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Hoch v. Alexander

United States District Court, Third Circuit

July 2, 2013

KENNETH HOCH, Plaintiff,
BARBARA T. ALEXANDER, et al., Defendants, and QUALCOMM INCORPORATED, Nominal Defendant.

Brian Farnan, Esq., Farnan LLP, Wilmington, DE; Alexander Arnold Gershon, Esq. (argued), Barrack, Rodos & Bacine, New York, NY, Attorneys for Plaintiff.

Richard L. Horwitz, Esq., Potter Anderson & Corroon LLP, Wilmington, DE; Evan R. Chesler, Esq., Rachel G. Skaistis, Esq. (argued), Cravath Swaine & Moore LLP, New York, NY, Attorneys for Defendants.


RICHARD G. ANDREWS, District Judge.

Kenneth Hoch brings this litigation directly and derivatively against Defendants, who include directors and executive officers of Qualcomm.[1] In his "Verified Amended and Supplemented Complaint" (D.I. 122), he alleges that Defendants violated their duties under federal securities law and Delaware law when they issued a false or misleading proxy statement regarding the tax-deductible status of executives' compensation; that Defendants coerced shareholders to vote to approve the compensation; that the voting card violated federal securities law; that Defendants provided misleading information to the Internal Revenue Service and subjected Qualcomm to a fine and a potentially inaccurate closing agreement with the IRS; and that the process of submitting the compensation to shareholders for approval was invalid. Defendants have filed a motion to dismiss (D.I. 127), which the Court granted in part at oral argument (D.I. 160) and denies in part here.


Hoch's Counts II, III, IV, and V center on Qualcomm's January 19, 2011 Proxy Statement[2] seeking shareholder approval of its 2006 Long-Term Incentive Plan as amended ("2011 LTIP"). (D.I. 122, ¶ 3; see D.I. 129, Ex. H). The Proxy Statement informed shareholders that certain prospective payments to senior management pursuant to the 2011 LTIP would be tax deductible under § 162(m) of the Internal Revenue Code. (D.I. 122, ¶¶ 21-24; see D.I. 129, Ex. H, pp. 17-24). Shareholders voted to approve the 2011 LTIP. Hoch claims that the compensation is not tax deductible. Qualcomm alerted the IRS to Hoch's lawsuit and allegations concerning the nondeductibility. On June 11, 2012, Qualcomm and the IRS entered into an Issue Resolution Agreement ("IRA"), pursuant to which the IRS concurred with Qualcomm that the 2011 LTIP approved by shareholders was compliant with § 162(m). (D.I. 129, Ex. Q). Count X alleges Defendants provided misleading information in pursuit of the IRA.[3]

Counts VI and VII are based on the form voting card used for the 2011 vote. Counts VIII, IX, XI, XII and XIII are based on the process by which Defendants submitted the 2011 LTIP and a 2010 amendment to shareholders for approval.


Defendants moved to dismiss all remaining claims against them pursuant to Federal Rule of Civil Procedure 12(b)(6).[4] The Court granted Defendants' Motion with regard to Counts IV, V, and VII at oral argument, and Hoch conceded dismissal of Count VI. (D.I. 138 at 20; D.I. 160 at 39, 51-52). Counts II, III, and VIII through XIII are addressed here.

Evaluating a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) requires the Court to accept as true all material allegations of the complaint. See Spruill v. Gillis, 372 F.3d 218, 223 (3d Cir. 2004). "The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1420 (3d Cir. 1997). Thus, the Court may grant such a motion to dismiss only if, after "accepting all well-pleaded allegations in the complaint as true, and viewing them in the light most favorable to plaintiff, plaintiff is not entitled to relief." Maio v. Aetna, Inc., 221 F.3d 472, 481-82 (3d Cir. 2000) (internal quotation marks omitted).

1. Counts II and III

Counts II and III are derivative claims for breach of fiduciary duty and waste under Delaware law.[5] Hoch alleges certain statements in the Proxy Statement preclude the 2011 LTIP compensation from being deductible under § 162(m), and that the Proxy Statement's representations that the compensation would be deductible are therefore false and misleading. (D.I. 122, ¶¶ 24-25, 69-80). Specifically, Hoch claims that under the terms of the 2011 vote, Qualcomm would still pay performance-based compensation under the 2006 LTIP regardless of whether the 2011 LTIP plan was approved, and that therefore the 2011 LTIP compensation is not deductible. Treasury Regulation §1.162-27(e)(4)(i) provides that §162(m) is not satisfied "if the compensation would be paid regardless of whether the material terms are approved by shareholders." The Proxy Statement provided:

Should stockholder approval not be obtained, then the proposed amendments will not be implemented, and the 2006 LTIP will continue in effect pursuant to its current terms. However, the shares reserved for issuance will be depleted, and the 2006 LTIP will not achieve its intended objectives of helping to attract and retain employees. (D.I. 129, Ex. H at 25).[6] Defendants make two main arguments for dismissal: that under a proper reading of the Proxy Statement and the Treasury Regulation, the compensation is deductible under § 162(m), as supported by the IRA; and that the Proxy Statement's discussion about § 162(m) comprises opinion, but Hoch failed to allege that Defendants did not believe the 2011 LTIP would be deductible at the time the Proxy Statement was filed. (D.I. 128, pp. 5-10).

This is Defendants' second attempt to dismiss Hoch's claim based on whether Hoch's § 162(m) tax theory bears out under a proper reading of the Proxy Statement and the law. See Hoch v. Alexander, 2011 WL ...

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