Kamkari v. Sonic Solutions, A123028 (Cal. App. 9/14/2009)
| Decision Date | 14 September 2009 |
| Docket Number | A123028 |
| Court | California Court of Appeals Court of Appeals |
| Parties | KOOROSH KAMKARI, Plaintiff and Appellant, v. SONIC SOLUTIONS et al., Defendants and Respondents. |
Appeal from the Marin County, Super. Ct. No. CV075442.
Koorosh Kamkari appeals from an order sustaining respondents' demurrer to his complaint for breach of fiduciary duty and violations of the California Corporations Code and dismissing his complaint. His claims against Sonic Solutions and a number of its officers and directors are based on allegations that the defendants made misrepresentations and failed to disclose material facts regarding improper backdating of stock options; that the backdating practices resulted in overstatement of the company's value; and that, as a result, appellant and class members paid artificially inflated prices for their shares of Sonic stock. Appellant argues the trial court erred in concluding that certain of his claims were preempted under federal law and others were derivative. We affirm.
According to the allegations of the amended complaint, Sonic Solutions (Sonic) is a California corporation, based in Novato, that develops and markets computer software related to digital media. Appellant is a current Sonic shareholder.
On February 1, 2007, Sonic announced that it was commencing a voluntary review of its historical and current stock option grant practices and related accounting. The audit committee, comprised of independent directors with assistance from independent legal counsel and outside consultants, subsequently concluded that, for a large portion of the options issued prior to September 23, 2005, "there is little or no contemporaneous grant-specific documentation that satisfies the requirements for `measurement dates' under [Accounting Principles Board Opinion] No. 25 and that would allow [Sonic] to maintain the original grant date used for accounting purposes . . . ." The audit committee stated that there was no intentional wrongful conduct by Sonic employees, officers or directors, and no evidence they "had any knowledge that their handling of option grants violated stock option accounting rules." On February 26, 2008, Sonic filed its form 10-K with the Securities and Exchange Commission (SEC) for the fiscal year ended March 31, 2007, which restated its prior financial statements to adjust for compensation expenses related to stock option grants.
Meanwhile, as described in the declaration of Sonic's counsel, after Sonic's February 1, 2007 announcement, four substantially similar federal derivative shareholder complaints were filed against the company and individual officers and directors between March and June 2007, alleging various causes of action relating to the historical and current dating and pricing of Sonic's stock options. These actions were consolidated as Wilder v. Doris, et al. (U.S. Dist. Ct., N.D.Cal, No. C 07-1500 CW). In June 2007, a state shareholder derivative action was filed against Sonic and individual defendants in Marin County Superior Court, McCay v. Doris et al. (No. CV 07-3038), alleging causes of action for unjust enrichment, breach of fiduciary duty, violation of California Corporations Code sections 25402 and 25403,1 abuse of control, gross mismanagement, waste of corporate assets, accounting, rescission and constructive trust. In October 2007, a federal class action was filed, City of Westland Police and Fire Retirement System v. Sonic Solutions et al. (U.S. Dist. Ct., N.D. Cal., No. CO7-5111 JSW), asserting federal securities law claims against Sonic and individual defendants.
On November 16, 2007, appellant filed the present class action complaint for breach of fiduciary duty against Sonic and five individual defendants, all Sonic directors and/or officers. The complaint alleged, on behalf of individuals who owned common stock of Sonic between July 12, 2001 and May 17, 2007 (the "class period"), that certain current and former officers and members of the Board of Directors breached their fiduciary duties by failing to inform shareholders that they had issued backdated stock options to Sonic's directors and top executive officers.
According to the allegations of the complaint, prior to the class period, Sonic manipulated its stock option accounting, causing its filings with the SEC during the class period to be false. Sonic's public disclosures were alleged to have falsely represented that the exercise price of its stock options would be not less than the fair market value of its common stock, measured by the publicly-traded closing price on the date of the grant of the options, whereas in fact the options were backdated, in many instances dated just before a sharp increase in the trading price or at the bottom of a steep drop in the stock's price. The complaint alleged that the backdating "line[d] the pockets of Sonic's directors and executives at the direct expense of the Company," which received less money upon exercise of the options, and "resulted in the overstatement of the company's publicly reported financial results since at least 2001." Appellant alleged that the defendants' conduct unjustly enriched Sonic's top executives, misled its public shareholders, and exposed Sonic to a costly investigation by the SEC and costly internal investigations into the company's compliance with federal securities law and accounting rules, and that the class was harmed as a result of the dilution of its voting power and proportionate share of the company.
Respondents demurred on several grounds, including that the cause of action could not be asserted directly on behalf of shareholders but only derivatively on behalf of the corporation because, to the extent the defendants breached their fiduciary duties, the alleged harm to shareholders was only incidental to harm to the company. The trial court agreed, holding that appellant's claims were "derivative rather than direct" in that appellant alleged that the backdating of options reduced the value of the entire corporate entity and "the injury claimed by plaintiff (shareholders not having true facts when they voted on the option plans) is not `independent of any alleged injury to the corporation'" as required by caselaw. Expressing doubt that appellant could amend to state a direct claim, the trial court sustained the demurrer with leave to amend.
Appellant's amended complaint was filed on April 22, 2008. Count I of the complaint again alleged breach of fiduciary duty regarding the backdating of stock options, resulting in material overstatement of the company's net income and retained earnings in proxy statements and reports filed with the SEC. Count II alleged violation of section 1507, in that as a result of the backdating scheme, enumerated proxies and SEC filings materially overstated the company's net income and retained earnings and the class relied upon the materially false statements and was damaged thereby. Count III alleged violation of sections 25400 and 25500 in that the defendants made false and misleading statements to induce purchase of Sonic stock by appellant and the class, as a result of which appellant and class members paid artificially inflated prices for their Sonic stock.
Respondents demurred to the breach of fiduciary duty claim, again on the basis that it was derivative rather than direct. Respondents demurred to the Corporations Code claims on the grounds that they were preempted by the Securities Litigation Uniform Standards Act (SLUSA) and that the complaint failed to state a cause of action under the statutes. The trial court sustained the demurrer to the first cause of action without leave to amend, finding that appellant had not amended the complaint to show any injury to the shareholders independent of that to the corporation. The court sustained the demurrers to the other causes of action with leave to amend. The court found the section 1507 cause of action, which it viewed as based upon shareholders' voting to approve the stock option plans without knowledge of the backdating, was derivative. It found the section 25400 and 25500 claims, based upon purchase of shares at inflated prices, preempted by SLUSA. The order sustaining the demurrers was filed on July 14, 2008.
On July 30, 2008, respondents filed an ex parte application for dismissal of the amended complaint with prejudice and entry of final judgment. The same day, the court filed its order dismissing the complaint with prejudice and entering final judgment.
Appellant filed a timely notice of appeal on September 26, 2008.
Appellant argues that the court erred in finding his claims under sections 25400 and 25500 preempted by SLUSA, and in dismissing his section 1507 claim as derivative. He concedes that, if we find the cause of action under sections 25400 and 25500 preempted, his cause of action under section 1507 would be preempted as well. He does not challenge the trial court's dismissal with respect to his fiduciary duty claim.
We review a trial court's ruling on a demurrer independently. (Tarkington v. California Unemployment Ins. Appeals Bd. (2009) 172 Cal.App.4th 1494, 1502.) (Reynolds v. Bement (2005) 36 Cal.4th 1075, 1091.) In these circumstances, ...
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