MILTON PFEIFFER, derivatively on behalf of HEALTHWAYS, INC., Plaintiff,
BEN LEEDLE, JR., JAY BISGARD, JOHN BALLANTINE, THOMAS CIGARRAN, MARY JANE ENGLAND, C. WARREN NEEL, WILLIAM NOVELLI, WILLIAM O'NEIL, JR., ALISON TAUNTON-RIGBY, and JOHN WICKENS, Defendants, and HEALTHWAYS, INC., a Delaware Corporation, Nominal Defendant.
Submitted: August 1, 2013.
Brian E. Farnan, Esq., Michael J. Farnan, Esq., FARNAN LLP, Wilmington, Delaware; Eduard Korsinsky, Esq., Douglas E. Julie, Esq., LEVI & KORSINSKY LLP, New York, New York; Attorneys for Plaintiff.
William M. Lafferty, Esq., D. McKinley Measley, Esq., MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Wallace W. Dietz, Esq., W. Brantley Phillips, Jr., Esq., Joseph B. Crace, Jr., Esq., BASS BERRY & SIMS PLC, Nashville, Tennessee; Attorneys for Defendants.
PARSONS, Vice Chancellor.
This derivative action involves a shareholder challenge to a corporate executive's receipt of stock options under a shareholder approved stock incentive plan. The defendant directors of the corporation allegedly breached their fiduciary duties by approving stock option grants to a company executive that exceeded the maximum number of stock options that could be granted to that individual under the corporation's stock incentive plan. The plaintiff alleges further that the executive who received the excessive stock option grants breached his fiduciary duties and was unjustly enriched by accepting the allegedly unauthorized stock options.
The defendants have moved to dismiss the complaint in its entirety for failure to make demand and for failure to state a claim upon which relief can be granted.
Having considered the parties' briefs and heard argument on the motion, I conclude that the defendants' motion to dismiss should be denied in its entirety.
A. The Parties
Plaintiff, Milton Pfeiffer, is a shareholder of Nominal Defendant Healthways, Inc. ("Healthways" or the "Company"), and has been a Healthways shareholder at all times relevant to this action.
Nominal Defendant Healthways, a Delaware corporation, implements programs designed to reduce direct healthcare costs and health-related costs associated with the loss of employee productivity by helping individuals to adopt or maintain healthy behaviors, reduce health-related risk factors, and optimize care for identified health conditions.
Defendants Ben Leedle, Jr., Jay Bisgard, John Ballantine, Thomas Cigarran, Mary Jane England, C. Warren Neel, William Novelli, William O'Neil, Jr., Alison Taunton-Rigby, and John Wickens (together, "Defendants" or the "Board") are members of Healthways's Board of Directors. Defendant Leedle currently serves as President of the Company. Defendant Cigarran is a founder of the Company and has served as Chairman of the Board, President, and CEO.
Defendants England, Novelli, O'Neil, and Taunton-Rigby comprised the Board's compensation committee (the "Compensation Committee") at all relevant times.
1. The 2007 Stock Incentive Plan
In 2007, Healthways adopted, and the Company's shareholders approved, a Stock Incentive Plan (the "Plan"). Under the Plan, the Company's officers, directors, employees, and consultants are eligible to receive various equity awards, including stock options, stock appreciation rights, restricted stock awards, and performance awards. A committee consisting of all the Company's non-employee directors is responsible for administering the Plan. Although the Compensation Committee is authorized to execute the Plan, the full committee of non-employee directors retains final authority with respect to how the Plan is administered. Among other things, the Plan administrator is responsible for determining the type and number of awards to be granted to the Plan's participants.
Section 4 of the Plan is entitled "Eligibility." Under Section 4, "no Participant may receive (i) Options or Stock Appreciation Rights under the Plan in any calendar year that, taken together, relate to more than 150, 000 shares of Stock." The Plan defines an "Option" as "any option to purchase shares of Stock (including Restricted Stock, if the Committee so determines) granted pursuant to Section 5 or Section 9" of the Plan.
Section 8.2 of the Plan outlines the criteria for "Performance Awards." This section states that:
The Committee shall have sole and complete authority to determine the Participants who shall receive a Performance Award, which shall consist of a right that is (i) denominated in cash or shares, (ii) valued, as determined by the Committee, in accordance with the achievement of such performance goals during such performance periods as the Committee shall establish, and (iii) payable at such time and in such form as the Committee shall determine.
In addition, "[t]he Committee may grant Performance Awards to Covered Officers based solely upon the attainment of performance targets related to one or more performance goals selected by the Committee from among the goals specified [in Section 8.2(a) of the Plan]." One of the enumerated means to measure performance goals is "stock price or total shareholder return." The Committee's ability to grant ...