to the executives - Sumner Redstone, Dauman, and Dooley - who are also directors. (Id. at ¶¶ 7, 16) According to plaintiff, the 2007 Plan required the Committee to award tax-deductible compensation under I.R.C. § 162(m) and did not permit the awarding of compensation that was not tax-deductible. (Id. at ¶¶ 16) The members of the Committee were director defendants Salerno, McGarvie, Phillips, Jr., and Schwartz. (Id. at ¶ 8) Until August 2009, Kraft was also a member of the Committee. (Id.)By its terms, the 2007 Plan required the Committee to establish a "performance period;" designate the participants for the performance period; select "performance goals" from a list set forth in Section 2.2(b) of the 2007 Plan; establish specific "performance targets" for each performance goal selected; and set "target awards" for each participant. (Id. at ¶¶ 16, 17; D.I. 6, ex. A at §§ 1.2(e), 2.2(a)) Section 2.2(b) provided the following performance goals from which the Committee could choose:

OIBDA [or operating income before depreciation and amortization], OIBDA Without Intercompany Eliminations, Operating Income, Free Cash Flow, Net Earnings, Net Earnings From Continuing Operations, Earnings Per Share, Revenue, Net Revenue, Operating Revenue, total shareholder return, share price, return on equity, return in excess of cost of capital, profit in excess of cost of capital, return on assets, return on invested capital, net operating profit after tax, operating margin, profit margin or any combination thereof.

(D.I. 1 at ¶ 16; D.I. 6, ex. A at § 2.2(b))

The Committee was then tasked with certifying, at the end of the performance period, "whether the performance targets were achieved in the manner required by [I.R.C. §] 162(m)." (D.I. 6, ex. A at § 2.4) If the performance targets had been achieved, "the Awards for such Performance Period shall have been earned except that the Committee may, in its sole discretion, reduce the amount of any Award to reflect the Committee's assessment of the Participant's individual performance or for any other reason." (Id.) The 2007 Plan imposed a limitation on awards, such that awards granted under it to any individual could not exceed eight times the individual's salary, "but in no event shall such amount exceed $51.2 million."² (Id., ex. A at § 2.3)

Plaintiff avers that, in purporting to follow the 2007 Plan, the Committee selected performance measures from § 2.2(b), established a "range" of performance goals for each of those performance measures, and then set each executive's target award at "some arbitrary designated point" on the range of performance goals. (D.I. 1 at ¶ 17) Because the Committee used more than one of the § 2.2(b) performance measures, it allegedly assigned a weight to each performance measure. (Id. at ¶ 18) Plaintiff claims that, at the end of each performance period, that weight would be multiplied by the actual performance to obtain a "weighted percentage point" for each performance measure. (Id. at ¶ 18) The Committee would then add up those weighted percentage points to obtain a "total multiplier," which was applied to each executive's target award. (Id.) According to plaintiff, the actual bonus could be between 25% and 200% of the target bonus. (Id. at ¶ 17)

It is alleged that the implementation of the 2007 Plan differed from how it was supposed to work in theory. (See id. at ¶¶ 17-22) Between 2008 and 2011, the Committee allegedly used subjective and discretionary non-financial qualitative factors, in addition to certain of the objective quantitative factors set forth in § 2.2(b), to determine approximately 20% of the bonus awarded to each executive.³ (Id. at¶¶ 19-20) Between 2009 and 2011, the Committee allegedly committed further wrongdoing by using "positive discretion" to provide additional compensation based on theperformance of each executive in subjective areas. (Id. at ¶ 21) These subjective areas allegedly included "leadership and vision, continuing to navigate economic challenges, continuing to foster a diverse and inclusive corporate culture, continuing to enhance the legal function across Viacom and its divisions, and achieving success in . . . risk management and technology responsibilities." (Id.) Plaintiff avers that "subjectivity pervade[d] this bonus calculation in other ways as well," including one executive, Dauman, making specific bonus recommendations for another executive, Dooley. (Id. at ¶¶ 7, 22) Plaintiff asserts that the committee's use of subjective factors to determine bonuses between 2008 and 2011 and to upwardly adjust bonuses...