Grimes v. Donald
| Decision Date | 25 January 1996 |
| Docket Number | No. 791995,791995 |
| Citation | 673 A.2d 1207 |
| Court | Supreme Court of Delaware |
| Parties | C.L. GRIMES, Plaintiff Below, Appellant, v. James L. DONALD, Clement M. Brown, Jr., Frank J. Cummiskey, Raymond J. Dempsey, John Fairclough, James L. Fischer, Robert S. Folsom, James P. Leake, James M. Nolan, and Jim A. Watson, Defendants Below, Appellees, and DSC Communications Corporation, Nominal Defendant Below, Appellee. . Submitted: |
Upon appeal from the Court of Chancery. AFFIRMED.
Court Below: Court of Chancery of the State of Delaware in and for New Castle County; C.A. No. 13358.
Clark W. Furlow (argued), of Smith, Katzenstein & Furlow, Wilmington, and Thaddeus Holt (argued), Point Clear, Alabama, for Appellant C.L. Grimes.
Robert K. Payson and Stephen C. Norman of Potter, Anderson & Corroon, Wilmington; Samara L. Kline (argued), of Baker & Botts, Dallas, TX, for appellee James L. Donald.
Thomas R. Hunt, Jr., Michael L. Vild, and Thomas C. Grimm of Morris, Nichols, Arsht & Tunnell, Wilmington, Chester A. Hinshaw (argued), of Jones, Day, Reavis & Pogue, Dallas, TX, for Appellees Clement M. Brown, Frank J. Cummiskey, Raymond J. Dempsey, John Fairclough, James L. Fischer, Robert S. Folsom, James P. Leake, James M. Nolan and Jim A. Watson.
Stephen E. Jenkins of Ashby & Geddes, Wilmington, for Appellee DSC Communications Corporation.
Before VEASEY, C.J., WALSH, HOLLAND, HARTNETT and BERGER, JJ. (constituting the Court en Banc).
In this appeal we address the following issues: (1) the distinction between a direct claim of a stockholder and a derivative claim; (2) a direct claim of alleged abdication by a board of directors of its statutory duty; (3) when a pre-suit demand in a derivative suit is required or excused; and (4) the consequences of demand by a stockholder and the refusal by the board to act on such a demand.
We hold that the Court of Chancery correctly dismissed this stockholder action for the failure to state a claim upon which relief can be granted where the plaintiff stockholder: (a) asserted a direct claim that the directors abdicated their statutory duty to manage or direct the management of the business and affairs of the corporation by entering various employment contracts (the "Agreements") with the chief executive officer ("CEO") providing that the CEO "shall be responsible for the general management of the affairs of the company" and further providing that the CEO can declare a constructive termination of the Employment Agreement for "unreasonable interference" by the Board with the CEO; (b) made a pre-suit demand on the Board to abrogate the Agreements, the demand was refused, and the stockholder thereafter sought to assert other legal theories relating to the Agreements, arguing that demand was excused.
We hold as follows: First, an abdication claim can be stated by a stockholder as a direct claim, as distinct from a derivative claim, but here the complaint fails to state a claim upon which relief can be granted. Second, when a stockholder demands that the board of directors take action on a claim allegedly belonging to the corporation and demand is refused, the stockholder may not thereafter assert that demand is excused with respect to other legal theories in support of the same claim, although the stockholder may have a remedy for wrongful refusal or may submit further demands which are not repetitious.
Accordingly, on the state of this record, we AFFIRM the dismissal of this action by the Court of Chancery.
C.L. Grimes ("Grimes"), plaintiff below-appellant, appeals from the dismissal, for failure to state a claim, of his complaint against James L. Donald ("Donald") (the CEO) and the Board of Directors (the ") of DSC Communications Corporation ("DSC" or the "Company"). Grimes seeks a declaration of the invalidity of the Agreements between Donald and the Company. He also seeks an award of damages against Donald and other members of the Board. He alleges that the Board has breached its fiduciary duties by abdicating its authority, failing to exercise due care and committing waste.
The following facts have been drawn from the face of the complaint. The Company is a Delaware corporation headquartered in Plano, Texas, a suburb of Dallas. The Company, whose shares are traded on the Nasdaq National Market System, designs, manufactures, markets and services telecommunication systems.
The Agreements, executed during 1990, are the focus of the complaint. The Employment Agreement provides that Donald "shall be responsible for the general management of the affairs of the company ...," and that Donald "shall report to the Board." The Employment Agreement runs until the earlier of Donald's 75th birthday or his termination (1) by reason of death or disability; (2) for cause; or (3) without cause. Under the Employment Agreement, Donald can declare a "Constructive Termination Without Cause" by the Company of his employment as a result of, inter alia, "unreasonable interference, in the good-faith judgment of ... [Donald], by the Board or a substantial stockholder of the Company, in [Donald's] carrying out his duties and responsibilities under the [Employment] Agreement." A Constructive Termination Without Cause takes effect after delivery of notice by Donald and the failure by the Board to remedy such interference.
In the event of a Termination Without Cause, constructive or otherwise, Donald is entitled to the following:
1. Continued payment of his "Base Salary" at the level in effect immediately prior to termination for the remainder of his "Term of Employment," which, as stated, will be 6 1/2 years unless Donald dies or turns 75 first. In 1992, Donald's Base Salary exceeded $650,000.
2. Annual incentive awards for the remainder of the Term of Employment equal to the average of the three highest annual bonuses awarded to Donald during his last ten years as CEO. In 1992, such award allegedly equaled $300,000.
3. Medical benefits for Donald and his wife for life, as well as his children until the age of 23.
4. Continued participation in all employee benefit plans in which Donald is participating on the date of termination until the earlier of the expiration of the Term of Employment or the date on which he receives equivalent benefits from a subsequent employer.
5. Other (unidentified) benefits in accordance with DSC's plans and programs. See Am.Cplt.Ex. 1 § 11(d).
Grimes v. Donald, Del.Ch., 20 Del.J.Corp.L. 757, 765, 1995 WL 54441 (1995).
The Income Continuation Plan provides, inter alia, that after Base Salary payments cease under the Employment Agreement, Donald is entitled to receive, for the remainder of his life, annual payments equal to the average of the sum of his Base Salary plus bonuses in the three highest years, multiplied by 3%, multiplied by his years of service. Donald has also been awarded 200,000 "units" under the Long Term Incentive Plan. In the event of a Change of Control, as defined in the Incentive Plan, Donald will have the right to cash payments for his units, which Grimes alleges could total $60,000,000 at the stock price in effect at the time the complaint was filed.
As required by Court of Chancery Rule 23.1, Grimes alleges in his complaint that he wrote to the Board on September 23, 1993 and demanded that the Board abrogate the Agreements. The demand letter states, in part:
Paragraph 2(c) of the Employment Agreement dated as of January 1, 1990, between the Company and Mr. Donald purports to vest in Mr. Donald "the general management of the affairs of the Company." Under Paragraph 1(f)(vii) of the Employment Agreement, Mr. Donald is deemed to have been constructively terminated without cause, if there is "unreasonable interference, in the good-faith judgment of [Mr. Donald], by the Board or a substantial stockholder of the Company, in [Mr. Donald's] carrying out his duties and responsibilities under the Agreement."
Paragraph 1(f)(vii), therefore, purports to put Mr. Donald in a position unilaterally to declare a "constructive termination without cause" whenever he declares that the Board has "unreasonably interfered" with his general management of the affairs of the Company. Other provisions, including, without limitation, Paragraphs 11(d) and 27 of the Employment Agreement and Paragraph 4(b) of the DSC Communications Corporation Executive Income Continuation Plan dated as of January 1, 1990, between the Company and Mr. Donald, would impose drastic costs and burdens on the Company in the event of such a "constructive termination without cause."
The effect of the cited provision is to delegate the duties and responsibilities of the Board of Directors to Mr. Donald. This delegation is contrary to law and inconsistent with the certificate of incorporation and bylaws of the Company.
* * * * * *
The cited provisions of the Employment Agreement are therefore void as a matter of law. Although they are void, they should be abrogated so as to leave no cloud upon the lawful conduct of the Company's affairs. And it should go without saying that the Board must refrain from conducting the business of the Company as if they were valid.
* * * * * *
Accordingly, I hereby demand that the Board of Directors take immediate steps to abrogate Paragraphs 1(f)(vii) and 2(c) of the Employment Agreement dated as of January 1, 1990, between the Company and James L. Donald, and the 1990 Long-Term Incentive Compensation Plan insofar as it applies to Mr. Donald.
The Board refused the demand in a letter dated November 8, 1993, which states in part:
The Compensation Committee of our Board of Directors, as well as the entire Board, have seriously considered the issues set forth in your letter of September 29. To assist in the review, the Board obtained reports analyzing the relevant issues from the Company's outside benefits consultant, Hirschfeld, Stern, Moyer & Ross, Inc. and from the Company's outside...
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