On January 11, 2012, Magistrate Judge John Acosta recommended the dismissal of the derivative lawsuit against the Board of Directors of Umpqua Holdings Corporation ("Umpqua") for breach of fiduciary duty. The lawsuit was filed after the shareholders, in an advisory vote, rejected the Board-approved executive compensation program. The Magistrate Judge found that the plaintiffs failed to make a presuit demand as required for a derivative suit and were not excused from doing so under the arguments they raised regarding the Board members’ exercise of the business judgment rule or their lack of independence or disinterest. As Broc Romanek of theCorporateCounsel.Net Blog pointed out, "[t]his is the first federal court decision to dismiss such an action." Magistrate Judge Acosta has referred his Findings and Recommendations to District Judge Michael W. Mosman for review and final determination.
According to Umpqua’s Proxy Statement, the company received "capital investment from the U.S. Treasury in 2008." As a part of that investment, Umpqua agreed to certain compensation limitations for 2009 and 2010. The Proxy Statement further stated that once the limitations were lifted in 2010, the company’s compensation committee decided to "normalize" compensation of its executives. Umpqua commissioned an executive compensation study and a benchmarking study to provide guidance regarding executive base salaries and established performance categories based on both financial and non-financial metrics which were to be used in determining incentive pay. The Board unanimously approved the compensation package on February 25, 2011.
Plaintiffs alleged that the 2010 executive compensation program increased the compensation for each executive officer by approximately 60% and up to 160%, although the 2010 return to shareholders was a negative 7.7%. On April 22, 2011, the shareholders, in an advisory vote mandated under the Dodd-Frank Act, voted against the compensation plan by a 62% to 35% margin. Shareholders Plumbers Local No. 137 Pension Fund and Laborers’ Local #231 Pension Fund filed their action against the Umpqua Board on May 25, 2011.
On June 27, 2011, the defendants moved to dismiss, arguing, among other things that plaintiffs failed to allege facts raising certain reasonable doubts that would excuse a presuit demand. Defendants’ two-pronged argument was that: (1) plaintiffs failed to adequately allege that the Board majority was independent and disinterested; and (2) the Board’s decision was the product of a valid business judgment.
Plaintiffs (who were represented by the same counsel who were initially successful in defeating a motion to dismiss in the Cincinnati Bell litigation discussed here) opposed the motion, arguing that: (1) a presuit demand was not required because the Board was not disinterested; and (2) the breach of the fiduciary duty by the Board stripped it of his ability to rely on the business judgment rule (also excusing the presuit demand).
Focusing on the Board’s interest and independence, Magistrate Judge Acosta said "the court determines only whether the board’s alleged interest in the compensation decision would have precluded it, in response to a demand, from conducting an objective and unbiased assessment of a shareholder challenge to the appropriateness of that decision." Defendants argued that only one Board member, the CEO, was impacted by the compensation plan (meaning the majority was disinterested), while plaintiffs argued that demand may be excused where, as here, that board member is in a leadership position or otherwise wields significant influence. Plaintiffs also argued that the remaining directors were not disinterested because they face a substantial likelihood of liability in this derivative action.
The Court quickly rejected the "likelihood-of-liability-from-the-lawsuit" argument, pointing out that it "would permit every derivative action plaintiff to argue that demand is futile and need not be made because no board would be able to act objectively in evaluating a presuit demand," and that "[s]uch a result would effectively erase the demand requirement and negate its purpose." With respect to the claimed influence wielded by the CEO, Magistrate Judge Acosta noted that plaintiffs failed "to provide particularized factual allegations" to support that argument.
Turning to the exercise of business judgment, Magistrate Judge Acosta stated that "the plaintiffs must plead particularized facts sufficient to raise (1) a reason to doubt that the action was taken honestly and in good faith or (2) a reason to doubt that the board was adequately informed in making the decision" (internal quotations and citations omitted). The Court agreed with defendants that compensation determinations are typically within the business judgment of the board and concluded that the allegations regarding the board’s decision failed to overcome the presumption that the board exercised business judgment. For example, the Court noted, the Board did not directly defy or violate any Umpqua bylaw, any shareholder agreement, or any legally mandated disclosure or reporting requirement, but, instead relied on a policy. Magistrate Judge Acosta also found that plaintiffs’ conclusory allegations that the approved level of compensation was inconsistent with general corporate performance was not sufficient to create a reasonable doubt that the Board took this action honestly and in good faith or that it was adequately informed in making the decision.
Magistrate Judge Acosta recommended that because plaintiffs failed to make a presuit demand and did not allege facts that would excuse it from such a demand, the lawsuit should be dismissed. His recommendation is to dismiss the suit without prejudice, which would allow plaintiffs an opportunity to amend the complaint. Plaintiffs are required to file any objections to the Findings and Recommendations by January 25, 2012 which will be considered by District Judge Mosman.
