Masters ex rel. Situated v. Avanir Pharms., Inc.

• Decision Date: 12 February 2014
• Docket Number: Case No. SACV 14–00053–CJC(RNBx).
• Parties: Robert MASTERS, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. AVANIR PHARMACEUTICALS, INC., Keith A. Katkin, Craig A. Wheeler, Corinne H. Nevinny, Dennis G. Podlesak, Hans E. Bishop, David J. Mazzo, and Scott M. Whitcup, Defendants.
• Court: U.S. District Court — Central District of California

996 F.Supp.2d 872

Robert MASTERS, Individually and on Behalf of All Others Similarly Situated, Plaintiff,

v.AVANIR PHARMACEUTICALS, INC., Keith A. Katkin, Craig A. Wheeler, Corinne H. Nevinny, Dennis G. Podlesak, Hans E. Bishop, David J. Mazzo, and Scott M. Whitcup, Defendants.

Case No. SACV 14–00053–CJC(RNBx).

United States District Court,

C.D. California,

Southern Division.

Feb. 12, 2014.

David E. Bower, Faruqi and Farugi LLP, Los Angeles, CA, for plaintiff.

Travis Biffar and Kevin Hugh Logan, Jones Day, Irvine, CA, for defendants.

ORDER DENYING PLAINTIFF'S MOTION FOR PRELIMINARY INJUNCTION

CORMAC J. CARNEY, District Judge.

I. INTRODUCTION

This shareholder class action was filed to enjoin a shareholder vote because of allegedly inadequate disclosures about a proposed equity compensation plan in Defendant Avanir Pharmaceuticals, Inc.'s (“Avanir”) 2014 proxy (the “Proxy”). The Proxy disclosed that the company's only existing incentive plan was running out of shares available to be issued to employees—it disclosed that the board had issued roughly 3 to 3.5 million shares per year in each of the prior three fiscal years, and that only 191,126 shares remained as of December 13, 2013. In order to allow the company to continue to award equity-based compensation, the Proxy requested shareholder approval of the proposed plan, which would authorize an additional 17 million shares for issuance to employees. According to the Proxy, this reserve of shares would allow the company to continue to make awards at historical average annual rates for the next four years.

Plaintiff Robert Masters (“Plaintiff”) alleges that the Proxy misleadingly fails to state that the prior incentive plan is no longer eligible to allow the company to deduct certain executive compensation under Internal Revenue Code (“IRC”) § 162(m). He also alleges that the Proxy omits information regarding the reasons for and effects of the proposed plan, including how, and at what rate, the plan may dilute shareholders' interests. Plaintiff asserts claims against Defendants ¹ for breach of fiduciary duties and violation of § 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 14a–9. Before the Court is Plaintiff's Motion for Preliminary Injunction, which seeks to enjoin a vote at Avanir's annual stockholder meeting scheduled to be held on February 12, 2014.² (Dkt. No. 6 [“Mot. Prelim. Inj.”].)

After considering all the evidence presented by the parties and the arguments of counsel, the Court DENIES Plaintiff's motion. The Proxy provides a full and fair disclosure of the purpose, rationale, and effects of the proposed plan. Each of the disclosures that Plaintiff seeks is factually mistaken, is already disclosed in the Proxy, or is not material to investors. To require more would either risk affirmatively misleading shareholders or would bury shareholders in needless information and summaries.

II. BACKGROUND

Avanir is a publicly-held pharmaceutical company that acquires, develops, and commercializes therapeutic products for the treatment of central nervous system disorders. (Dkt. No. 1 [Class Action Compl. (“Compl.”) ] ¶¶ 11, 29.) Avanir is incorporated in Delaware. (Compl. ¶ 11.) The Individual Defendants include all of the members of Avanir's board of directors as of the date the Complaint was filed. ( Id. ¶¶ 12–18.) Plaintiff is a holder of 10,000 shares of Avanir stock. ( See Dkt. No. 5, ¶ 4.) Avanir currently has approximately 152 million shares of common stock outstanding. (Compl. ¶ 22.)

The controversy here arises from Avanir's Proxy, which was submitted to Avanir shareholders on December 30, 2013 in anticipation of Avanir's annual stockholder meeting scheduled to be held on February 12, 2014. ( Id. ¶¶ 1–2.) The Proxy solicits shareholder approval of a number of proposals, including Proposal 4, the only proposal at issue here. ( Id. ¶ 2.) Proposal 4 seeks approval of the 2014 Incentive Plan (“2014 Plan”), which would increase the number of shares that Avanir may award in the future by 17 million shares. ( Id.; see alsoDkt. No. 6–2 Ex. C [“Proxy”] at 13.)

At present, Avanir has only one existing equity incentive plan: the 2005 Equity Incentive Plan (the “2005 Plan”). (Proxy at 12.) The 2005 Plan, which was approved by Avanir's shareholders, allows Avanir to grant non-statutory stock options, stock appreciation rights, stock awards, and cash-based incentive awards to employees, directors, and consultants. ( Id. at 13; Dkt. No. 21 [Decl. of Christine G. Ocampo in Supp. of Defs.' Opp'n to Pl.'s Mot. for Prelim. Inj. (“Ocampo Decl.”) ] Ex. B [“2005 Plan”].) Each year, Avanir files with the Securities and Exchange Commission (“SEC”) an annual report on Form 10–K disclosing the number of shares issued under the 2005 Plan. ( See Dkt. No. 19 [Decl. of Robert M. Daines in Supp. of Defs.' Opp'n to Pl.'s Mot. for Prelim. Inj. (“Daines Decl.”) ] ¶ 22.) As of December 13, 2013, the 2005 Plan had 191,126 shares available for Avanir to grant as equity awards. (Proxy at 12.) In fiscal years 2011, 2012, and 2013, Avanir made equity awards under its existing equity incentive plans totaling 2,993,888 shares, 3,501,642 shares, and 3,095,910 shares, respectively. ( Id. at 13.) The Proxy states that Avanir currently does not have a sufficient number of remaining shares available under the 2005 Plan to compensate its employees in line with past practice. ( Id. at 12, 13; see also Ocampo Decl. ¶ 24.) According to the Proxy, Avanir's ability to offer equity incentive awards to employees is necessary to ensure that its employees, executive officers, and directors remain with the company, as well as to ensure that their interests are aligned with those of the company's stockholders. ( See Proxy at 12.)

The 2014 Plan would replenish Avanir's share reserves. It would increase the number of shares of Avanir common stock that may be awarded by 17 million shares. ( Id. at 14.) The Proxy states that this amount of shares would allow the company to continue to issue shares to employees at historic rates for at least four years. ( Id. at 13.) The 2014 Plan would also expand the types of tax-deductible equity awards that the Compensation Committee may grant to covered executives to include stock awards (restricted stock and restricted stock units) and cash-based awards. ( Id. at 14.) The 2014 Plan is to be administered by Avanir's Compensation Committee, which is composed of outside directors on the company's board. ( Id.) The Compensation Committee “has the authority to, among other things, interpret the 2014 Plan, determine eligibility for, grant and determine the terms of awards under the 2014 Plan, and to do all things necessary or appropriate to carry out the purposes of the 2014 Plan.” ( Id.)

The 2014 Plan states that some compensation to top executives may be intended to qualify as “performance-based compensation” for purposes of IRC § 162(m). ( Id. at 15.) As discussed in greater detail below, § 162(m) provides that a corporation may only deduct more than $1 million of compensation paid to covered executives to the extent such compensation qualifies as “performance based,” as defined by the statute and applicable Treasury Regulations.

The board designed the 2014 Plan with the assistance of a hired compensation consultant, Radford. (Dkt. No. 20 [Decl. of Jesus Varela in Supp. of Defs.' Opp'n to Pl.'s Mot. for Prelim. Inj. (“Varela Decl.”) ] ¶ 6.) Radford was specifically tasked with determining the number of shares that Institutional Shareholder Services, Inc. (“ISS”) would support for reservation under the 2014 Plan. ( Id. ¶ 8.) ISS is a proxy advisory service. ( See Dkt. No. 18–3 [Decl. of Travis Biffar in Supp. of Defs.' Opp'n to Pl.'s Mot. for Prelim. Inj. (“Biffar Decl.”) ] Ex. H.) In making that determination, Radford used a subscription to proprietary software offered by ISS Corporate Services, Inc., which includes modeling for “shareholder value transfer,” a metric used by ISS in reviewing proxy proposals. (Varela Decl. ¶ 7.) Radford also advised on other criteria that the 2014 Plan would need to satisfy before ISS would recommend in favor of the plan. ( See Dkt. No. 16–1 Ex. B [“Oct. 2013 Radford Presentation”] at AVANIR 000022.)

The country's two principal proxy advisory services, ISS and Glass Lewis & Co. (“Glass Lewis”), have supported the 2014 Plan and have not objected to the disclosures. (Biffar Decl. Exs. H, I.) As of February 4, 2014, votes representing over 38 million shares (over 25% of total outstanding shares) had been received, and over 90% of the shares voted were for approval of the 2014 Plan. (Ocampo Decl. ¶ 40.)

Plaintiff asserts that the Proxy is false and misleading. First, he claims that the Proxy is misleading because it “states that if Proposal 4 is not approved then the Company may be limited on its ability to make tax deductible performance awards under Section 162(m) of the Internal Revenue Code.” (Mot. Prelim. Inj. at 1.) According to Plaintiff, this statement misleads investors by failing to disclose that Avanir “is already in default of its 2005 Plan and is not eligible to make deduction under Section 162(m) since 2011.” ( Id.) Plaintiff further contends that the Proxy “does not provide proper disclosure of information regarding the reasons for, consideration and effects of Proposal 4, including how, and at what rate, the Plan may dilute their public shareholders.” ( Id. at 2.) Because of these allegedly inadequate disclosures, Plaintiff claims that the Individual Defendants have breached their fiduciary duties under Delaware law and that Defendants have violated rules promulgated by the SEC under § 14(a) of the Exchange Act. ( Id. at 1–2.)

III. ANALYSIS

“A plaintiff seeking a preliminary injunction must establish that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an...