FREDERICK WARHANEK, derivatively on behalf of VERISIGN, Inc., Plaintiff,
D. JAMES BIDZOS, WILLIAM L. CHENEVICH, ROGER H. MOORE, KATHLEEN A. COTE, JOHN D. ROACH, LOUIS A. SIMPSON, TIMOTHY TOMLINSON, MARK D. MCLAUGHLIN, RICHARD H. GOSHORN, CHRISTINE C. BRENNAN, AND KEVIN A. WERNER, Defendants, and VERISIGN, Inc., Nominal Defendant.
REPORT AND RECOMMENDATION
Presently before the court in this shareholder derivative action brought under Section 14(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78n(a) et seq., are the motions to dismiss the complaint under Federal Rules of Civil Procedure 23.1 and 12(b)(6) of defendants Richard H. Goshorn ("Goshorn"), Christine C. Brennan ("Brennan"), and Kevin A. Werner ("Werner") (collectively, the "Executive Defendants") (D.I. 12), and defendants D. James Bidzos ("Bidzos"), William L. Chenevich ("Chenevich"), Roger H. Moore ("Moore"), Kathleen A. Cote ("Cote"), John D. Roach ("Roach"), Louis A. Simpson
("Simpson"), Timothy Tomlinson ("Tomlinson"), and Mark D. McLaughlin ("McLaughlin") (collectively, the "Director Defendants"), together with nominal defendant VeriSign, Inc. ("VeriSign") (collectively with the Executive Defendants and the Director Defendants, "Defendants") (D.I. 8). For the following reasons, I recommend that the court grant Defendants' motions to dismiss and grant Warhanek's request to file an amended complaint within thirty (30) days of the entry of this Report and Recommendation. In the event that an amended complaint is not timely filed, I recommend that the court dismiss the action.
A. The Parties
Plaintiff Warhanek is a resident of New Mexico and a current VeriSign shareholder who has owned VeriSign common stock at all relevant times for purposes of the instant action. (D.I. 1 at ¶ 9)
Nominal defendant VeriSign is a Delaware corporation with its principal place of business in Virginia. (Id. at ¶ 10) VeriSign provides internet infrastructure services that enable "network confidence and availability for mission-critical internet services, such as domain name registry services and infrastructure assurance services." (Id.)
Bidzos has served as Verisign's Chief Executive Officer ("CEO") since August 2011, and has served as Chairman of the Board since August 2007. Bidzos served as Executive Chairman and CEO on an interim basis from June 2008 to August 2009, and was President of VeriSign from June 2008 to January 2009. (Id. at ¶ 11)
McLaughlin served as President, CEO, and director of VeriSign from August 2009 until August 2011. (Id. at ¶ 18) McLaughlin was also President and Chief Operating Officer from January 2009 to August 2009, and provided consulting services to VeriSign from November 2008 to January 2009. (Id.) From January 2007 to November 2007, McLaughlin was Verisign's Executive Vice President of Products and Marketing, and he served as Executive Vice President and General Manager of Information Services from May 2006 to January 2007. (Id.) Since August 2011, McLaughlin has not been involved with VeriSign.
Director Defendants Chenevich, Moore, Cote, Roach, Simpson, and Tomlinson have served as directors during the time period relevant to the instant action. (Id. at ¶¶ 12-17) Director Defendants Roach, Simpson, and Tomlinson are members of the Board's compensation committee (the "Compensation Committee"). (Id. at ¶¶ 15-17) These Director Defendants, together with Bidzos and McLaughlin, authorized the distribution of proxy statements for the annual shareholder meetings held on May 27, 2010 and May 26, 2011. (Id. at ¶ 19)
The Executive Defendants have also served in their executive capacities during the entire time period relevant to the instant action. Goshorn served as Senior Vice President, General Counsel, and Secretary of VeriSign since June 2007, Brennan served as Senior Vice President of Human Resources from February 1, 2010 to July 1, 2010, and Werner served as Senior Vice President of Corporate Development and Strategy from September 2007 to April 2011. (Id. at ¶¶20-22)
B. The 2010 and 2011 Proxy Statements
Warhanek initiated this shareholder derivative action on behalf of VeriSign against certain current and former officers and directors to recover equitable relief for allegedly false and misleading proxy statements filed by VeriSign. (D.I. 1 at ¶ 1) On April 14, 2010, VeriSign filed its proxy statement for its 2010 annual shareholder meeting (the "2010 Proxy Statement"), seeking shareholder approval for its annual incentive compensation plan ("AICP"), among other things. (Id. at ¶¶ 2, 29) VeriSign's shareholders approved the unchallenged AICP on or about May 27, 2010. (Id. at ¶ 32) The AICP provided an annual bonus framework for all of Verisign's executive officers. (Id. At ¶ 2) Only one member of the Board, CEO Bidzos, was eligible for compensation under the proposed AICP at the time the 2010 Proxy Statement was approved. (D.I. 1 at ¶¶ 19, 29, 32)
The 2010 Proxy Statement indicated that performance-based compensation under the AICP was intended to be tax deductible pursuant to Section 162(m) of the Internal Revenue Code ("IRC"). (Id. at ¶ 31) However, Warhanek contends that awards granted to the Executive Defendants under the AICP are not tax deductible because the Director Defendants did not sufficiently disclose Verisign's performance goals under the AICP. (Id. at ¶¶34-37) According to Warhanek, these performance goals grant the Compensation Committee broad discretion to determine which executive officers receive compensation. (D.I. 1 at ¶¶35-39)
On April 13, 2011, VeriSign filed the proxy statement for its 2011 annual shareholder meeting (the "2011 Proxy Statement"), seeking shareholder approval for an Amended and Restated 2006 Equity Incentive Plan ("2011 Equity Plan"). (Id. at ¶¶ 3, 47) The 2011 Equity Plan amends Verisign's 2006 Equity Incentive Plan (the "2006 Equity Plan;" together with the 2011 Equity Plan, the "Plans")). Both Plans provide for the grant of non-qualified and incentive stock options, restricted stock awards, restricted stock units, stock bonus awards, stock appreciation rights, and performance shares. (Id. at ¶¶ 41, 49) Both Plans reserve 27 million shares of VeriSign common stock for issuance, and all employees and non-employee directors are eligible to receive awards under the 2006 and 2011 Equity Plans. (Id. At ¶¶ 40-43, 50-51) Verisign's non-employee directors are eligible to receive all awards under the Plans except for incentive stock options. (Id. At ¶¶ 43, 50)
However, the Plans offer differing lists of performance criteria under which awards could be granted. The 2006 Equity Plan provides for the grant of awards under twelve metrics:
(1) Net revenue and/or net revenue growth; (2) Earnings per share and/or earnings per share growth; (3) Earnings before income taxes and amortization and/or earnings before income taxes and amortization growth; (4) Operating income and/or operating income growth; (5) Net income and/or net income growth; (6) Total stockholder return and/or total stockholder return growth; (7) Return on equity; (8) Operating cash flow return on income; (9) Adjusted operating cash flow return on income; (10) Economic value added; (11) Individual business objectives; and (12) Company specific operational metrics.
(Id. at ¶¶44) The performance goals under the 2011 Equity Plan, in contrast, are based on the same list of forty-three criteria set forth in the AICP. (Id. at ¶¶ 55) The 2011 Equity Plan also provides that each eligible participant may receive up to 1, 500, 000 shares in a calendar year, equating to a maximum award of approximately $57 million per individual participant. (Id. at ¶¶56-58) The complaint does not identify the maximum awards available under the 2006 Equity Plan.
The shareholders approved the unchallenged 2011 Equity Plan on or about May 26, 2011. (Id. at ¶¶ 53) On March 5, 2012, Warhanek initiated this action to challenge Verisign's representations regarding the potential tax treatment of compensation awarded pursuant to the AICP and the 2011 Equity Plan under Section 162(m). (Id. at ¶73) Warhanek did not make a ...