In re Unitedhealth Group Inc.

• Decision Date: 14 August 2008
• Docket Number: No. A08-114.,A08-114.
• Citation: 754 N.W.2d 544
• Parties: In re UNITEDHEALTH GROUP INCORPORATED SHAREHOLDER DERIVATIVE LITIGATION. and In re UnitedHealth Group Incorporated PSLRA Litigation.
• Court: Minnesota Supreme Court

754 N.W.2d 544

In re UNITEDHEALTH GROUP INCORPORATED SHAREHOLDER DERIVATIVE LITIGATION. and In re UnitedHealth Group Incorporated PSLRA Litigation.

No. A08-114.

Supreme Court of Minnesota.

August 14, 2008.

Garrett Dennis Blanchfield, Jr., Reinhardt Wendorf & Blanchfield, St. Paul, MN, for plaintiff.

Karl L. Cambronne, Minneapolis, MN, for plaintiff.

Andrew J. Brown, Coughlin Stoia, San Diego, CA, for plaintiff.

Barbara Podlucky Berens, Kelly & Berens, Minneapolis, MN, for defendant.

Peter William Carter, Marianne D. Short, Dorsey & Whitney, Minneapolis, MN, for defendant.

David L. Hashmall, Felhaber Larson, Minneapolis, MN, for defendant.

Richard G. Mark, Minneapolis, MN, for defendant.

Seth L. Levine, Foley & Lardner, New York, NY, for defendant.

Alexandra Shapiro, Blair Connelly, David M. Brodsky, Lori Alvino McGill, Latham & Watkins, New York, NY, for defendant.

Daniel John Supalla, Briggs and Morgan, Minneapolis, MN, for defendant.

Jeffrey Jerome Harrington, Assistant Attorney General, St. Paul, MN, amicus.

Vernon J. Vanderweide, Head, Seifert & Vanderweide, Minneapolis, MN, intervenor.

OPINION

ANDERSON, G. BARRY, Justice.

This case arises from a certified question from the United States District Court for the District of Minnesota regarding the extent to which a court, in deciding whether to approve a proposed settlement of a shareholder derivative action, must defer to the decision of a special litigation committee "SLC" that the derivative action should be settled on specific terms.

In 2006 the Wall Street Journal reported that executives at various U.S. corporations received stock options on dates that coincided with a low price (or, in some cases, the lowest price for a given time frame) and that those options appeared to have been backdated.¹ See Charles Forelle & James Bandler, The Perfect Payday, Wall St. J., Mar. 18, 2006, at A1. Among the corporations discussed in the article was UnitedHealth Group, Inc. ("UnitedHealth"), see id., a Minnesota corporation with its principal executive offices in Minnetonka. The article noted that Dr. William McGuire, CEO and chairman of the board of UnitedHealth, received UnitedHealth stock options that might have been backdated. Id. McGuire subsequently resigned from his position at UnitedHealth.

Shortly after the publication of the Wall Street Journal article, a number of actions were brought against McGuire and other UnitedHealth executives, including (1) federal shareholder derivative litigation, (2) federal securities class actions under the Private Securities Litigation Reform Act ("PSLRA litigation"), and (3) state derivative suits under Minnesota law. The state derivative suits were brought in Minnesota district court, whereas the federal derivative litigation and PSLRA litigation were brought in the United States District Court for the District of Minnesota. The Securities Exchange Commission brought its own action against McGuire; the parties reached a settlement in which McGuire agreed to return $400 million to UnitedHealth and pay a $7 million civil fine. In settling the SEC action, McGuire agreed not to "make or permit to be made any public statement denying, directly or indirectly, any allegation in the [SEC] complaint or creating the impression that the complaint is without factual basis."

On July 19, 2006, UnitedHealth's board passed a resolution creating a two-member SLC under Minn.Stat. § 302A.241, subd. 1 (2006).² Both members of the SLC are former justices of this court. The board resolution conferred on the SLC "complete power and authority to investigate [the derivative claims] and analyze the legal rights or remedies of the Company and determine whether those rights or remedies should be pursued." In the resolution, the board also retained the ability to expand the size of the SLC as it deemed appropriate. On November 29, 2006, the federal district court issued a preliminary injunction preventing McGuire from exercising any UnitedHealth stock options without court approval. The injunction was set to expire after the SLC issued its report.

Following an extensive investigation, the SLC issued its report on December 6, 2007. In the report, the SLC set forth the legal standards and defenses applicable to each derivative claim. Citing the "ongoing federal securities fraud actions involving similar allegations," however, the SLC declined to provide any detailed factual bases for its conclusions. In the end, the SLC determined that a number of the claims "may have merit" and recommended settlement of the claims against McGuire and settlement or dismissal of the claims against the other named defendants. Under the terms of the proposed settlement, McGuire would relinquish approximately $320 million in UnitedHealth stock options, surrender his rights to his UnitedHealth retirement plan and executive savings plan, and relinquish any claim he might have had to post-employment benefits. The total economic value McGuire would relinquish under the settlement amounted to approximately $420 million.

On the basis of the recommended settlement with McGuire, the federal derivative plaintiffs joined with the defendants to request the lifting of the preliminary injunction on McGuire's stock options in excess of the proposed settlement. In re UnitedHealth Group Inc. S'holder Derivative Litig., Nos. 06-CV-1216, 06-CV-1691, 2007 WL 4571127, at *2 (D.Minn. Dec. 26, 2007). But one party, the California Public Employees' Retirement System ("CalPERS"), requested that the injunction be maintained, fearing that "release of the funds will jeopardize its ability to collect a judgment, should it prevail in the PSLRA litigation." Id.

Applying federal precedent regarding the termination of preliminary injunctions, the federal district court considered the factors set forth in Dataphase Systems, Inc. v. CL Systems, Inc., 640 F.2d 109, 113 (8th Cir.1981).³ UnitedHealth, 2007 WL 4571127, at *2. In its evaluation of CalPERS's chance of success on the merits, the court noted a "significant probability" of success, based in part on what the court construed as McGuire's admission of wrongdoing to the SEC. Id. at *5-6. Nevertheless, the court believed that "the ultimate question" was whether the UnitedHealth board could in good conscience release approximately $800 million in compensation to an individual who could not deny substantial malfeasance in his capacity with the company. Id. at *6. The court noted that although the SLC had "apparently made a business judgment favoring settling the Board's and UHG's possible claims," the SLC's "lack of any findings leaves no tracks showing why or how its business judgment can be considered reasonable." Id. The court stated that if Minnesota law permitted a more searching analysis, then "there may be a ground upon which to preserve additional assets pending approval of the settlement." Id.

Declining to speculate on the scope of Minnesota law, the district court chose to certify to this court the following question: "Does Minnesota's business judgment rule foreclose a court from a) examining the reasonableness of, or b) rejecting on the merits, a settlement of a derivative action proposed by a Special Litigation Committee duly constituted under Minnesota Statutes § 302A.241 subd. 1?" UnitedHealth, 2007 WL 4571127, at *8. We accepted the certified question, which we reformulated to read as follows:

To what extent does the business judgment rule as recognized in Minnesota law require a court, in deciding whether to approve a proposed settlement of a shareholder derivative action, to defer to the decision of a Special Litigation Committee duly constituted under Minn.Stat. § 302A.241, subd. 1 (2006), that the derivative action should be settled on specific terms?

I.

Under Minn.Stat. § 480.065, subd. 3 (2006), we "may answer a question of law certified ... by a court of the United States ... if the answer may be determinative of an issue in pending litigation in the certifying court and there is no controlling appellate decision, constitutional provision, or statute of this state." A certified question is a question of law that we review de novo. Clark v. Lindquist, 683 N.W.2d 784, 785 (Minn.2004). The certified question before us requires that we consider three distinct legal concepts: shareholder derivative suits, special litigation committees, and the business judgment rule.

A shareholder derivative suit is a creation of equity in which a shareholder may, in effect, "step into the corporation's shoes and ... seek in its right the restitution he could not demand in his own." Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 548, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949). "Derivative suits allow shareholders to bring suit against wrongdoers on behalf of the corporation, and force liable parties to compensate the corporation for injuries so caused." Janssen v. Best & Flanagan, 662 N.W.2d 876, 882 (Minn.2003). "A derivative action actually belongs to the corporation, but the shareholders ... bring the action where the corporation has failed to take action for itself." Id. In a derivative action, the plaintiff essentially brings two claims: "one against the directors for failing to sue; the second based upon the right belonging to the corporation." Brown v. Tenney, 125 Ill.2d 348, 126 Ill.Dec. 545, 532 N.E.2d 230, 232 (1988). Shareholder derivative actions provide concerned shareholders a check against abuses committed by corporate executives, but they also provide disruptive shareholders an opportunity to abuse the legal system. Cohen, 337 U.S. at 548, 69 S.Ct. 1221. Some derivative actions — for example, strike suits⁴ — are "brought not to redress real wrongs, but to realize upon their nuisance value." Id.

In Minnesota, a board of directors may create a special litigation committee "consisting of one or more independent directors or other independent persons to consider legal rights or remedies of the corporation and...