Garfield v. Allen

• Decision Date: 24 May 2022
• Docket Number: C. A. 2021-0420-JTL
• Parties: ROBERT GARFIELD, derivatively on behalf of THE ODP CORPORATION and individually on behalf of himself and all other similarly situated stockholders, Plaintiff, v. QUINCY L. ALLEN, KRISTIN A. CAMPBELL, MARCUS B. DUNLOP, CYNTHIA T. JAMISON, FRANCESCA RUIZ DE LUZURIAGA, V. JAMES MARINO, SASHANK SAMANT, WENDY L. SCHOPPERT, GERRY P. SMITH, DAVID M. SZYMANSKI, NIGEL TRAVIS, and JOSEPH S. VASSALLUZZO, Defendants, and THE ODP CORPORATION, Nominal Defendant.
• Court: Court of Chancery of Delaware

ROBERT GARFIELD, derivatively on behalf of THE ODP CORPORATION and individually on behalf of himself and all other similarly situated stockholders, Plaintiff,
v.
QUINCY L. ALLEN, KRISTIN A. CAMPBELL, MARCUS B. DUNLOP, CYNTHIA T. JAMISON, FRANCESCA RUIZ DE LUZURIAGA, V. JAMES MARINO, SASHANK SAMANT, WENDY L. SCHOPPERT, GERRY P. SMITH, DAVID M. SZYMANSKI, NIGEL TRAVIS, and JOSEPH S. VASSALLUZZO, Defendants,

and THE ODP CORPORATION, Nominal Defendant.

C. A. No. 2021-0420-JTL

Court of Chancery of Delaware

May 24, 2022

Date Submitted: March 1, 2022

Brian Farnan and Michael J. Farnan, FARNAN LLP, Wilmington, Delaware; Steven J. Purcell, Douglas E. Julie, Robert H. Lefkowitz, and Anisha Mirchandani, PURCELL JULIE & LEFKOWITZ LLP, New York, New York; Counsel for Plaintiff.

Brian M. Rostocki, Benjamin P. Chapple, and Justin M. Forcier, REED SMITH LLP, Wilmington, Delaware; William M. Regan and Allison M. Wuertz, HOGAN LOVELLS U.S. LLP, New York, New York; Counsel for Defendants.

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OPINION

LASTER, V.C.

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In 2019, the stockholders of The ODP Corporation (the "Company") approved an equity compensation plan (the "2019 Plan"). The 2019 Plan authorizes the Company's board of directors (the "Board") to grant awards of performance shares, performance units, restricted stock, restricted stock units, nonqualified stock options, incentive stock options, stock appreciation rights, and other forms of equity-based compensation to officers, employees, non-employee directors, and consultants. A committee of the Board (the "Committee") administers the 2019 Plan.

The 2019 Plan limits the number of performance shares that the Committee can award to any single individual in the same fiscal year. In March 2020, the Committee made two grants of performance shares to the Company's chief executive officer ("CEO"), defendant Gerry P. Smith (the "Challenged Awards"). Each of the Challenged Awards entitled Smith to receive a variable number of performance shares, with the actual amount determined by the Company's performance over a three-year measurement period that will end in 2023. If the Company performs well, then the aggregate number of shares that Smith is entitled to retain will exceed the limit in the 2019 Plan.

The plaintiff is a stockholder of the Company. He contends that by granting the Challenged Awards, the defendants violated the express terms of the 2019 Plan, and he has asserted a direct claim for breach of the 2019 Plan.

The plaintiff also contends that the individual defendants breached their fiduciary duties, and he has sued derivatively on behalf of the Company to recover for the harm that the Company suffered as a result of those breaches. The plaintiff contends that the members of the Committee breached their fiduciary duties by approving the Challenged Awards. He

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maintains that Smith breached his fiduciary duties by accepting the Challenged Awards. And he contends that all of the members of the Board breached their fiduciary duties by not fixing the Challenged Awards after the plaintiff brought the violation of the 2019 Plan to their attention. In a separate derivative claim, the plaintiff asserts that Smith has been unjustly enriched by the Challenged Awards.

The defendants moved to dismiss the complaint in its entirety for failing to state a claim on which relief can be granted. The defendants did not seek dismissal of the derivative claims under Rule 23.1.

The defendants' arguments for dismissal conflicted with the express language of the 2019 Plan, the express language of the agreements that govern the Challenged Awards, and the Company's description of the Challenged Awards in its public disclosures. The defendants' arguments frequently contravened settled precedent.

In their opening salvo, the defendants argued that none of the plaintiff's claims are ripe. According to the defendants, a ripe challenge will not exist until it becomes certain how many shares Smith will retain. For decades now, the Delaware courts have dealt with variants of this argument. In earlier versions, defendants have contended that challenges to option grants were not ripe until the options were exercised. Past cases put those arguments to rest, and this decision rejects the latest reincarnation. When the Committee approved the Challenged Awards, the Committee granted a bundle of rights to Smith. The plaintiff can challenge now whether that bundle complies with the 2019 Plan.

The defendants next argued that the plaintiff failed to state a claim for breach of the 2019 Plan because the directors have authority to interpret the 2019 Plan and can determine

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that the Challenged Awards did not violate it. In an earlier case, this court flatly rejected an identical argument, holding that the authority to interpret an equity compensation plan does not confer authority to evade express restrictions in the equity compensation plan. The court reaches the same result in this case.

Turning to the fiduciary duty claims, the defendants argued that the plaintiff failed to state a claim because the business judgment rule protects the decision to grant the Challenged Awards. Multiple precedents explain that the business judgment rule does not apply to a claim that directors lacked authority to take action under the terms of a governing document. Other authorities hold that when directors grant awards that exceed an express limitation in an equity compensation plan, the allegations support an inference that the directors acted knowingly and intentionally. That inference in turn supports a claim that the directors breached their duty of loyalty by failing to act in good faith, which rebuts the protections of the business judgment rule. Under each line of reasoning, the defendants' argument lacks merit.

The defendants argued in passing that the plaintiff failed to state a claim for breach of fiduciary duty against Smith because the Challenged Awards were legitimate compensation. In several decisions, this court has recognized that a plaintiff states a claim against a fiduciary who accepts an award when the award violates an express limitation in an equity compensation plan. As with the directors who approved the award, the allegation that the award violates an express limitation in the plan supports a claim that the recipient acted knowingly when accepting the award, thereby breaching the duty of loyalty by failing to act in good faith. The court adheres to those precedents.

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In contrast to the preceding issues, which are governed by settled law, the plaintiff also advanced a novel theory. According to the plaintiff, all of the directors-including the directors who did not approve the Challenged Awards-breached their fiduciary duties by not fixing the obvious violation after the plaintiff sent a demand letter calling the issue to their attention. There is something disquieting about a plaintiff manufacturing a claim against directors by acting as a whistleblower and then suing because the directors did not respond to the whistle. Nevertheless, the logic of the plaintiff's theory is sound: Delaware law treats a conscious failure to act as the equivalent of action, so if a plaintiff brings a clear violation to the directors' attention and they do not act, then it is reasonably conceivable that the directors' conscious inaction constitutes a breach of duty. The same logic animates a Caremark claim that rests on the theory that the board consciously ignored proverbial red flags, although the source of the notice that the board receives is different.

There are obvious policy issues associated with such a claim. The artifice of sending a demand letter and then suing based on the failure to fix the problem could undermine salutary doctrines such as laches that force plaintiffs to bring claims in a timely fashion. It also could enable plaintiffs to expose new directors to litigation risk by presenting them with a problem that they did not create and asserting that they failed to fix it. And there is a lack of precedent for the theory. The wrongful rejection of a demand historically has affected only the question of who controls the derivative claim. It does not appear to have been analyzed as a separate fiduciary wrong.

The plaintiff, however, has pled what seems like one of the strongest possible scenarios for such a claim. The limitation in the 2019 Plan is plain and unambiguous. Under

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established precedent, the failure to comply with a plain and unambiguous restriction in a stockholder-approved equity compensation plan supports an inference that the directors acted in bad faith. The recipient of the Challenged Awards was a fellow fiduciary who faced the same obligation to fix the flawed grants as the other members of the Board. If there was ever a time when all of the directors had a duty to take action to benefit the Company by addressing an obvious problem, it is reasonably conceivable that this was it. With admitted trepidation about knock-on effects, this decision permits the claim to survive pleading-stage analysis. In light of the policy implications that claims of this sort present, future decisions must consider carefully any attempts by plaintiffs to follow a similar path. In response to the claim for unjust enrichment, the defendants argued that plaintiff failed to plead any of the required elements. That was plainly an overstatement, because the defendants did not attempt to dispute that one element was met. Because the Challenged Awards represented a transfer of value from the Company to Smith, most of the elements were met easily. The defendants' strongest attack on the claim was their assertion that the plaintiff had to show the absence of an adequate remedy at law. Because the plaintiff had pled other theories of recovery, the defendants contended that the plaintiff could not meet that element. But that assertion rests on a misunderstanding of the role that the...