Telxon Corp. v. Bogomolny

• Decision Date: 29 October 2001
• Docket Number: No. C.A. 17706.,C.A. 17706.
• Parties: TELXON CORPORATION, Plaintiff, v. Richard J. BOGOMOLNY, John H. Cribb, Robert A. Goodman, RAJ Reddy, Frank Brick, Norton Rose, Robert F. Meyerson, and Telantis Venture V Inc., Defendants.
• Court: Court of Chancery of Delaware

792 A.2d 964

TELXON CORPORATION, Plaintiff, v. Richard J. BOGOMOLNY, John H. Cribb, Robert A. Goodman, RAJ Reddy, Frank Brick, Norton Rose, Robert F. Meyerson, and Telantis Venture V Inc., Defendants.

No. C.A. 17706.

Court of Chancery of Delaware, New Castle County.

Submitted: August 22, 2001.

Decided: October 29, 2001.

Revised: November 1, 2001.

Joseph A. Rosenthal, Esquire, Rosenthal, Monhait, Gross & Goddess, P.A., Wilmington, Delaware; Sidney B. Silverman, Esquire, (argued), New York, New York; and Walter Siegle, Esquire, Symbol Technologies, Inc., Attorneys for Plaintiff.

Henry E. Gallagher, Jr., Esquire, Connolly, Bove, Lodge & Hutz, LLP, Wilmington, Delaware; and Drew A. Carson, Esquire, (argued), Goodman, Weiss, Miller, LLP, Cleveland, Ohio, Attorneys for Defendants Bogomolny, Cribb, Goodman, Reddy, Brick and Rose.

Martin P. Tully, Esquire, Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware, Attorneys for Defendant Meyerson.

OPINION

LAMB, Vice Chancellor.

I.

This action was filed as a derivative action on behalf of Telxon Corporation challenging an April 1996 stock option agreement between Telxon and its then board chairman, Robert F. Meyerson (the "Derivative Complaint"). The option agreement gave Meyerson the right to acquire 10% of the fully diluted equity of a valuable wholly owned subsidiary of Telxon and required Telxon to finance Meyerson's exercise of that option on a non-recourse basis. The Derivative Complaint named as defendants Meyerson and six others who were members of Telxon's board of directors during the relevant period of time (the "Non-Meyerson Directors").

In 2000, Telxon was acquired by Symbol Technologies, Inc. and continues to do business as a wholly owned subsidiary of Symbol. On May 10, 2001, Telxon (now controlled by Symbol) realigned itself as plaintiff and filed an Amended Complaint converting the derivative action to a direct action (the "Amended Complaint"). The Amended Complaint alleges, notably, that Telxon has no record that any of the Audit, Compensation, or Stock Option Committees of the Telxon Board of Directors kept minutes of any of their deliberations during the pertinent time and, in particular, that there is no record of the deliberations of the committee responsible for authorizing the 10% stock option at issue in this case.

The Non-Meyerson Directors have moved to dismiss the Amended Complaint on the grounds that it is barred by the applicable statute of limitations and fails to state a claim upon which relief may be granted. For the reasons that follow, I conclude that the derivative claim was timely filed in December 1999 and, thus, that the Amended Complaint, which relates back to that filing, is also timely. I also conclude that, in view of well-pleaded allegations of the Amended Complaint, I cannot determine with confidence that Telxon has failed to state a claim upon which relief may be granted.

II.

On December 12, 1999, Merchants National Properties, Inc. brought a derivative action on behalf of Telxon alleging breach of fiduciary duties and corporate waste against the Telxon board as it existed during the 1997 fiscal year, which spanned the period between April 1996 and March 1997. Merchants had owned 1,000 shares of Telxon common stock since 1990. The complaint named as defendants Meyerson and Telxon directors Richard J. Bogomolny, Frank Brick, John H. Cribb, Robert A. Goodman, Raj Reddy, and Norton Rose. Brick and Cribb were salaried executives of Telxon who, it is alleged, reported directly to Meyerson. Goodman was the senior partner of a small law firm that represented Telxon, Meyerson, and other companies owned or controlled by Meyerson. Bogomolny, Reddy, and Rose were nominally outside directors who are claimed to have been beholden to Meyerson for the substantial and allegedly excessive fees and benefits they received in connection with their service as directors.¹

Meyerson, the founder of Telxon, served as its chairman of the board of directors from 1979 to February 26, 1997. He served as Telxon's CEO from 1979 to 1985, and then again from October 1992 until February 26, 1997. Meyerson also served as a consultant to Telxon during a 1985-1992 hiatus from his CEO responsibilities. Meyerson's last employment contract with Telxon expired in March of 1996. Thereafter, Meyerson continued to serve at the pleasure of the board until he resigned all positions with Telxon on February 26, 1997.

At the time of Meyerson's resignation, he received a cash severance of $5,520,000. Prior to that, he had borrowed $1,150,000 from Telxon to meet his personal tax obligations, and another $1,229,241.93 to purchase stock of Metanetics Corporation. The severance payments were not offset against those loans. The company's directors also granted 460,000 shares of Telxon stock to Meyerson. The complaint does not seek relief with respect to these severance payments but, nonetheless, alleges that they were all improper because Meyerson allegedly agreed in November 1992 to forego "stock options, restricted stock or severance." That agreement, which was never disclosed publicly, allegedly arose out of Telxon's $17.3 million purchase of a corporation from Meyerson and members of his family.

The Aironet Option

Aironet was a provider of high-speed, standards-based, wireless local area network solutions. Telxon formed Aironet in 1993 by combining two of its operating units with a company that had recently been purchased by it. Aironet was, until March of 1997, a wholly owned subsidiary of Telxon.

In August of 1995, Telxon announced a program called "Telxon 2000" which was designed to allow key employees to purchase shares of Telxon subsidiaries at fair market value as determined by outside experts. The complaint alleges that:

The Telxon subsidiaries eligible for grants under Telxon 2000 were those which had been acquired from others. The purpose of Telxon 2000 was to provide employees whose efforts were responsible for the acquisition with a risk-reward incentive. Telxon's 1997 Proxy Statement ... described the "incentive opportunity" created by the program as "long-term," and stated that it was designed to encourage the employees receiving it to support the development of the subsidiaries and their businesses with the same effort and dedication as in their service to Telxon, "thereby more closely aligning their objectives with the long-term goals of the Company as a whole."

The Amended Complaint alleges that, on or about April 11, 1996, the Stock Option Committee² (composed of Goodman and Rose) awarded Meyerson an option to purchase from Telxon, at $1.86 per share, 808,500 shares of Aironet, representing a 10% interest in Aironet (the "Aironet Option").³ Meyerson assigned this option to a company controlled by him and exercised it in full by contract dated March 31, 1997. In accordance with the terms of the Aironet Option, Meyerson paid the purchase price of the shares by delivering a non-recourse note to Telxon. Thus, the complaint alleges, Meyerson took no risk when he exercised the option because, if Aironet failed, Meyerson would merely redeliver the shares to Telxon and have no further liability on the note. The complaint alleges that this arrangement "from Telxon's perspective was devoid of business purpose and constituted an extraordinarily unusual transaction for a public company."

The disclosure of the Aironet Option to Telxon shareholders was made in the 1997 Proxy Statement and cast the option grant as a part of the "Telxon 2000" program. The Amended Complaint alleges that this disclosure was false and misleading because, it claims, the Aironet Option was not made in accordance with the terms of Telxon 2000, but in violation of it.

On July 30, 1999, Aironet made a public offering of its shares at a price of $11 per share. On November 9, 1999, Cisco Systems, Inc. announced that Aironet would be merged into Cisco and each share of Aironet common stock would be exchanged for 0.637 shares of Cisco common stock. On the date the Cisco-Aironet merger closed, Cisco's stock closed at $128.63, making each share of Aironet worth about $82 and the 958,659 shares of Aironet stock Meyerson and his affiliates had purchased worth about $78.6 million.

The Non-Meyerson Directors

Cribb and Brick were both salaried executives with Telxon. Brick became President of Telxon in June 1996, having previously served in other positions at the corporation. He became a Telxon director on July 17, 1996. Brick was previously employed by Basicomputer Corporation, a company founded by and affiliated with Meyerson. The Amended Complaint alleges that Cribb and Brick reported directly to Meyerson, that their positions at Telxon were important to them, and that both were financially dependent on their salaries.

Goodman is alleged to be the senior partner of a "small law firm that was selected by Meyerson in 1979 as Telxon's principal lawyers." During fiscal year 1997, Goodman's firm is alleged to have received fees from Telxon of $2,780,220. The complaint alleges that Telxon was, by far, Goodman's firm's most important client and that the fees paid by Telxon were material to Goodman. Goodman's firm also represented Meyerson personally and other companies owned or controlled by him. Goodman also received $118,750 cash compensation for serving as an outside director of Telxon in fiscal year 1997. In addition, Goodman received 25,000 options on joining the board and 10,000 options annually thereafter.

Rose received $119,500 in cash compensation for serving as an outside director of Telxon in fiscal year 1997. Moreover, the complaint alleges that Meyerson caused Telxon to hire Rose as a consultant at a rate of $3,500 per day and that, in fiscal year 1997, Rose received $157,500 in consulting fees from Telxon. The consulting agreement under which these services were rendered further called for Rose to receive an additional $150,000 at the conclusion of the engagement. The...