Kaufman v. Alexander
| Decision Date | 28 August 2015 |
| Docket Number | No. 14-3293,14-3293 |
| Parties | JEFFREY KAUFMAN, Appellant v. BARBARA T. ALEXANDER; STEPHEN M. BENNETT; DONALD G. CRUICKSHANK; RAYMOND V. DITTAMORE; THOMAS W. HORTON; IRWIN M. JACOBS; PAUL E. JACOBS; ROBERT E. KAHN; SHERRY LANSING; DUANE NELLES; FRANCISCO ROS; BRENT SCOWCROFT; MARC I. STERN; WILLIAM E. KEITEL; STEVEN R. ALTMAN; STEVEN M. MOLLENKOPF; DONALD J. ROSENBERG; QUALCOMM INCORPORATED |
| Court | U.S. Court of Appeals — Third Circuit |
NOT PRECEDENTIAL
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE
Submitted Under Third Circuit L.A.R. 34.1(a)
March 26, 2015
Before: GREENAWAY, JR., KRAUSE, GREENBERG, Circuit Judges.
Appellant Jeffrey Kaufman, a QualComm, Inc. shareholder, asserts that QualComm's Board Members made material misstatements in two proxy statements and breached their fiduciary duties and various corporate contracts. Five of the Claims on appeal are derivative. On those claims, the District Court appropriately granted summary judgment to the QualComm Board Members ("Individual Directors") because demand was not made and was not excused. As to the two direct Claims, there are no genuine disputes of material fact regarding whether the Individual Directors had the authority to submit for shareholder approval amendments to the relevant compensation plan. We will affirm.
QualComm, Inc. is a Delaware Corporation. On December 5, 2005, QualComm's Board passed a formal resolution approving the 2006 Long-Term Incentive Plan ("LTIP").1 Shareholders approved the plan at the 2006 Annual Meeting. In both 2010 and 2011, the Compensation Committee2 approved amendments to the LTIP, whichsought increases to the share reserve. Per Section 16 of the LTIP, J.A. 483. The amendments were submitted for shareholder approval in the 2010 and 2011 Proxy Statements respectively and the shareholders approved both amendments.
On March 11, 2011, plaintiff Kenneth Hoch filed the original complaint against the Individual Directors and QualComm, Inc. (collectively "Appellees"),3 which alleged that certain statements in the 2011 Proxy violated specified Treasury regulations precluding QualComm, Inc. from receiving tax deductions under 26 U.S.C. § 162(m). After the District Court granted in part a motion to dismiss, in the first of many iterations of the allegations, Hoch filed an amended complaint, which included four direct claims and six derivative claims. On July 2, 2013, the District Court granted in part a second motion to dismiss, which left unresolved Claims II, III, VIII, IX, X, XI, XII, and XIII. On July 12, 2013, Hoch and Appellant Kaufman filed the second amended verified complaint, which left the claims unchanged but substituted the plaintiff from Hoch to Kaufman. Kaufman v. Alexander, 62 F. Supp. 3d 395, 397 n.2 (D. Del. 2014). The Individual Directors moved for summary judgment. Appellant cross-moved for partialsummary judgment. On June 11, 2014, the District Court granted the Individual Directors' motion for summary judgment. On that same day, but in a separate Memorandum Order, the District Court granted QualComm, Inc.'s motion for summary judgment. Kaufman timely appealed the District Court's grant of summary judgment as to all Appellees.
The District Court had jurisdiction pursuant to 28 U.S.C. § 1332. We have jurisdiction pursuant to 28 U.S.C. § 1291. "We review a district court's grant of summary judgment de novo, applying the same standard the district court applied." In re G-I Holdings, Inc., 755 F.3d 195, 201 (3d Cir. 2014) (internal quotation marks and citation omitted). "'We also review the legal interpretation of contractual language de novo.'" Id. (quoting Viera v. Life Ins. Co. of N. Am., 642 F.3d 407, 413 (3d Cir. 2011)). We may affirm on any ground supported by the record. Hildebrand v. Allegheny Cnty., 757 F.3d 99, 104 (3d Cir. 2014).
The only claims remaining in the instant appeal are Claims II, III, VIII, IX, XI, XII, and XIII. Delaware law applies to Claims VIII and XI; Delaware law also provides the substantive requirements for the issue of demand futility, which implicates Claims II, III,4 IX, XII, and XIII.5
Federal Rule of Civil Procedure 23.1(b)(3) requires a shareholder filing a derivative suit to make a particularized pleading of "(A) any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members; and (B) the reasons for not obtaining the action or not making the effort." This demand requirement "afford[s] the directors an opportunity to exercise their reasonable business judgment and waive a legal right vested in the corporation in the belief that its best interests will be promoted by not insisting on such right." Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96 (1991) (internal quotation marks omitted). "[F]ederal courts hearing shareholders' derivative actions involving state law claims apply the federal procedural requirement of particularized pleading, but apply state substantive law to determine whether the facts demonstrate [that] demandwould have been futile and can be excused." Kanter v. Barella, 489 F.3d 170, 176 (3d Cir. 2007).
1. Demand Was Not Excused7
Under Delaware law, to determine whether demand is excused, a court considers "whether, under the particularized facts alleged, a reasonable doubt is created that the directors are disinterested and independent" or "whether the pleading creates a reasonable doubt that the challenged transaction was otherwise the product of a valid exercise of business judgment."8 Brehm v. Eisner, 746 A.2d 244, 256 (Del. 2000) (internal quotation marks omitted).
Appellant argues that the Individual Directors "were interested in maintaining the results of the 2010 and 2011 shareholder votes because the majority of theircompensation in those years was awarded based on these votes."9 Appellant's Br. at 39 (emphasis omitted). While the amendments to the LTIP did increase the number of shares available to be utilized for compensation payments, the amendments did not alter the amount of compensation to which each Director was entitled. As noted by Appellees, there is no evidence that, had the LTIP amendments not been passed by shareholders, QualComm, Inc. would not have used an alternative compensation form to provide its Directors the compensation to which they were contractually entitled. A district court in Delaware recently rejected a similar argument made by Appellant in a different case. See Kaufman v. Allemang, 70 F. Supp. 3d 682, 692 (D. Del. 2014) ().
Nor was the Board "interested" with regard to the actions of the Compensation Committee generally. To establish demand futility, plaintiff must establish that a majority of the board is interested. Levine v. Smith, 591 A.2d 194, 205-06 (Del. 1991) (). The District Court was correct that "the presence of three of theeight board members on the compensation committee [did not] excuse demand."10 Kaufman, 62 F. Supp. 3d at 403. For the foregoing reasons, demand was not excused, which is dispositive as to Claims II, III, IX, XII, and XIII.11
Throughout the course of this litigation Appellant has changed the articulation of Claim VIII. In his complaint, Claim VIII concerned the Directors' alleged abdication of their duties under the corporate documents and sought injunctive relief "in the form of a meeting of the board to consider and vote upon amending the 2006 LTIP and recommending it to the stockholders for a new vote." J.A. 114. The District Court analyzed the claim as one alleging that the Individual Directors utilized the incorrect procedure for slating the LTIP amendments for shareholder vote. Kaufman, 62 F. Supp. 3d at 403 .
On appeal, Appellant appears to present Claim VIII as a breach of contract claim, conflating it with Claim XI. See Appellant's Br. at 20, 25-26 . Appellee correctly notes that this is the first time Appellant has made this argument as to Claim VIII, a fact that explains why the District Court did not analyze Claim VIII in tandem with Claim XI. "Absent exceptional circumstances, this Court will not consider issues raised for the first time on appeal." Del. Nation v. Pennsylvania, 446 F.3d 410, 416 (3d Cir. 2006) (citation omitted). As such, we need not engage in a breach of contract analysis as to Claim VIII. That being said, the analysis, infra, regarding Claim XI applies equally to Claim VIII.
Assuming, arguendo, that this claim is direct rather than derivative,...
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