United States District Court, D. Delaware
Order Filed: November 18, 2014
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
For Plaintiff: Joseph James Farnan, III, Esquire, Brian Farnan, Esquire, and Rosemary Jean Piergiovanni, Esquire of Farnan LLP, Wilmington, Delaware.
For Defendants: Kenneth Nachbar, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware.
Sue L. Robinson, District Judge.
On March 5, 2013, shareholder plaintiff Jeffery Kaufman (" plaintiff" ) filed suit against nominal defendant The Dow Chemical Company (" Dow" ), the eleven members of its board of directors, and Dow's five named executive officers (collectively, " defendants" ), asserting direct and derivative claims related to a series of allegedly false and misleading proxy statements issued annually between 2007 and 2012. (D.I. 1) On May 14, 2013, defendants moved to dismiss the complaint. (D.I. 5) Plaintiff amended his complaint on July 19, 2013, alleging only derivative claims relating to the proxy statements issued between 2007 and 2012. (D.I. 9) Specifically, plaintiff alleges breaches of the duty of disclosure and fiduciary duty, waste of corporate assets, and unjust enrichment. ( Id.) Currently before the court is defendants' motion to dismiss pursuant to Federal Rules of Civil Procedure 23.1 and 12(b)(6). (D.I. 11) The court has jurisdiction pursuant to 28 U.S.C. § § 1331, 1332, 1340, and 1367.
A. The Parties
Plaintiff, a citizen of New Jersey, has been a stockholder of Dow continuously since 2006. (D.I. 9 at ¶ ¶ 1, 5) Dow is a publicly held corporation, incorporated in Delaware, with its principal place of business in Michigan. Dow manufactures and sells products, including raw materials to make other products. ( Id. at ¶ 4)
The individual defendants described below are all citizens of states other than New Jersey. ( Id. at ¶ 1) As of the date of the original complaint filed in this action, the eleven members of the Dow board of directors (" board" ) were Arnold A. Allemang (" Allemang" ), Ajay Banga (" Banga" ), Jacqueline K. Barton (" Barton" ), James A. Bell (" Bell" ), Jeff M. Fettig (" Fettig" ), John B. Hess (" Hess" ), Andrew N. Liveris (" Liveris" ), Paul Polman (" Polman" ), Dennis H. Reilley (" Reilley" ), James M. Ringler (" Ringler" ), and Ruth G. Shaw (" Shaw" ). For the 2007 through 2012 stockholders' annual meetings, the board soliciting proxies consisted of at least Allemang, Barton, Bell, Fettig, Hess, Liveris, Geoffery Merszei (" Merszei" ), Ringler, and Shaw. ( Id. at ¶ ¶ 6-8, 39)
Since 2009, Barton, Hess, Polman, Reilley, and Shaw were the five members of the compensation and leadership development committee (the " committee" ). In
2011, Liveris, William Weideman (" Weideman" ), Joe Harlan (" Harlan" ), Charles Kalil (" Kalil" ), and Merszei were Dow's " Named Executive Officers" (" NEOs" ). The members of the committee in 2007 and 2008 were Barton, Hess, Ringler, and Shaw. ( Id.)
B. The 1988 Plan
On May 12, 1988, the Dow 1988 Award and Option Plan (the " 1988 plan" ) became effective upon approval of the Dow stockholders. The 1988 plan provided for stock-based compensation, including options, stock appreciation rights, restricted stock, and deferred stock, to employees but not to non-employee directors. The 1988 plan was amended on August 10, 1993 by the board to conform with new provisions of the Internal Revenue Code § 162(m); the stockholders approved such amendments at their annual meeting on May 15, 1997. (D.I. 9 at ¶ ¶ 9-10, 17) The 1997 amendments to the 1988 plan
set forth a number of categories from which performance goals could be set, as follows: (i) earnings, (ii) earnings per share, (iii) share price, (iv) revenues, (v) total shareholder return, (vi) return on invested capital, equity, or assets, (vii) operating margins, (viii) sales growth, (ix) productivity improvement, (x) market share, and (xi) economic profit. The amendments also included annual limits on individual equity-based compensation.
( Id. at ¶ 17) While the 1997 proxy statement reported that I.R.C. § 162(m) required disclosure of these performance goals to the stockholders and the stockholders' approval thereof, plaintiff alleges that Treasury Regulation § 1.162-27(e)(4)(vi) requires stockholder reapproval of the performance goals every five years. ( Id. at ¶ 18) The board did not seek or obtain such reapproval after the five-year period elapsed in 2002; however, the committee continued to make annual grants under the 1988 plan, even though the 1988 plan stopped being deductible under § 162(m) after 2002.
Plaintiff alleges that the board was fully aware of the tax consequences of its executive compensation based on statements made in Dow's proxy statements between 1997 and 2001. ( Id. at ¶ ¶ 19-25) In 2002, the board sought and obtained stockholder approval of an amendment to the 1988 plan that changed the definition of " employee," but did not seek reapproval of the plan itself or its performance goals. ( Id. at ¶ 26)
Plaintiff alleges that each of the proxy statements from 2002-2006 contained false representations regarding the tax deductibility of the executive compensation. For example, the 2003 proxy statement represented that Dow's " executive performance award and long-term incentive programs are stockholder-approved and are designed to comply with the requirements of Section 162(m)." The 2004 proxy statement represented that the 1988 plan was " approved
by Dow stockholders in 1988, 1997, and 2002." ( Id. at ¶ ¶ 26-34)
In accordance with 17 C.F.R. § 229.402(b)(2)(xii), the 2007 proxy statement disclosed " [t]he impact of the . . . tax treatment of the particular form of compensation." ( Id. at ¶ 35) The 2007 proxy statement represented:
Section 162(m) of the Internal Revenue Code generally limits the tax deductibility of compensation paid by a public company to its CEO and certain other highly compensated executive officers to $1 million in the year the compensation becomes taxable to the executive. There is an exception to the limit on deductibility for performance-based compensation that meets certain requirements. The Company considers the impact of this rule when developing and implementing the performance award, stock option and performance share programs (described above) which are designed to meet the deductibility requirements. Stockholders have approved the material terms of awards to the covered executives under these programs.
( Id. at ¶ 35) Plaintiff claims that the last sentence of this statement was false or misleading because the performance goals under the 1988 plan had not been reapproved since 1997. ( Id.) As the directors considered the tax consequences of § 162(m) and knew that the 1988 plan had not been reapproved in ten years, plaintiff alleges that making such statements in the 2007 proxy statement was a breach of the duties of loyalty and care, including the directors' disclosure duties. ( Id.)
Plaintiff alleges that the directors knew that the 2007 proxy statement was false or misleading because the 2008 proxy statement did not contain the representation that " [s]tockholders have approved the material terms of awards to the covered executives." ( Id. at ¶ ¶ 37-38) The proxy statements for 2008, 2009, 2010, 2011, and 2012 represented that the 1988 plan was " Dow's omnibus stockholder-approved plan for equity awards to employees." ( Id. at ¶ 37) Plaintiff alleges that the revised language used in the proxy statements between 2008 and 2012 stating that the committee would take " advantage of Section 162(m) whenever feasible" ignores the point that awarding tax-deductible compensation is not feasible under the 1988 plan because such performance goals were never reapproved by stockholders. ( Id. at ¶ 38)
Plaintiff alleges that the statute of limitations under Delaware law is tolled as to the years 2006-2012 based on the misrepresentations in the proxy statements in 2007-2012. ( Id. at ¶ ¶ 40-47)
C. The 2012 Plan
In 2012, the proxy statement solicited proxies to approve the Dow 2012 Stock Incentive Plan (" 2012 plan" ) to replace the 1988 plan and the 2003 non-employee directors' stock incentive plan (the " 2003 directors' plan" ), which awarded only non-employee directors. Plaintiff alleges certain representations in the 2012 proxy statement were false. For example, the representation that the 1988 plan was " 'Dow's omnibus stockholder-approved plan for equity awards to employees' was a materially false or misleading statement because the stockholders had not reapproved it since 1997" as required by Treasury Regulations. Plaintiff alleges that the 2012 proxy statement " failed to properly explain the dramatic increase in Director and NEO compensation" and " misrepresented the tax-deductibility" of the 2012 plan. (D.I. 9 at ¶ ¶ 48-52)
The 2012 plan " provides that each participant can receive an annual grant of equity incentive compensation equal to as many as 3,000,000 Dow common shares and an annual cash incentive bonus of as
much as $15,000,000." (D.I. 9 at ¶ ) Using the approximate price of $32 per share of Dow stock on May 10, 2012 when the plan was proposed, each participant " can receive in a single year as much as $96,000,000 in stock plus $15,000,000 in cash, for a total of $111 million per participant, per year. Previously, each director was limited to an annual maximum of approximately $800,000 (25,000 shares), and each NEO was limited to an annual maximum of approximately $20 million." The 2012 proxy statement failed to disclose " that potential director compensation was being increased more than a hundred-fold, including cash for the first time, under the 2012 [p]lan, and potential NEO compensation was being quintupled under the 2012 [p]lan." ( Id. at ¶ ¶ 53-56)
Plaintiff alleges that, to be deductible, a compensation plan must either provide the " formula used to calculate the amount of compensation to be paid to the employee if the performance goal is attained" or disclose " the maximum amount of compensation that could be paid to any employee." ( Id. at ¶ 58 (citing I.R.C. § 162(m), Treas. Reg. § 1.162-27(e)(4)(i))) Plaintiff maintains that the maximum award under the 2012 plan, $111 million per participant, is so high it is illusory. Moreover, it offends the " reasonable" requirement of the IRC. ( Id. at ¶ 59 (citing I.R.C. § 162(a)(1)) Plaintiff alleges that the 2012 plan does not comply with the I.R.C.; instead it creates " an infinite number of performance goals from which the [c]ommittee may later select to determine performance," which is the same as telling " shareholders that the compensation committee will later decide what criteria to use." This is contrary to the IRC, which requires that performance criteria be fully-defined and disclosed to enable shareholders' informed approval. ( Id. at ¶ ¶ 60-65)
Plaintiff alleges that the 2012 proxy statement made materially false or misleading representations as to the complexity ...