Knight v. Miller

• Decision Date: 27 April 2022
• Docket Number: C. A. 2021-0581-SG
• Parties: ROBIN KNIGHT, derivatively on behalf of Nominal Defendant UNIVERSAL HEALTH SERVICES, INC., Plaintiff, v. ALAN B. MILLER, MARC D. MILLER, STEVE G. FILTON, LAWRENCE S. GIBBS, EILEEN C. McDONNELL, WARREN J. NIMETZ, MARVIN G. PEMBER, MATTHEW J. PETERSON, MARIA SINGER, and ELLIOT J. SUSSMAN, Defendants, and UNIVERSAL HEALTH SERVICES, INC. Nominal Defendant.
• Court: Court of Chancery of Delaware

ROBIN KNIGHT, derivatively on behalf of Nominal Defendant UNIVERSAL HEALTH SERVICES, INC., Plaintiff, v. ALAN B. MILLER, MARC D. MILLER, STEVE G. FILTON, LAWRENCE S. GIBBS, EILEEN C. McDONNELL, WARREN J. NIMETZ, MARVIN G. PEMBER, MATTHEW J. PETERSON, MARIA SINGER, and ELLIOT J. SUSSMAN, Defendants, and UNIVERSAL HEALTH SERVICES, INC. Nominal Defendant.

C. A. No. 2021-0581-SG

Court of Chancery of Delaware

April 27, 2022

Date Submitted: January 24, 2022

Stephen E. Jenkins and Tiffany Geyer Lydon, of ASHBY &amp GEDDES, P.A., Wilmington, Delaware; OF COUNSEL: Gregory Mark Nespole, Daniel Tepper, Correy A. Kamin, and Ryan C. Messina of LEVI & KORSINSKY, LLP, New York, New York, Attorneys for Plaintiff Robin Knight.

Francis G.X. Pileggi and Cheneise V. Wright, of LEWIS BRISBOIS BISGAARD & SMITH LLP, Wilmington, Delaware; OF COUNSEL: Gary A. Orseck, Matthew M. Madden, and Jason A. Shaffer, of KRAMER LEVIN ROBBINS RUSSELL, Washington, D.C., Attorneys for Defendants Alan Miller, Marc Miller, Steve Filton, Lawrence Gibbs, Eileen McDonnell, Warren Nimetz, Marvin Pember, Matthew Peterson, Maria Singer, and Elliot Sussman, and Nominal Defendant Universal Health Services, Inc.

MEMORANDUM OPINION

GLASSCOCK, Vice Chancellor The oft-noted fact that corporate actions are "twice-tested"^[1]-first in light of compliance with the DGCL, second for compliance with fiduciary duties-is neatly illustrated by directors' actions to set their own compensation. Those actions are clearly authorized by statute, and just as clearly an act of self-dealing, subject to entire fairness review. This case is another bloom on the hardy perennial of director compensation litigation. The Plaintiff is a stockholder, challenging option awards granted by certain Defendant corporate directors. The matter is before me on a motion to dismiss.

Here, among the Defendants are directors serving on a compensation committee, who awarded themselves stock options based on a market price determined as of what the Plaintiff stockholder characterizes as an obvious dip in the market. Why this dip would have been "obvious" to the Defendant directors, but not to the market itself, is not entirely clear in the complaint. Nonetheless, the standard is entire fairness, and the Plaintiff has cleared the low hurdle of pleading sufficient facts to make it plausible^[2] that the price and process of the option awards transaction were not entirely fair. The Plaintiff pleads unjust enrichment against the option recipients in light of the allegations of breach of the duty of loyalty; this claim also survives.

The Plaintiff also contends that the recipients of the awards, including noncompensation committee directors and corporate officers, breached fiduciary duties in accepting the awards, and that the awards themselves amount to corporate waste. These allegations, I find, do not state a claim. My reasoning is set out below.

I. BACKGROUND

The instant action deals with grants of equity compensation made to directors and officers of Universal Health Services, Inc. ("UHS" or the "Company") during the market volatility taking place in March 2020. As a sentient reader may remember, the novel coronavirus, or COVID-19, became a worldwide concern in March 2020. The market reacted to the emergence of the pandemic and to proposed government relief packages in quick succession. At the same time, UHS prepared to make its yearly equity compensation grants to its directors and officers at a preplanned meeting, aided by the assistance of its compensation consultant. The grants were made-and the strike price set-on the same day that UHS stock hit its lowest point during the pandemic.

The Plaintiff, a UHS stockholder, challenges the grants, pleading two breach of fiduciary duty claims, an unjust enrichment claim, and a corporate waste claim. The Defendants-which comprise nominal defendant UHS and various UHS directors and officers-move to dismiss, largely on basis of a fair process and a fair price. I address the motion following a recitation of the pertinent facts, below.

A. Factual Overview^[3]

1. The Parties Plaintiff Robin Knight (the "Plaintiff") is a common stockholder in the Company.^[4]

Nominal Defendant UHS is a Delaware corporation in the healthcare industry.^[5]

The defendants in this action have made a singular motion to dismiss (the "Motion to Dismiss"), ^[6] though the defendants can be categorized into officer defendants and director defendants generally. The officer defendants include Steve Filton, the Company's CFO; Marvin Pember, President of the Company's acute care division; and Matthew Peterson, President of the Company's behavioral health division (together, the "Officer Defendants").^[7] The director defendants include Alan Miller, a director and the Chairman of the Company's board of directors (the "Board");^[8] Marc Miller, a director, the CEO, and the Company's overall President;^[9] Lawrence Gibbs; Eileen McDonnell; Warren Nimetz; Maria Singer; and Elliot Sussman (the "Director Defendants," and, together with the Officer Defendants, the "Defendants").^[10]

This Memorandum Opinion refers to defendants Gibbs, McDonnell, Nimetz, Singer, and Sussman as the "Outside Director Defendants" at times.

Alan and Marc Miller are also the Company's controllers, together holding 87.6% of the Company's voting power per the Company's 2021 proxy statement.^[11]This Memorandum Opinion refers to Alan and Marc Miller in certain instances as the "Controller Defendants."

Alan Miller is also affiliated with the Federation of American Hospitals ("FAH"), a lobbying group of for-profit hospitals and health systems.^[12] FAH lobbied Congress to pass relief bills associated with the novel coronavirus in the first quarter of 2020.^[13]

Finally, the Board's compensation committee (the "Compensation Committee") consists of Gibbs, McDonnell, and Sussman (together, the "Compensation Committee Defendants"). ^[14] The Compensation Committee is governed by its charter, which outlines among other things the duty of its members to determine the form and amount of compensation of the non-management members of the Board.^[15]

2. COVID-19 and its Effects on the Market and the Company

The occurrence of the COVID-19 pandemic in March 2020 is integral to the allegations at bar. COVID-19 had wide-ranging effects on the market, particularly in March 2020, when it first emerged on a global scale.^[16] UHS was no exception.^[17]

From December 2019 to February 2020, the Company's stock price was fairly stable; it traded between $123.74 and $147.78 per share.^[18] From February to March 2020, however, UHS saw its stock price drop by over 50%.^[19] UHS stock reached its lowest point on March 18, 2020, closing at $67.69 per share.^[20] This was the lowest closing price for UHS stock since September 2013.^[21]

On March 6, 2020, the federal government enacted its first-phase coronavirus relief legislation.^[22] This "Phase 1" provided over $8 billion for vaccine development and public health funding.^[23] Phase 2 followed shortly after on March 18.^[24] While Phase 2 was being considered in Congress, the media began reporting on an anticipated third round of legislation.^[25] Phase 3 of federal coronavirus relief was signed into law on March 27.^[26]

By March 30, 2020, the Company's stock price had rebounded to a closing price of $100.13 per share.^[27]

On March 12, 2020^[28]-after Phase 1 of federal coronavirus relief, but before Phase 2 of federal coronavirus relief-the Company's CFO, Filton, attended a healthcare conference and answered questions from analysts.^[29] When asked whether the Company would continue its share repurchase plan in 2020, Filton noted that the planned buyback program had been established before the rise of COVID-19, which had "changed [things] dramatically," but that the Company still had a "point of view right now that the earnings power of our business has changed very little in the last month or 6 weeks," even though the market valuation had declined precipitously.^[30] Filton went on to say that the Company

certainly view[ed] the current situation as a buying opportunity. But also, we acknowledge that this is a pretty uncertain period. So we'll continue to evaluate how this plays out . . . . But I think in our minds, if anything, it has created more of a buying opportunity for us.^[31]

On that same day, March 12, at least one independent analyst following UHS set a year-end 2020 price target for UHS of $127, using a model that purportedly incorporated the effects of COVID-19.^[32] How such a model was possible (or accurate) this early in the development of the pandemic is not explained in the Plaintiff's complaint (the "Complaint").

3. The Equity Award Grants

a. Background to the March 2020 Compensation Committee Meeting

The Complaint is silent on the historical practice with respect to UHS's equity compensation grants. The Complaint does state that books and records obtained from the Company in response to a Section 220 demand "are expressly incorporated into this Complaint."^[33] The Defendants attach a number of exhibits to their opening brief in support of the Motion to Dismiss which are identified as Section 220 books and records.^[34] Of the Section 220 exhibits, only one provides information pertinent to the scheduling of the March 2020 meeting-Exhibit D, an email sent September 4, 2019 identifying the UHS Board Meeting Dates for 2020.^[35] From this one can glean that the March 18, 2020 Board meeting date was set at least six months in advance; that is, as the Defendants point out, the timing was likely not driven by the effect of the pandemic on stock price.

The Defendants attached a number of public Securities &amp Exchange Commission ("SEC") filings as exhibits as well.^[36...