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Halpert v. Zhang

United States District Court, Third Circuit

August 11, 2013

PHILIP HALPERT, derivatively on behalf of ASIAINFO-LINKAGE, INC, Plaintiff,
v.
STEVE ZHANG, JIAN DING, LIBIN SUN, SEAN SHAO, YUNGANG LU, DAVIN A. MACKENZIE, THOMAS J. MANNING, SUNING TIAN, XIWEI HUANG, and GUOXIANG LIU, Defendants, and ASIAINFO-LINKAGE, INC., a Delaware Corporation, Nominal Defendant.

Brian E. Farnan, Esquire of Farnan LLP, Wilmington, Delaware. Counsel for Plaintiff. Of Counsel: Eduard Korsinsky, Esquire, and Steven J. Purcell, Esquire of Levi & Korsinsky, LLP.

Arthur Dent, Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware. Counsel for Defendants. Of Counsel: David H. Kistenbroker, Esquire, Joni S. Jacobsen, Esquire, and Angela M. Liu, Esquire of Dechert LLP.

MEMORANDUM OPINION

ROBINSON, district Judge

I. INTRODUCTION

Plaintiff Philip Halpert ("Halpert"), as a shareholder, brings this action derivatively on behalf of Asialnfo-Linkage, Inc. ("Asialnfo"), a Delaware corporation that sells telecommunications software and information technology. (D.I. 1 at ¶¶ 10, 33) Halpert alleges demand futility, a breach of fiduciary duty, waste of corporate assets, and unjust enrichment against defendants, who include the members of Asialnfo's board of directors and some of Asialnfo's executives. (Id. at ¶¶ 37, 45, 51, 56) Specifically, Halpert alleges that defendants knowingly violated the terms of a shareholder-approved 2011 Stock Incentive Plan ("the Plan"), which limited the number of stock options granted as "performance-based compensation" to 100, 000 per year per recipient. (Id. at ¶¶ 29, 30) Under this supposed abuse of authority, defendant Steve Zhang ("Zhang"), an officer and director of Asialnfo, received 750, 000 stock options and defendant Guoxiang Liu ("Liu"), an officer of Asialnfo, received 110, 000 stock options. (Id. at ¶ 30) Halpert requests damages, injunctive relief, and rescission of the excess stock options, as well as corrective measures. (Id. at ¶¶ A, B, C)

Currently before the court is defendants' motion to dismiss under Federal Rules of Civil Procedure 23.1 and 12(b)(6).[1] (D.I. 10) The court has jurisdiction over this matter pursuant to 28 U.S.C. § 1332(a).

II. BACKGROUND

Nominal defendant Asialnfo is a Delaware corporation and a provider of telecommunications software and information technology. (D.I. 1 at ¶10) Asialnfo had a nine-member board of directors (hereinafter, the "Board") at the time of the alleged misconduct, comprising defendants Jian Ding ("Ding"), Xiwei Huang ("Huang"), Yugang Lu ("Lu"), David MacKenzie ("Mackenzie"), Thomas Manning ("Manning"), Sean Shao ("Shao"), Libin Sun ("Sun"), Suning Tian ("Tian"), and Zhang. (Id. at ¶¶11-19) Of the directors, both Zhang and Sun are employed by Asialnfo, while the others are not. (Id. at ¶¶ 11, 13) Zhang is the President and CEO of Asialnfo and Sun is the Executive Co-Chairman of the Board. (Id.) Defendant Liu is the Executive Vice President of Asialnfo. (Id. at ¶ 20)

On February 19, 2011, the Board adopted the Plan, which "authorizes the [c]ompany to grant restricted stock awards, stock options, and other types of equity awards to the [c]ompany's executive officers, directors, and other employees." (Id. at ¶22) The shareholders approved the Plan on April 21, 2011. (Id.) Grants under the Plan are determined by the Compensation Committee. (Id. at ¶ 23) At the relevant time, directors Ding, Mackenzie, Tian, and Shao were on the Compensation Committee. (D.I. 1 at ¶ 21) According to the 2012 Proxy Statement, "Zhang . . . and . . . Sun [also] participate^] in the discussions and decisions regarding salaries and incentive compensation for all of [Asialnfo's] executive officers, except. . . regarding their own salary and incentive compensation." (D.I. 15, ex. A at 9)[2]

On December 6, 2011, the Compensation Committee granted 750, 000 stock options to Zhang and 110, 000 stock options to Liu, ostensibly under the Plan. (D.I. 1 at ¶24) Halpert alleges that these actions directly contradicted Section 4.2 of the Plan, which states that "no individual may be granted within any one fiscal year of [Asialnfo] one or more Awards intended to qualify as Performance-Based Compensation which in the aggregate are for more than (a) 100, 000 shares . . . [or] up to 200, 000 shares ... to newly hired or newly promoted individuals." (Id. at ¶ 26) The Plan defines "performance-based compensation" as that which satisfies § 162(m) of the Internal Revenue Code ("IRC"), which generally disallows a tax deduction to public companies for compensation in excess of $1 million, but carves out an exception for performance-based compensation. (Id. at ¶ 28) Halpert avers that the grants to Zhang and Liu exceeded the Board's authority and harmed Asialnfo and its shareholders. (Id. at ¶¶ 30, 32)

III. STANDARD OF REVIEW

A. Federal Rule of Civil Procedure 23.1

Pursuant to Federal Rule of Civil Procedure 23.1(b)(3), a shareholder bringing a derivative action must file a verified complaint that "state[s] with particularity:"

(A) any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from ...

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