Hoch v. Alexander et al
MEMORANDUM OPINION re 127 MOTION to Dismiss the Amended Complaint. Signed by Judge Richard G. Andrews on 7/2/2013. (nms)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
BARBARA T. ALEXANDER, et al.,
Civil Action No. 11-217-RGA
Brian Farnan, Esq., Farnan LLP, Wilmington, DE; Alexander Arnold Gershon, Esq.
(argued), Barrack, Rodos & Bacine, New York, NY, Attorneys for Plaintiff.
Richard L. Horwitz, Esq., Potter Anderson & Corroon LLP, Wilmington, DE; Evan R.
Chesler, Esq., Rachel G. Skaistis, Esq. (argued), Cravath Swaine & Moore LLP, New York, NY,
Attorneys for Defendants.
Kenneth Hoch brings this litigation directly and derivatively against Defendants, who
include directors and executive officers of Qualcomm. 1 In his "Verified Amended and
Supplemented Complaint" (D.I. 122), he alleges that Defendants violated their duties under
federal securities law and Delaware law when they issued a false or misleading proxy statement
regarding the tax-deductible status of executives' compensation; that Defendants coerced
shareholders to vote to approve the compensation; that the voting card violated federal securities
law; that Defendants provided misleading information to the Internal Revenue Service and
subjected Qualcomm to a fine and a potentially inaccurate closing agreement with the IRS; and
that the process of submitting the compensation to shareholders for approval was invalid.
Defendants have filed a motion to dismiss (D.I. 127), which the Court granted in part at oral
argument (D.I. 160) and denies in part here.
Hoch's Counts II, III, IV, and V center on Qualcomm's January 19, 2011 Proxy
Statemenf seeking shareholder approval of its 2006 Long-Term Incentive Plan as amended
("2011 LTIP"). (D.I. 122, ,-r3; see D.I. 129, Ex. H). The Proxy Statement informed shareholders
that certain prospective payments to senior management pursuant to the 2011 LTIP would be tax
deductible under§ 162(m) ofthe Internal Revenue Code. (D.I. 122, ~ 21-24; see D.I. 129, Ex.
H, pp. 17-24). Shareholders voted to approve the 2011 LTIP. Hoch claims that the
Hoch has subsequently moved to withdraw, and Jeffrey Kaufman has moved to
intervene as plaintiff; Defendants have filed an additional motion to dismiss related to Plaintiff's
status. (D.I. 183, 188, 189). These motions will be addressed in due course.
At times, the Proxy Statement is also said to be dated January 20,2011.
compensation is not tax deductible. Qualcomm alerted the IRS to Hoch's lawsuit and allegations
concerning the nondeductibility. On June 11, 2012, Qualcomm and the IRS entered into an Issue
Resolution Agreement ("IRA"), pursuant to which the IRS concurred with Qualcomm that the
2011 LTIP approved by shareholders was compliant with§ 162(m). (D.I. 129, Ex. Q). Count X
alleges Defendants provided misleading information in pursuit of the IRA. 3
Counts VI and VII are based on the form voting card used for the 2011 vote. Counts VIII,
IX, XI, XII and XIII are based on the process by which Defendants submitted the 2011 LTIP and
a 2010 amendment to shareholders for approval.
Defendants moved to dismiss all remaining claims against them pursuant to Federal Rule
of Civil Procedure 12(b)(6).4 The Court granted Defendants' Motion with regard to Counts IV,
V, and VII at oral argument, and Hoch conceded dismissal of Count VI. (D.I. 138 at 20; D.l. 160
at 39, 51-52). Counts II, Ill, and VIII through XIII are addressed here.
Evaluating a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) requires
the Court to accept as true all material allegations of the complaint. See Spruill v. Gillis, 372
F.3d 218, 223 (3d Cir. 2004). "The issue is not whether a plaintiff will ultimately prevail but
whether the claimant is entitled to offer evidence to support the claims." In re Burlington Coat
Factory Sec. Litig., 114 F.3d 1410, 1420 (3d Cir. 1997). Thus, the Court may grant such a
There are no factual allegations naming any Defendant as performing any action in
pursuit of the IRA, or even knowing about the communications with the IRS. (See D.l. 122, W
48-55). The Defendants have not raised any issue about the lack of specificity.
Hoch's Count I was dismissed in July, 2011, and Hoch included it in his Amended
Complaint "solely to preserve his rights." (D.I. 122, p. 31 ).
motion to dismiss only if, after "accepting all well-pleaded allegations in the complaint as true,
and viewing them in the light most favorable to plaintiff, plaintiff is not entitled to relief." Maio
v. Aetna, Inc., 221 F.3d 472, 481-82 (3d Cir. 2000) (internal quotation marks omitted).
1. Counts II and III
Counts II and III are derivative claims for breach of fiduciary duty and waste under
Delaware law. 5 Hoch alleges certain statements in the Proxy Statement preclude the 2011 LTIP
compensation from being deductible under§ 162(m), and that the Proxy Statement's
representations that the compensation would be deductible are therefore false and misleading.
mf 24-25, 69-80).
Specifically, Hoch claims that under the terms of the 2011 vote,
Qualcomm would still pay performance-based compensation under the 2006 LTIP regardless of
whether the 2011 LTIP plan was approved, and that therefore the 2011 LTIP compensation is not
deductible. Treasury Regulation §1.162-27(e)(4)(i) provides that §162(m) is not satisfied "if the
compensation would be paid regardless of whether the material terms are approved by
shareholders." The Proxy Statement provided:
Should stockholder approval not be obtained, then the proposed amendments will
not be implemented, and the 2006 LTIP will continue in effect pursuant to its
current terms. However, the shares reserved for issuance will be depleted, and the
2006 LTIP will not achieve its intended objectives ofhelping to attract and retain
At oral argument, Hoch asserted these were both Delaware state law claims and federal
claims under Section 14(a) of the Securities Exchange Act of 1934. (D.I. 160 at 36). The claims
allege "breaches of these defendants' respective duties of loyalty to and care for the Company''
and that seeking stockholder approval "is irrational and constitutes waste." (D.I. 122, mf 77, 78,
82, 83). While the claims do mention SEC regulations, they do not state a claim under §14(a).
They are pled as state law claims. Cf Hoch v. Alexander, 2011 WL 2633722, *3 (D. Del. July 1,
2011) (characterizing the earlier versions of Counts II and III as state law claims).
(D.I. 129, Ex. Hat 25). 6 Defendants make two main arguments for dismissal: that under a
proper reading of the Proxy Statement and the Treasury Regulation, the compensation is
deductible under§ 162(m), as supported by the IRA; and that the Proxy Statement's discussion
about § 162(m) comprises opinion, but Hoch failed to allege that Defendants did not believe the
2011 LTIP would be deductible at the time the Proxy Statement was filed. (D.I. 128, pp. 5-10).
This is Defendants' second attempt to dismiss Hoch's claim based on whether Hoch's
§ 162(m) tax theory bears out under a proper reading of the Proxy Statement and the law. See
Hoch v. Alexander, 2011 WL 2633722, *2 (D. Del. July 1, 2011). The Court previously held:
Although it is a close question as to whether Hoch has properly interpreted the
proxy statement, this Court cannot conclude at this stage of the proceedings that
his Complaint fails to state a claim. The parties dispute, among other things,
whether certain treasury regulations apply as well as the meaning of the Proxy
Statement. But at this stage, Hoch has properly pled that a material misstatement
interfered with the voting rights of shareholders and that the false proxy statement
breached Defendants' duties ofloyalty and good faith and constituted waste.
Id. at *6. The parties' disputes, their arguments, and the stage of the case and record remain
largely the same on this issue, providing no basis to disturb the Court's earlier ruling. 7
Defendants make the additional argument that the IRA, in which the IRS concurred with
Qualcomm that the 2011 LTIP approved by shareholders was compliant with§ 162(m), shows
the Proxy Statement was not false or misleading. (D.I. 129, Ex. Q). Defendants contend the IRA
It is appropriate to consider the Proxy Statement as it is referenced in and integral to the
Amended Complaint. See Seinfeld v. Becherer, 461 F .3d 365, 367 n.1 (3d Cir. 2006).
The underlying issue of whether the compensation is deductible under Treasury
Regulation§ 1.162-27(e)(4) does appear to be a question oflaw. E.g., Seinfeld v. O'Connor, 774
F.Supp.2d 660, 665-69 (D. Del. 2011). Defendants' briefing on that issue here is insufficient for
the Court to decide that question, perhaps because of page limitations. On summary judgment,
the Court requests that the issue be more thoroughly briefed, and will grant additional pages upon
makes any harm to Qualcomm - from not being able to deduct the compensation - too speculative
for Hoch to maintain Counts II and III.
A threshold issue is whether the Court may consider the IRA in this motion to dismiss.
"To decide a motion to dismiss, courts generally consider only the allegations contained in the
complaint, exhibits attached to the complaint and matters of public record." Pension Ben. Guar.
Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir. 1993). "However, an
exception to the general rule is that a document integral to or explicitly relied upon in the
complaint may be considered without converting the motion to dismiss into one for summary
judgment." In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997)
(internal quotations omitted). "The rationale underlying this exception is that the primary
problem raised by looking to documents outside the complaint-lack of notice to the plaintiff-is
dissipated where plaintiff has actual notice and has relied upon these documents in framing the
complaint." Id. (internal quotations omitted). The exception also prevents a plaintiff with a
legally deficient claim from surviving a motion to dismiss "simply by failing to attach a
dispositive document on which it relied." Pension Benefit Guar. Corp., 998 F.2d at 1196.
The IRA is referenced by and integral to Hoch's claims of misrepresentation in procuring
it. In Count X, Hoch alleges Defendants provided misleading information to the IRS in pursuit
of the IRA, and that as a result the IRS "has not confronted the issue discussed in plaintiffs
original complaint" and has "based its analysis on false information." (D.I. 122, mf 48-51, 11417). Hoch relies on those same allegations in opposing Defendants' motion here, in an attempt to
discredit or devalue the IRA, going so far as to quote the IRA itself. (D.I. 138 at 16). Hoch's
claims that Defendants made false statements to the IRS in procuring the IRA, and that the IRS'
analysis and bases therefore are incomplete as a result, require the final IRA to know what the
IRS finally decided. The Court notes the IRA is dated June 11, 2012; the record indicates Hoch
had notice of the IRA at least as of July 20, 2012, as indicated by a discovery dispute letter
("[T]he IRS has expressly stated that it agrees with Qualcomm that the substance of the 2011
Proxy complies with the relevant tax and Treasury provisions ....");and Hoch's Amended
Complaint alleging misrepresentations in obtaining the IRA was filed August 13, 2012. (D.I.
129, Ex. Q; D.I. 117; D.I. 122). As such, Hoch had notice of the IRA, fulfilling the rationale
behind the exception for documents external to the complaint. The Court will take notice of the
In seeking the IRA, Qualcomm's position was:
The 2011 Proxy merely stated that, if the 2011 Amended LTIP were not approved,
the previously approved 2006 LTIP would continue in effect pursuant to its terms.
The 2011 Proxy makes clear that, in the event of a failed vote, the 2011 Amended
LTIP would not be adopted and that Taxpayer would suffer adverse consequences.
Thus, the 2011 Proxy fully complies with Treas. Reg. Section 1.162-27(e)(4)(i).
(D.I. 129, Ex. Qat 3). The Government's position was:
Following review of the Taxpayer's analysis of the facts and law, the Government
concurs with the Taxpayer's position that the 2006 Shareholder Approval and
2011 Shareholder Approval are compliant with the requirements ofTreas. Reg.
!d. The IRS' concurrence squarely opposes Hoch's claims that the 2011 Proxy Statement's
representation that the 2006 LTIP would continue if the 2011 LTIP was not approved violated
§ 1.162-27(e)(4)(i) and precluded deduction ofthe compensation under§ 162(m).
Hoch's next tack is to argue that the IRA is not binding on the IRS because it is not a
"closing agreement" and not signed by the Secretary of the Treasury or the Commissioner of
Internal Revenue, under I.R.C. § 7121. (D.I. 138 at 15).
Section 7121 authorizes the Secretary or his delegate to enter into an agreement in
writing, referred to as 'closing agreement,' with any person relating to the tax
liability of such person for any taxable period, and provides that if such agreement
is approved by the Secretary or his delegate, such agreement shall be final and
conclusive .... It is well established that the statutory procedure provides the
exclusive method by which a closing agreement may be accorded finality .... As
stated in Knapp-Monarch Co. v. Commissioner, 139 F.2d 863, 864 (8th Cir.
1944): "The very fact that Congress has provided a way in which the Internal
Revenue Department may bind itself, precludes the possibility of its being bound
by some other procedure."
Levin v. Comm 'r, T.C. Memo. 1990-226, 1990 WL 57569 (T.C. May 7, 1990) (internal citations
omitted). IRS documents that are not closing documents under Section 7121 have been found to
fall short of a final binding IRS opinion. See id.; Sunik v. Comm 'r, 321 F.3d 335, 337 (2d Cir.
Defendants do not dispute that the IRA is not a Section 7121 closing agreement and lacks
the formal trappings to make it technically binding on the IRS. Instead, Defendants argue Hoch
has shown no reason for the IRS to change its mind, so the IRA makes any harm to Qualcomm
(from the compensation not being deductible) too speculative to sustain Counts II and III. (D.I.
128 at 8-9; D.I. 143 at 3). Hoch alleges one reason why the IRS might deviate from the IRA such
that harm (nondeductibility) is not speculative: that, in obtaining the IRA, Qualcomm
misrepresented the validity of the shareholder vote to the IRS. (D.I. 122, ,-r,-r 48-54; D.I. 138 at
16-17). Hoch also alleges the IRS did not focus on the 2011 vote, and that the IRS misstated in
communications leading up to the IRA that the 2006 Plan was approved at a 2010 meeting. (D.I.
122, W50-51; D.I. 138 at 16-17).
The likelihood of the IRS changing its mind is not, in my opinion, the issue; the issue is
whether the IRS could change its mind. In other words, the issue is whether the IRA definitively
provides, as a matter oflaw, that the compensation will be deductible, and that therefore
Qualcomm will not suffer the harm Hoch alleges. There is no dispute that the IRA does not
formally bind the IRS; the IRA therefore does not definitively rule out nondeductibility and
resultant harm to Qualcomm, particularly where Hoch has pled reasons the IRA may be
Defendants' second argument for dismissing Counts II and III is that the Proxy
Statement's discussion about§ 162(m) comprises opinion, but that Hoch's failure to allege that
Defendants did not believe the 2011 LTIP would be deductible at the time the Proxy Statement
was filed is fatal to Hoch's claims. Defendants rely upon Fait v. Regions Financial Corp., 655
F.3d 105, 110 (2d Cir. 2011), which requires a statement of opinion to be "both objectively false
and disbelieved by the defendant at the time it was expressed" to state a claim under sections 12
and 13 of the Securities Act of 1933. Hoch concedes that the statements are opinion, but that
such statements "may be actionable when they expressly or impliedly assert something false or
misleading about their subject matter" and that Defendants' argument is an inappropriate request
for reconsideration ofthe Court's denial of Defendants' previous motion to dismiss. (D.I. 138 at
As explained, the issue of whether or not the compensation is actually deductible under
§ 162(m) is not sufficiently briefed to be decided here. While the IRA does not provide a
dispositive, binding basis to dismiss here, it may be informative and may shed light on the
probability the IRS would view the compensation to be deductible, in the context of sufficient
briefing on the ultimate issue. See Seinfeld v. 0 'Connor, 774 F.Supp.2d 660, 668 (D. Del. 2011).
Hoch may be able to undermine the IRA based on Qualcomm' s alleged
misrepresentations and the IRS' alleged focus on the wrong shareholder vote, but it is not clear to
the Court how doing so would affect the ultimate issue of whether the compensation is actually
deductible. It seems the value of undermining the IRA is limited to the secondary argument that
the IRA does not rule out nondeductibility and harm to Qualcomm.
14-15, n.9) (quoting In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357, 372 (3d Cir. 1993)).
Counts II and III are Delaware law claims. Defendants and Hoch both rely on cases
providing the elements for a claim based on an opinion under sections 12 and 13 of the 1993
Securities Act. Defendants have not shown Counts II and III should be dismissed for failing to
allege any element under Delaware law.
In sum, Defendants have not shown the compensation is deductible and that Hoch is not
entitled to relief. The IRA does not demonstrate that the compensation is deductible such that
Hoch has failed to allege harm to Qualcomm. Defendants' motion is denied on this basis without
prejudice to renew the argument at summary judgment with greater context and more sufficient
briefing. Defendants have also not shown the failure to allege any element of Count II or III
under Delaware law. Defendants' motion is denied as to Counts II and III.
2. Counts VIII and IX, XI through XIII
Counts VIII and IX, and XI through XIII, 9 are direct and derivative Delaware law claims
based on Hoch's allegations that Qualcomm did not properly submit amendments to the 2006
LTIP to the shareholders for approval at the 2010 and 2011 votes, and that those votes are
therefore void. (D.I. 122, ~ 30-44, 52-53, 105-13, 118-26). Defendants assert any defects
relating to the votes are voidable and that the board ratified the defects.
I think how the issue is framed largely determines what the correct result will be. I accept
the Defendants' argument that the actions at issue are the actions that led to the amendments
Defendants moved to dismiss Count X along with these other Counts, but Count X
alleges misrepresentations to the IRS in pursuit of the IRA and does not allege anything
pertaining to the processes underlying the 2010 or 2011 shareholder votes. (D.I. 122, ~ 114-17).
Defendants' arguments for dismissing the process claims provide no basis for dismissing Count
being up for a vote, not the votes themselves. The Court reads Hoch's allegations to claim the
2011 vote is defective because: 1) Qualcomm's Compensation Committee, rather than the full
board, amended the LTIP and slated it for a vote; and 2) that committee approved three
amendments to the 2006 LTIP but slated the entire plan as amended for a vote. Hoch' s
allegations with regard to the 201 0 vote are more general, stating the board never reviewed or
discussed the amendment to increase the share reserve and that there are no board minutes or
unanimous written consents regarding the 2006 LTIP. (D.I. 122, mf 30-44).
The first issue for the Court is whether the allegedly defective actions are void or
voidable. "The essential distinction between voidable and void acts is that the former are those
which may be found to have been performed in the interest of the corporation but beyond the
authority of management, as distinguished from acts which are ultra vires, fraudulent or gifts or
waste of corporate assets." Michelson v. Duncan, 407 A.2d 211, 218-19 (Del. 1979). There
seems to be no dispute that it was within the board's power and authority to review those
amendments and slate them for a vote; Hoch claims only that the Qualcomm employees who put
the matter up for the votes did so without authority and without following proper procedures.
(D.I. 138 at 11). Ifthe board's alleged failure to properly slate the votes were the only defect
with the votes - in other words, if the issue were borne out of procedural defects as to how the
matters got up for a vote - Michelson would control, and the votes would be voidable.
Hoch also alleges the 2010 and 2011 votes are void because the board's failure to
properly slate the 2006 LTIP for those votes violated Qualcomm' s bylaws, specifically § 5(b).
Hoch argues that because the board's failure to act violated the corporation's bylaws, the board's
omission is void, not voidable. (D.I. 138 at 8-9; D.I. 122, ~~ 30-40; D.I. 160 at 31-32).
Defendants assert actions that violate bylaws have been found to be voidable, and refer back to
the Michelson test for whether an act is void or voidable. (D .I. 143 at 9-1 0) (citing Lofland v.
DiSabatino, 1991 WL 138505, at *2-3 (Del. Ch. July 25, 1991)).
Lofland applies the Michelson test and provides that a defective meeting notice that
violated the corporation's bylaws was voidable, not void, because it was not alleged and did not
appear "that the defect was the result ofbad faith or an attempt to mislead the shareholders" and
the defect was "an innocent failure." !d. at *3 (citing Michelson, 407 A.2d at 218). Lofland
therefore refutes Hoch's argument that actions that violate a company's bylaws are per se void.
There is no dispute that the board had the authority to approve and slate proposed amendments to
the LTIP. Hoch provides no other reason why the votes would be void, and specifically, makes
no argument that they are ultra vires, fraudulent, or gifts or waste of corporate assets under
Michelson. (See D.I. 138, pp. 10-11 ). The alleged defects in slating matters for the 2010 and
2011 votes are voidable.
The next step of the analysis is whether the voidable actions could be, and were, ratified
by the board. Specifically, the issue is whether a voidable action- a corporate action within the
board's authority- that resulted in a shareholder vote can be ratified by the board alone, without
a new shareholder vote. Defendants assert that the board ratified its approval of the 2010 and
2011 amended LTIPs by performing or executing the amendments, as evidenced by a number of
corporate documents. (D.I. 128 at 19-20) (citing CarrAmerica Realty Corp. v. Kaidanow, 321
F.3d 165, 173 (D.C. Cir. 2003); Kalageorgi v. Victor Kamkin, Inc., 750 A.2d 531,539 (Del.Ch.
1999); Adams v. Calvarese Farms Maintenance Corp., 2010 WL 3944961, *9 (Del. Ch. Sept. 17,
2010)). Hoch claims that if the votes were voidable, Delaware law requires the votes be cured by
a new shareholder vote, not by the board. 10 (D.I. 138 at 8-13).
Defendants have not shown that Delaware law requires dismissal because the board
ratified the alleged defects in the 2010 and 2011 amended LTIPs. Defendants' cited casesKalageorgi, CarrAmerica, and Adams, supra- were all decided upon a complete factual record
(trial, summary judgment, and trial, respectively). Indeed, Defendants' argument that the board
implicitly ratified the defects depends upon proving the board ratified the votes as evidenced by
documents outside the pleadings. (D.I. 128 at 19, Ex. H, M, J, N, C, E, G). The issue ofwhether
the board implicitly11 ratified the defective actions relating to board approval and slating matters
for a vote is not properly decided at this motion to dismiss stage. Defendants' motion cannot be
granted on the basis that the board ratified the 2010 and 2011 shareholder votes.
Defendants' motion is denied in part. Regarding Counts II and III, Defendants have not
shown that Hoch is not entitled to relief based on the compensation being deductible and
precluding any harm to Qualcomm, even with the added argument relying on the nonbinding
IRA. Regarding Counts VIII and IX and XI through XIII, while the allegedly defective
shareholder votes are voidable, Defendants have not shown that dismissal is warranted because
the board could and did ratify those votes. Defendants have not shown any grounds for
Hoch also asserted as an alternative position that any board ratification failed because
the board did not take any ratifying action at a proper meeting. (D .I. 13 8 at 13; D .I. 160 at 29).
At oral argument, Hoch also asserted that there can be no ratification by the board because the
defect is a board omission, as opposed to a board action, and that board omissions cannot be
ratified. (D.I. 160 at 31-32). Because Defendants have not shown that any board action ratified
the allegedly defective shareholder votes, the Court need not reach these arguments.
There is no representation of any express ratifying act by the board.
dismissing Count X. The remainder of Defendants' motion, regarding Counts IV, V, and VII,
was granted at oral argument. An appropriate order will follow.