Raul ex rel. Hercules Offshore, Inc. v. Rynd

• Decision Date: 14 March 2013
• Docket Number: C.A. No. 11–560–LPS.
• Court: U.S. District Court — District of Delaware
• Parties: Pinchus E. RAUL, Derivatively on Behalf of Hercules Offshore, Inc., Plaintiff, v. John T. RYND, James W. Noe, Stephen M. Butz, Troy L. Carson, Terrell L. Carr, Lisa W. Rodriguez, Thomas N. Amonett, Thomas J. Madonna, F. Gardner Parker, Suzanne V. Baer, Stephen A. Webster, Thomas R. Bates, Jr., Thomas M. Hamilton, Thierry Pilenko and Frederic W. Cook & Co., Inc., Defendants, and Hercules Offshore, Inc., Nominal Defendant.

929 F.Supp.2d 333

Pinchus E. RAUL, Derivatively on Behalf of Hercules Offshore, Inc., Plaintiff,

v. John T. RYND, James W. Noe, Stephen M. Butz, Troy L. Carson, Terrell L. Carr, Lisa W. Rodriguez, Thomas N. Amonett, Thomas J. Madonna, F. Gardner Parker, Suzanne V. Baer, Stephen A. Webster, Thomas R. Bates, Jr., Thomas M. Hamilton, Thierry Pilenko and Frederic W. Cook & Co., Inc., Defendants,andHercules Offshore, Inc., Nominal Defendant.

C.A. No. 11–560–LPS.

United States District Court, D. Delaware.

March 14, 2013.

Ryan Ernst, Esquire, of O'Kelly, Ernst, Bielli & Wallen, LLC, Wilmington, DE, Eduard Korsinsky, Esquire and Michael H. Rosner, Esquire, of Levi & Korsinsky, LLP, New York, NY, for Plaintiff Pinchus E. Raul.

William M. Lafferty, Esquire, Susan W. Waesco, Esquire, Ryan D. Stottmann, Esquire, and Angela C. Whitesell, Esquire, of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, DE, David D. Sterling, Esquire, S. Joy Dowdle, Esquire, and Christie Mathis, Esquire, of Baker Botts LLP, Houston, TX, for Defendants John T. Rynd, James W. Noe, Stephen M. Butz, Troy L. Carson, Terrell L. Carr, Lisa W. Rodriguez, Thomas N. Amonett, Thomas J. Madonna, F. Gardner Parker, Suzanne V. Baer, Steven A. Webster, Thomas R. Bates, Jr., Thomas M. Hamilton, Thierry Pilenko, and Hercules Offshore, Inc.

Sally J. Daugherty, Esquire, of Salmon, Ricchezza, Singer & Turchi, LLP, Wilmington, DE, Joseph L. Turchi, Esquire, of Salmon, Ricchezza, Singer & Turchi, LLP, Philadelphia, PA, David L. Miller, Esquire, of Miller, Scamardi & Carrabba P.C, Houston, TX, for Defendant Frederic W. Cook & Co., Inc.

MEMORANDUM OPINION

STARK, District Judge.

Hercules Offshore, Inc. (“Hercules” or “the Company”), a Delaware corporation, provides shallow-water offshore drilling and marine services to the oil and natural gas exploration and production industry. Pincus E. Raul (“Plaintiff”), a Hercules shareholder, brings this lawsuit derivatively on behalf of Hercules. Plaintiff alleges that the Hercules board of directors, assisted by an advisor, Frederick W. Cook & Co., Inc. (“FWC”), breached fiduciary duties and securities laws by approving 2010 compensation for Hercules' top executives, despite the failure of a “say-on-pay” shareholder vote on that compensation. Under these circumstances, Plaintiff contends that pre-suit demand would be futile and is, therefore, excused.

Pending before the Court are two motions to dismiss the complaint for failure to satisfy the pre-suit demand requirement for derivative suits, as well as for failure to state a claim upon which relief may be granted. (D.I. 24; D.I. 26) The Court heard oral argument on February 9, 2012. (D.I. 48) (“Tr.”)

For the reasons that follow, the Court will grant the motions to dismiss.

BACKGROUND¹

I. The Parties And The Complaint

Plaintiff is and has been a shareholder of Hercules at all relevant times, since at least October 2010. (D.I. 1 ¶ 17) He filed the instant lawsuit on June 22, 2011. (D.I. 1)

In the Verified Shareholder Derivative Complaint (the “Complaint”), Plaintiff names as defendants the individual members of Hercules' board of directors (“Board”),² its highest-level executives (“Executives”),³ and its compensation consultant, FWC.⁴ ( Id. at 1) Hercules is also identified as a nominal defendant. ( Id. at 1 ¶¶ 18, 34)

The Complaint generally alleges: (i) breaches of fiduciary duty in connection with the Board's approval of the Company's 2010 executive compensation plan; and (ii) violation of Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78n(a), due to false and misleading statements contained in the Company's Definitive Proxy Statement distributed in connection with its May 10, 2011 Annual Meeting of Stockholders (the “Proxy Statement”). ( Id. at 1) Specifically, five counts are alleged, as further described later in this Opinion.

II. The Motions To Dismiss

On July 25, 2011, the Board, Executives, and Hercules (collectively, the “Hercules Offshore Defendants” or “HOD”), filed a motion seeking dismissal of Counts I, II, and V of the Complaint, pursuant to Federal Rules of Civil Procedure 23.1(b)(3), 12(b)(6), and 9(b), for (i) failure to make a pre-suit demand on the Board and failure adequately to plead why demand would have been futile, and (ii) failure to state a claim upon which relief may be granted (the “HOD Motion”). (D.I. 24; see also D.I. 25; D.I. 34) On July 27, 2011, FWC filed a motion requesting dismissal of Counts III and IV, also based upon Plaintiff's failure to comply with the demand requirements and failure to state a claim (the “FWC Motion”). (D.I. 26; see also D.I. 27; D.I. 38)

III. The Dodd–Frank Act⁵

The Dodd–Frank Wall Street Reform and Consumer Protection Act, see15 U.S.C. § 78n–1 (“Dodd Frank”), was enacted on July 21, 2010. ( See D.I. 1 ¶ 1; D.I. 25 at 1) Section 951 of Dodd–Frank requires that publicly-traded companies include a resolution in their proxy statements asking shareholders to approve, in a non-binding, “say-on-pay” shareholder vote, the compensation of their executive officers. ( See D.I. 1 ¶¶ 2, 5 & n. 3; D.I. 25 at 1; 15 U.S.C. § 78n–1; 17 C.F.R. § 229.402) A separate resolution is required to determine whether this shareholder say-on-pay vote should occur every one, two, or three years. ( See D.I. ¶ 2; 15 U.S.C. § 78n–1)

Dodd–Frank explicitly provides that say-on-pay votes “shall not be binding” on a company or its board of directors, and “may not be construed” in any of the following ways: (1) “as overruling a decision” by the company or its board of directors; (2) “to create or imply any change to the fiduciary duties” of the company or its board of directors; (3) “to create or imply any additional fiduciary duties” for the company or its board of directors; or (4) “to restrict or limit the ability of shareholders to make proposals for inclusion in proxy materials related to executive compensation.” 15 U.S.C. § 78n–1(c).

On October 18, 2010, the Securities and Exchange Commission (“SEC”) issued proposed rules under the Exchange Act to implement Section 951 of Dodd–Frank. ( See D.I. 1 ¶ 5) On January 25, 2011, the SEC adopted rule changes relating to shareholder approval of executive compensation. ( See id.; see also15 U.S.C. § 78n–1)

IV. Hercules' Proxy Statement and 2010 Executive Compensation Plan

On March 25, 2011, Hercules issued its Proxy Statement for its Annual Meeting scheduled for May 10, 2011, at which Hercules was to hold its first Dodd–Frank mandated “say-on-pay” vote. (D.I. 1 ¶¶ 6, 48; D.I. 25 Ex. A at 31) The Proxy Statement contains a detailed discussion of the Company's executive compensation practices and policy. ( See, e.g., D.I. 25 Ex. A at 4–6, 9, 20) Generally, as provided in the Proxy Statement, the Company's executive compensation programs are designed:

• to attract, retain, motivate, and reward executive officers who are capable of leading the Company in a complex, competitive, and changing industry;

• to align the interests of our executive officers with those of our stockholders;

• to pay for performance;

• to ensure that performance-based compensation does not encourage excessive risk taking; and

• to increase retention by requiring forfeiture of a substantial portion of an executive officer's compensation upon voluntary termination of employment.

( Id.; see also D.I. 1 ¶ 49) The Proxy Statement further provides that the Company's compensation committee (the “Compensation Committee”) “will continue to design compensation arrangements with the objectives of emphasizing pay for performance and aligning the financial interests of our executives with the interests of long-term stockholders, and require executives to retain ownership of a significant portion of our common stock they receive as compensation.” (D.I. 25 Ex. A at 43; see also D.I. 1 ¶ 50)

Hercules' 2010 executive compensation plan, approved by Hercules' Board, raised executive compensation by between 40 and 190%. (D.I. 1 ¶¶ 10, 20–32, 47, 67) CEO Rynd's compensation was increased from approximately $1.3 million in 2009 to $2.5 million in 2010. ( Id. ¶¶ 10, 19) Similarly, CFO Butz's compensation increased from $333,000 in 2009 to $963,000 in 2010. ( See id. ¶¶ 10, 21) Senior V.P. and General Counsel Noe's compensation increased by 108% to $1.23 million. ( Id. ¶ 20) Chief Accounting Officer Carson's compensation increased 160% to more than $800,000. ( Id. ¶ 22) Vice President of Worldwide Operations Carr's compensation increased 150% to just over $1 million. ( Id. ¶ 23) Vice President of Human Resources Rodriguez's compensation increased 40% to approximately $950,000. ( Id. ¶ 124)

This increased compensation was awarded at a time that Hercules was not performing well. In 2010, the Company posted a net operating loss of $1.17 per share, which represented an $85.4 million, or 11%, decline in total revenue compared to the prior year. ( Id. ¶¶ 41–44) The Company also experienced a $300 million decrease in total assets, a $100 million decrease in net cash from operating activities, an almost 13% (more than $100 million) decrease in stockholder equity, and a drop in stock price to $3.48 per share, a decline of more than $1 per share. ( Id. ¶¶ 45–46)

As required by Dodd–Frank, the Company's 2011 Proxy Statement included a resolution asking for shareholder approval—in a “nonbinding advisory vote ... on an advisory basis”—of the Company's 2010 executive compensation. (D.I. 25 Ex. A at 43; see also D.I. 1 ¶ 2) The Board had unanimously approved the executive compensation package for 2010; in the Proxy Statement, the Board had likewise unanimously recommended that shareholders vote to approve that compensation plan. (D.I. 1 ¶¶ 7, 48, 51; see D.I. 25 Ex. A at 43)

However, at the May 10, 2011 Annual Meeting, Hercules' stockholders rejected the Company's 2010 executive compensation package, with approximately 59% of Hercules' shares voting against approval. ( See D.I. 1 ¶¶ 8, 51) Nonetheless, the compensation...