In Gordon v. Goodyear, No. 12 C 369, 2012 WL 2885695 (N.D. Ill. Jul. 13, 2012), the district court dismissed Natalie Gordon’s (“Plaintiff”) derivative suit against William M. Goodyear (“Goodyear”), CEO of Navigant Consulting, Inc. (“Navigant”); Navigant’s COO; Navigant’s CFO; Navigant’s General Counsel; and members of Navigant’s Board of Directors (“Board”) (collectively, the “Defendants”).
Plaintiff alleged that the “Board awarded excessive executive compensation” despite the fact that Navigant’s share price had declined from $21 per share in January 2006 to $9.20 per share in December 2010. According to Plaintiff, Defendants breached their fiduciary duties of trust, loyalty, good faith, and due care to Navigant and its shareholders by approving this compensation package in the face of Navigant’s dismal financial performance.
Plaintiff relied on Navigant’s March 16, 2011 proxy statement, which recommended that Navigant shareholders approve the performance-based pay package proposed by the Board. The proxy statement expressly stated that this vote was non-binding on the Board and on Navigant. Further, on March 31, 2011, a leading proxy advisory service recommended that shareholders vote against the pay package; over fifty-five percent of Navigant shareholders took this advice.
Plaintiff made no pre-suit demand on the Board, arguing that such a demand would have been futile because “the majority of the Board are also members of the Compensation Committee and . . . incapable of [dispassionately] evaluating a pre-suit demand.” Defendants moved to dismiss the suit under Federal Rule of Civil Procedure 23.1(b)(3), which requires a plaintiff to plead with particularity its efforts at a pre-suit demand or its reasons for not making a pre-suit demand. Courts apply the substantive law of the state of the corporation’s incorporation in pre-suit demand cases. Navigant is a Delaware corporation, so the court applied Delaware law.
Under Delaware’s test for demand futility, a pre-suit demand on a board of directors is futile where a plaintiff can show “under the particularized facts alleged, a reasonable doubt is created that (1) the directors are disinterested and independent [or] (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.”
As to the first prong, the court found Plaintiff had not alleged that any of the executives who personally benefited from the pay package served on the committee that recommended the pay package. The court also found that Plaintiff failed to show that Goodyear dominated or otherwise influenced the Board, or that any board member was double dealing or acting in bad faith with respect to the Board’s executive pay package decision.
As to the second prong, the court held that Plaintiff failed to provide particularized allegations to raise “(1) a reason to doubt that the [compensation] action was taken honestly and in good faith or (2) a reason to doubt that the board was adequately informed in making the [compensation] decision.” Plaintiff’s argument that that the shareholders’ vote against the executive compensation package was evidence that the Board either acted in bad faith or was inadequately informed was not found by the court to be persuasive. The court noted that the Dodd-Frank Act specifically provided that shareholder votes on executive compensation were non-binding on a company and its board.
The court also found that the board did not violate Navigant policies in approving the compensation and the decline in Navigant’s stock price did not justify demand excusal.
Because Plaintiff’s claim failed to satisfy either prong, the court held that Plaintiff had failed to show the futility of a pre-suit demand on the Board. On this basis, the court dismissed Plaintiff’s claims against all Defendants.
The primary materials for this case may be found at the DU Corporate Governance website.