Swanson v. Weil et al

Filing 64

ORDER. ORDERED that Nominal Defendant Janus Capital Group, Inc.'s Motion to Dismiss 29 and the Individual Defendants' Motion to Dismiss 31 are GRANTED, and this case is DISMISSED, by Chief Judge Wiley Y. Daniel on 9/26/12.(sgrim)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Chief Judge Wiley Y. Daniel
Civil Action No. 11-cv-02142-WYD-KLM
CHARLES D. SWANSON, derivatively on behalf of Janus Capital Group Inc.,
Plaintiff,
v.
RICHARD M. WEIL;
STEVEN L. SCHEID;
TIMOTHY ARMOUR;
PAUL BALSER;
G. ANDREW COX;
JEFFREY DIERMEIER;
J. RICHARD FREDERICKS;
DEBORAH GATZEK;
LAWRENCE KOCHARD;
ROBERT PARRY;
JOCK PATTON;
GLENN SCHAFER;
JONATHAN D. COLEMAN;
GREGORY A. FROST;
JAMES P. GOFF; and
R. GIBSON SMITH,
Defendants,
JANUS CAPITAL GROUP INC.,
Nominal Defendant.

ORDER

I.

INTRODUCTION
This is a shareholder derivative action purportedly brought by Plaintiff Charles

D. Swanson [“Plaintiff”] on behalf of nominal defendant Janus Capital Group, Inc. [“Janus”]

against its directors and certain executive officers. The Amended Verified Shareholder
Derivative Complaint [hereinafter “complaint”] asserts claims of breach of fiduciary duty,
violation of the Securities Exchange Act of 1934 [“the Exchange Act”], and unjust
enrichment. These claims relate to the Janus Board’s approval of, and Janus executive
officers’ receipt of, 2010 executive compensation payments. Plaintiff alleges that these
payments were excessive and unwarranted in light of Janus’ dismal 2010 financial
performance. Plaintiff also alleges that the Board made false and misleading statements
in Janus’ Definitive Proxy Statement on Schedule 14A [“Proxy”].
There are two pending motions to dismiss before the Court: Nominal Defendant
Janus’ Motion to Dismiss and the Individual Defendants’ Motion to Dismiss. Janus seeks
to dismiss the Complaint on the basis that Plaintiff did not make a pre-litigation demand on
Janus’ Board of Directors and has allegedly failed to meet the stringent requirements for
showing how such a demand would have been futile.
The individual Defendants join Janus’ motion, and also seek to dismiss the
Complaint on the basis that the claims for breach of fiduciary duty, violation of section 14(A)
of the Exchange Act, and unjust enrichment fail to state a claim upon which relief can be
granted. They assert that “[t]he Complaint is one of over a dozen meritless, cookie-cutter
complaints filed across the country in the wake of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (“Dodd-Frank”), enacted by Congress on July 21, 2010.” (Memo.
of Law in Supp. of Individual Defs.’ Mot. to Dismiss at 1.) Dodd-Frank “requires that public
companies hold a non-binding advisory shareholder vote on executive compensation at
least once every three years (an advisory “say on pay” vote.) (Id.)
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Plaintiff contends in response that his complaint details facts demonstrating that
Janus’ Board has acted directly against the best interests of Janus’ shareholders and
harmed Janus by giving excessive compensation to its senior executives in violation of
Janus’ own stated pay for performance plan. He argues that not only has he sufficiently
pled that Defendants are liable, he has also alleged sufficient facts to establish that demand
on the Board is excused as futile (or at least to raise the requisite reasonable doubt that the
Board would impartially consider a demand). Finally, Plaintiff argues that he has alleged
sufficient facts to support his claims and that the individual Defendants’ motion to dismiss
pursuant to Rule 12(b)(6) should be denied.
II.

FACTUAL BACKGROUND
Plaintiff alleges that he “is and been a shareholder of Janus since at least January

2003, and has held his Janus stock from January 2003 to the present.” (Am. Verified
Compl. [“Compl.”] ¶ 19.) Janus is a Delaware corporation headquartered in Denver. (Id.
¶ 20.) Janus is a “publicly owned asset management holding company with approximately
$167.7 billion in assets under management.” (Id. ¶ 43.)
The Janus Board consists of twelve directors. (Compl. ¶¶ 21-33; Decl. of Angie
Young Kim in Supp. of Defs.’ Mot. to Dismiss [“Kim Decl.”], Ex. A at 6-9.)1 All are
independent directors (i.e., not employed by Janus) except Richard M. Weil [“Weil”], Janus’

1

While Janus and the Individual Defendants have referred to documents outside the pleadings in
connection with their motions, I can consider these documents without converting the motions into motions
for summary judgment. Janus’ Proxy filed with the Securities and Exchange Commission [“SEC”] on
March 16, 2011 (Ex. A to Kim Declaration) may be considered because the complaint refers to this
document and it is central to the claims. See Utah Gospel Mission v. Salt Lake City Corp., 425 F.3d 1249,
1253-54 (10th Cir. 2005). Further, I may take judicial notice of the authenticated certificates filed with the
Delaware Secretary of State (Exs. B-C to Kim Declaration) as they as public records. Tal v. Hogan, 453
F.3d 1244, 1264-65 & n. 24 (10th Cir. 2006).

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CEO. (Id.) In 2010, the Compensation Committee consisted of six independent directors
(Ex. A to Kim Decl. at 12; Compl. ¶¶ 23-25, 29, 31.) In addition to Weil, the other executive
defendants include: Jonathon D. Coleman [“Coleman”], Gregory A. Frost [“Frost”], James
P. Goff [“Goff”], and R. Gibson Smith [“Smith”]. (Compl. ¶¶ 34-38.)
On March 16, 2011, Janus filed its Proxy with the SEC. (Compl. ¶ 6; Ex. A to Kim
Decl.)

The Proxy provides 46 pages of information on Janus’ 2010 executive

compensation. (Ex. A to Kim Decl. at 28-73.) It states that the Compensation Committee
met six times during fiscal year 2010, and considered market data from the broader
investment management industry and Janus’ peer group to determine executive
compensation in 2010. (Id. at 13, 31, 33-34.) It also notes that the Committee conferred
with senior management, the human resources department, independent directors from the
Board, and an outside compensation consultant. (Id. at 31-32, 39.) According to the
Proxy, Janus’ compensation for its executives reflects Janus’ five key policies: (1)
alignment of executive interests with those of public and fund shareholders, (2) competitive
pay, (3) rewarding performance against financial and strategic objectives, (4) meritocracy,
and (5) risk management. (Id. at 33.) It also states that “[c]ompensation of all Janus
executives depends on a combination of Company and individual performance”. (Id.; see
also Compl. ¶ 50.)
Janus asserts that the total amount paid to four of five of Janus’ highest paid
executives (Frost, Coleman, Smith and Goff) decreased from 2009 to 2010. (Ex. A to Kim
Decl. at 49.) As for Weil, half of his 2010 compensation consisted of a $10 million
restricted stock award vesting over three years as an incentive to leave his prior
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employment. (Id. at 9, 47, 51; Compl. ¶ 3.) In evaluating Weil’s individual performance,
the Committee noted:
Mr. Weil’s leadership and experience assisted the Company in navigating
very difficult industry conditions and an unbalanced economic recovery.
Under his direction, Janus delivered strong financial results for the year
including profit growth, enhanced margins, a strengthened balance sheet and
positive net flows in fixed income and Perkins businesses.
(Ex. A to Kim Decl. at 39.)
In response, Plaintiff points out Janus stated in the Proxy that the Company’s “pay
for performance” policy is designed to “provide a strong and direct link between pay and
both Company and individual performance.” (See Compl. ¶¶ 50, 61, 97.) Additionally, the
Board represented that “the compensation of our most senior executives, those who have
the greatest ability to influence Janus’ performance, should be primarily based on Company
and individual performance – an approach that reinforces the alignment of interests
between our executives and our public and fund shareholders.” (Id. ¶¶ 50, 97; see also Ex.
A to Kim Decl. at 33.)
The complaint alleges that rather than adhere to Janus’ performance-based
executive compensation plan, the Board awarded Weil, Coleman, Frost, Goff and Smith
substantial bonuses for their underperformance. (Compl. ¶¶ 3-4, 51-56.) It is also alleged
that the Board drastically increased executive compensation in the aggregate by 41% for
2010, including more than $20 million to Weil upon his appointment on or about February
1, 2010, $10 million of which he received before even performing a single duty. (Id.) The
total compensation award of $40 million represented approximately 30% of Janus’ net
income and 2% of its average market value during 2010. (Id. ¶¶ 3, 12. )
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Further, it is alleged that the Board increased compensation notwithstanding the fact
that Janus’ stock price declined by 7% in 2010 and underperformed the Dow Jones by 16%
in 2010 at the hands of these executives. (Compl. ¶ 4.) The price of Janus’ stock has not
recovered and was down more than 50% from 2009. (Id. ¶ 2.) Weil admitted in a May
2011 article entitled “Janus CEO Weil faces uphill climb in 2nd year on job” that “[w]e know
that we haven’t yet delivered the results that we need to deliver.” (Id. ¶ 58.)2
As required by Dodd-Frank, the Proxy included a resolution asking Janus
shareholders to cast a non-binding advisory vote in favor of Janus’ 2010 executive
compensation. (Compl. ¶ 6.) At the annual shareholder meeting on April 29, 2011, a
majority of Janus shareholders voted against the approval of the 2010 executive
compensation. (Id. ¶ 7.) Plaintiff asserts that Janus’ shareholders soundly rejected the
Board’s 2010 executive compensation plan, with approximately 59.89 million shares voted
against the compensation recommended by the Board. (Id.) The Board has not since
rescinded Janus’ 2010 executive compensation. (Id. ¶ 10).
III.

ANALYSIS
Fed. R. Civ. P. 23.1 establishes the procedural requirements for bringing a

shareholder action in federal court. It requires a complainant to “state with particularity” any
“effort by the plaintiff to obtain the desired action from the directors” and “the reasons for
not obtaining the action or not making the effort.” Id. Here, Plaintiff did not make a demand

2

The complaint further alleges that an article in the New York Times on June 18, 2011, entitled
“Paychecks as Big as Tajikistan” (the “NY Times Article”), stated that Janus “topped the list” of companies
that compensated executives irrespective of performance, noting Janus was the worst offender of
companies examined. (Id. ¶ 12.) Moreover, it is alleged that in 2009, Glass, Lewis & Co. ranked Janus’
CEO as being the 15th most overpaid CEO in the country. (Id. ¶ 13.)

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on Janus’ Directors as he argues that such a demand would have been futile. To
determine the substantive law applicable to a failure to make a demand on directors in a
derivative action, federal courts must “apply the demand futility exception as it is defined
by the law of the State of incorporation.” Kenny v. Koenig, 426 F. Supp. 2d 1175, 1180
(D. Colo. 2006) (quotation omitted). Since Janus is incorporated in Delaware, “Delaware
law will determine whether [Swanson is] . . . excused from the demand requirement.” Id.
In support of their arguments regarding whether the futility exception applies, both
parties cite the case of Aronson v. Lewis, 473 A.2d 805 (Del. 1984), overruled in part on
other grounds by Brehm v. Eisner, 746 A.2d 244, 246 (Del. Supr. 2000). In Aronson, the
Delaware Supreme Court stated that “[a] cardinal precept of the General Corporation Law
of the State of Delaware is that directors, rather than shareholders, manage the business
and affairs of the corporation.” Id. at 811. It further noted that “[t]he existence and exercise
of this power carries with it certain fundamental fiduciary obligations to the corporation and
its shareholders.” Id.
Thus, under Delaware law a shareholder “is not powerless to challenge director
action which results in harm to the corporation”, as “[t]he derivative action developed in
equity to enable shareholders to sue in the corporation's name where those in control of
the company refused to assert a claim belonging to it.” Aronson, 473 A.2d at 811.
However, since a derivative action “impinges on the managerial freedom of directors”,
Delaware law imposes a demand requirement which “exists at the threshold, first to insure
that a stockholder exhausts his intracorporate remedies, and then to provide a safeguard
against strike suits.” Id. at 811-12.
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Under Delaware law, the right to pursue a derivative action is “limited to situations
where the stockholder had demanded that the directors pursue the corporate claim and
they have wrongfully refused to do so or where demand is excused because the directors
are incapable of making an impartial decision regarding such litigation.” Rales v. Blasband,
634 A.2d 927, 932 (Del. 1993). Demand may, however, be excused as futile “where
officers and directors are under an influence which sterilizes their discretion, [as] they
cannot be considered proper persons to conduct litigation on behalf of the corporation.”
Aronson, 473 A.2d at 814.
In determining whether a plaintiff has established demand futility in connection with
a board decision, the court “must decide whether, under the particularized facts alleged,
a reasonable doubt is created that: (1) the directors are disinterested and independent and
(2) the challenged transaction was otherwise the product of a valid exercise of business
judgment.” Aronson, 473 A.2d at 814. Thus, the court “must make two inquiries, one into
the independence and disinterestedness of the directors and the other into the substantive
nature of the challenged transaction and the board's approval thereof.” Id. A plaintiff that
meets either prong is excused from making a pre-suit demand. Weiss v. Swanson, 948
A.2d 433, 441 (Del. Ch. 2008). By contrast, where no specific board action is alleged, a
plaintiff must plead “particularized facts creating a reasonable doubt that a majority of the
Board would be disinterested or independent in making a decision on a demand” as of the
time the complaint is filed, i.e., the first part of Aronson. Rales, 634 A.2d at 933-34.
Demand futility is “inextricably bound to issues of business judgment.” Aronson, 473
A.2d at 812, 814. “The business judgment rule is an acknowledgment of the managerial
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prerogatives of Delaware directors. . . . .” Id. at 812. “It is a presumption that in making a
business decision the directors of a corporation acted on an informed basis, in good faith
and in the honest belief that the action taken was in the best interests of the company”. Id.
As explained recently by the Delaware Court of Chancery, the business judgment rule “is
respectful to director prerogatives to manage the business of a corporation; in cases where
it applies, courts must give ‘great deference’ to directors’ decisions and, as long as the
Court can discern a rational business purpose for the decision, it must not ‘invalidate the
decision. . . examine its reasonableness, [or] substitute [its] views for those of the board.’
In re Smurfit-Stone Container Corp. S’holder Litig, C.A. No. 6164, 2011 WL 2028076, at
*11 (Del. Ch. May 24, 2011) (quotation omitted). The burden is on the party challenging
the decision [of the Board] to establish facts rebutting the presumption.” Aronson, 473 A.2d
at 812.
Since Aronson, the Delaware courts have made clear that pleadings in derivative
suits “must comply with stringent requirements of factual particularity.” Brehm, 746 A.2d
at 246. Indeed, as Aronson stated, “[u]nless facts are alleged with particularity to overcome
the presumptions of independence and a proper exercise of business judgment, in which
case the directors could not be expected to sue themselves, a bare claim of this sort raises
no legally cognizable issue under Delaware corporate law.” Id.
In the case at hand, I first must determine whether Plaintiff has presented
particularized factual allegations that create a reason to doubt that the Janus Board would
consider the demand in a disinterested, impartial manner. Aronson, 473 A.2d at 814. The
complaint alleges in that regard that “the entire Janus Board is interested in the outcome
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of this litigation as each of the directors is liable for breaches of their fiduciary duties
through their violation of Janus’s pay-for-performance policy.” (Compl. ¶ 87.) Plaintiff also
alleges that “Defendants Patton, Armour, Balser, Cox, and Kochard are interested in a
demand as a result of their conduct on the Compensation Committee.” (Id. ¶ 92.) Plaintiff
has not, however, alleged any facts to show that any director other than Weil, who received
compensation from the Board’s decision, stood to benefit from, or lacked independence to
consider, the 2010 executive compensation decisions.3 Thus, he has failed to create a
reasonable doubt through particularized facts that a majority of the Board was actually
“tainted by interest” or “lacked independence”, or that the directors were dominated or
controlled in some manner. Aronson, 473 A.2d at 814, 818; Seminaris v. Landa, 662 A.2d
1350, 1354 (Del. Ch. 1995). Instead, his allegations are conclusory on this issue.4
Plaintiff also argues, however, that he has presented facts which raise a reasonable
doubt as to the disinterestedness of the Board because he demonstrated that it is subject
to a substantial likelihood of liability for breaches of fiduciary duty and/or loyalty related to
the 2010 executive compensation program. He asserts that the approval of the executive
compensation program despite the shareholders’ express rejection of it “constituted an
‘intentional dereliction of duty’ and ‘a conscious disregard for one’s responsibilities,’ each

3

Weil himself was not a member of the Compensation Committee.

4

Plaintiff has, in fact, alleged a number of conclusory allegations in support of his assertion that
demand is excused based on futility. For example, he alleges that demand is excused as “a majority of
the Board either was at fault for the misconduct described herein and/or is liable for the misconduct
described herein”, and are thus “disabled as matter of law from objectively considering any pre-suit
demand. . . .” (Compl. ¶ 93.) Further, he alleges that “the Board has openly demonstrated its hostility to
this action” and that “the directors have exhibited antipathy towards the relief sought herein . . . .” (Id.
¶¶ 88, 95.)

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of which is ‘properly treated as a non-exculpable, non-indemnifiable violation of the
fiduciary duty to act in good faith.’” (Pl.’s Br. in Opp’n to Janus Capital Group’s Mot. to
Dismiss [Opp’n to Janus’ Mot.”] at 10) (quotations omitted.)
In support of his argument, Swanson cites Ryan v. Gifford, 918 A.2d 341, 355 (Del.
Ch. 2007), which held that “[d]irectors who are sued have a disabling interest for pre-suit
demand when ‘the potential for liability is not a mere threat but instead may rise to a
substantial likelihood’”. See also Seminaris, 662 A.2d at 1354. This ties into the business
judgment rule, related to the second prong of Aronson, since “a showing that the board
breached either its fiduciary duty of due care or its fiduciary duty of loyalty may rebut” the
“‘presumption that in making a business decision the directors . . .acted on an informed
basis, in good faith and in the honest belief that the action taken was in the best interest
of the company’”. Ryan, 918 A.2d at 357 (quoting Aronson, 473 A.2d at 812). Indeed, a
complaint that “alleges bad faith and, therefore, a breach of the duty of loyalty” is “sufficient
to rebut the business judgment rule and survive a motion to dismiss.” Id.
Thus, I turn to the factual allegations to determine whether Plaintiff has shown a
substantial likelihood of merits on his claims. I also analyze whether Plaintiff has alleged
particularized facts which create a reasonable doubt that the challenged transaction was
otherwise the product of a valid exercise of business judgment. On the latter issue, I note
that Plaintiff 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.” In Re JP Morgan Chase & Co. S’holder Litig.,
906 A.2d 808, 824 (Del. Ch. 2005).
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I first find that Plaintiff has not alleged facts creating a reasonable doubt that the
Janus Board was adequately informed in making the decision. Thus, Plaintiff has not
shown that during the informational component of the directors' decisionmaking process,
Janus’ directors failed to consider all material information reasonably available. See
Brehm, 746 A.2d at 259. Indeed, he has not even presented a challenged on this issue.
Thus, I turn to Plaintiff’s actual assertions.
Plaintiff asserts that the Board granted top executive pay raises of 41% in 2010 at
a time when the Company’s stock price was declining. He argues in that regard that “Janus
stock declined 7% in 2010 and underperformed the Dow Jones (which increased by 9%),
by 16% in 2010 at the hands of these executives.” (Opp’n to Janus’ Mot. at 1.) Plaintiff
also asserts that Janus’ performance was markedly negative, and that the Board
nevertheless granted an extravagant outlay of assets equal to approximately 30% of the
Company’s total net income for the year. (See id.; Compl. ¶ 86).
Janus responds that total compensation for the top five executives increased by
34%, not by 41% as Plaintiff claims. Further, Plaintiff has not disputed Janus’ assertion
that this increase is almost entirely attributable to the one-time signing bonus for Weil. Half
of Weil’s 2010 compensation consisted of a $10 million restricted stock award vesting over
three years as an incentive to leave his prior employment. Excluding this one-time award,
Janus has shown that compensation for the top five executives increased by less than 1%
in 2010. And the total amount paid to four out of five of Janus’ highest paid executives
(Frost, Coleman, Smith, and Goff ) decreased from 2009 to 2010. (Ex. A to Kim Decl. at
47.)
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Nonetheless, even if I assume Plaintiff’s numbers are accurate, I find that they fail
to show a substantial likelihood of liability or create a reasonable doubt that the challenged
transactions were the product of a valid exercise of business judgment. Plaintiff relies
primarily on the case of NECA-IBEW Pension Fund ex rel. Cincinnati Bell, Inc. v. Cox, No.
11-cv-451, 2011 WL 4383368 (S.D. Ohio Sept. 20, 2011), arguing that the directors’
actions in this case mirror those at issue in that case. In Cincinnati Bell, the court found at
the dismissal stage under similar facts that the plaintiff’s allegations “create a reasonable
doubt that the challenged transaction [related to 2010 executive pay hikes] is the result of
a valid business judgment” and excused a demand on the board as futile. Id. at *3-45
I find that the Cincinnati Bell case is not persuasive and decline to follow its holding.
First, its validity has been called into doubt because the court apparently lacked subject
matter jurisdiction and the plaintiff failed to disclose contrary authority in response to the
court’s specific inquiry. See Plumbers Local No. 137 Pension Fund v. Davis, No. 03:11633, 2012 WL 104776, at *5 (D. Or. Jan. 11, 2012), adopted as the district court’s opinion,
2012 WL 602321 (D. Or. Feb. 23, 2012). More importantly, it was analyzed under Ohio
law, “which is different from Delaware law”, id. at *7, and I find that Delaware law does not
support its holding.

5

As to futility, the court stated, “[g]iven that the director defendants devised the challenged
compensation, approved the compensation, recommended shareholder approval of the compensation,
and suffered a negative shareholder vote on the compensation, plaintiff has demonstrated sufficient facts
to show that there is reason to doubt these same directors could exercise their independent business
judgment over whether to bring suit against themselves for breach of fiduciary duty in awarding the
challenged compensation. Id. at *4. The court concluded, “at the dismissal stage, that plaintiffs’
allegations create a reasonable doubt that the challenged transaction is the result of a valid business
judgment, and, accordingly, the directors possess a disqualifying interest sufficient to render pre-suit
demand futile and hence unnecessary.” Id.

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Delaware courts hold “that a board’s decision on executive compensation is entitled
to great deference” as “the size and structure of executive compensation are inherently
matters of judgment.” Brehm, 746 A.2d at 263. “It is the essence of business judgment for
a board to determine if ‘a particular individual warrant[s] large amounts of money, whether
in the form of current salary or severance provisions.’” Id. (quotations and internal
quotation marks omitted). Thus, if there “‘is any substantial consideration received by the
corporation, and if there is a good faith judgment that in the circumstances the transaction
is worthwhile, there should be no finding of waste, even if the fact finder would conclude
ex post that the transaction was unreasonably risky.” Id. (emphasis in original) (quotation
omitted). While there are “outer limits” to this rule, “they are confined to unconscionable
cases where directors irrationally squander or give away corporate assets.” Id.
Thus, under Delaware law, the fact that executives “received substantial salaries
during a period when [the company] was performing poorly would not, without more,
ordinarily sustain a claim.” Prod. Res. Grp., L.L.C. v. NCT Grp. Inc., 863 A.2d 772, 799
(Del. 2004). Consistent with this, pleadings claiming that no person “acting in good faith
on behalf of [the company] consistently could approve the payment of between 44% and
48% of net revenues to [the company’s] employees year in and year out . . . f[e]ll far short
of creating a reasonable doubt that the Director Defendants” failed to exercise their
business judgment. In Re Goldman Sachs Grp. Inc. S’holder Litig., No. 5215, 2011 WL
4826104, at *13 (Del. Ch. Oct. 12, 2011). Also, the fact that the total compensation paid
to the top five executives of a company increased in 2010 due the hire of a new CEO who
was awarded “an extremely lucrative contract” has also been held to be unremarkable by
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the Delaware court, since the board “determined it had to offer an expensive compensation
package to attract [the CEO] and . . . determined he would be valuable to the Company.“
Brehm, 746 A.2d at 250, 263-64.
I also find persuasive the Davis case from the federal district court in Oregon which
applied Delaware law to a 2010 executive compensation program. 2012 WL 104776, at
*5. That program “increased the compensation for each executive officer by approximately
60 up to 160 percent” even though the company’s “return to shareholders was a negative
7.7 percent” that year. Id. at *2. The court held that the plaintiffs failed to meet their burden
with respect to the presuit demand requirement and the claims were dismissed. It noted
“that compensation determinations are typically within the business judgment of the board”
and found “that the Plaintiffs' allegations regarding the board's compensation decision in
this case are not sufficient to overcome the presumption that the board exercised business
judgment.” Id. at *7. In so finding, it noted that the plaintiffs' “essential position is that if a
simple comparison reveals a level of compensation inconsistent with general corporate
performance, the business judgment presumption is necessarily overcome, a position that
is unsupported by the applicable standards.” Id.6
Based on the foregoing authority, I reject Plaintiff’s argument that the executive
compensation paid in 2010 when a period when the company’s stock price was declining
and the company’s performance was negative excuses a demand on the Janus Board.

6

Similarly, in Teamsters Local 237 Additional Sec. Benefit Fund v. McCarthy, No. 2011-cv197841, 2011 WL 4836230 (Ga. Sup. Ct. Sept. 16, 2011), a case applying Delaware law, the court found
that demand was not excused where the company gave pay raises in 2010 to its four most highly
compensated executives, even though it suffered a net loss of $34 million and annual share price return of
-17.23%, both of which plaintiffs alleged fell below industry averages.

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Plaintiff also asserts, however, that the facts alleged in the complaint demonstrate
that the Board acted directly against the best interests of Janus’ shareholders and harmed
Janus by giving excessive compensation to its senior executives in violation of Janus’ own
stated pay for performance plan, i.e., that it would reward Janus’ executives only if they
achieved “strong performance against financial and strategic (non-financial) objectives”.
(See Compl. ¶¶ 86, 87, 92.) He further asserts that the Board “misrepresented to
shareholders that [Janus] supposedly pays for performance while nevertheless granting
lavish awards in the face of failure” (Opp’n to Janus’ Mot. at 9), and made
misrepresentations in Janus’ 2011 Proxy. ( Compl. ¶ 87.) This argument is likewise
unavailing, both in terms of showing a substantial likelihood of liability as well as creating
a reasonable doubt that the challenged transaction is the result of a valid business
judgment.
First, as noted by Janus, the Proxy states that the Compensation Committee never
equated “performance” solely with Janus’ share price, but rather based compensation on
a number of considerations. (Ex. A to Kim Decl. at 28-73.) Second, while Plaintiff attempts
to equate “performance” with Janus’ stock price, he ignores the actual metrics for both
Company and individual performance. For Janus, these “performance goals and metrics
for 2010 focused on [its] success as measured by Company profits, net flows and [its]
performance against several strategic initiatives[.]” (Id. at 37-38.) For each individual, the
Committee also considered numerous factors. (Id. at 37-38.) Plaintiff has not pleaded
particularized facts to raise any doubt that the Committee applied these metrics in good
faith in awarding the 2010 compensation, or that the criteria were mischaracterized.
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I again find the Davis case instructive on that issue. In rejecting a similar argument,
Davis noted that “the board's actions do not directly defy or violate any Umpqua bylaw, any
shareholder agreement, or any legally mandated disclosure or reporting requirement. . .
[i]nstead, Plaintiffs rely on a policy, pay for performance, that does not establish a binding
standard for compensation.” 2012 WL 104776, at *7. That analysis applies equally here.
Davis also found that an “allegation that the board violated the pay for performance policy”
or that the board made a material misrepresentation with respect to pay for performance
“is not sufficient to overcome the business judgment presumption.” Id. at *8. While it noted
that in specific instances “the presumption may be overcome where a board of directors,
although acting within the letter of a stockholder-approved plan, engages in deceptive
conduct or misrepresents the true nature of its actions”, it found that those facts did not
exist in that case and that the plaintiffs did not adequately plead demand futility. Id. It
stated on that issue:
. . . that the board's compensation decision does not square with Plaintiffs'
interpretation of the pay for performance policy is not the equivalent of an
allegation that the board intentionally misled shareholders that it would follow
the policy when, instead, it had no intention of doing so. Again, there must be
particularized facts supporting reasonable doubt that the board acted in good
faith or upon sufficient information. Here, the complaint's allegations do not
dispel the presumption that the board's compensation decision can be
attributed to any rational business purpose. For these reasons, the
challenged action is protected by the business judgment rule for purposes of
presuit demand analysis and Plaintiff fails to meet the second Aronson prong.
Id. Again, I find this analysis equally applicable here.
Plaintiff’s disclosure claims fare no better, as he has not shown a substantial
likelihood of liability as to same. Whether pleaded as a breach of fiduciary duty or a

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violation of Section 14(a) of the Exchange Act, Plaintiff must plead a material misstatement
or omission. See Loudon v. Archer-Daniels-Midland Co., 700 A.2d 135, 140 (Del. 1997).
While Plaintiff alleges that the Board “falsely stated that its compensation committee
emphasized ‘pay for performance”, “failed to disclose that the 2010 executive
compensation had no meaningful relationship to the Company’s performance”; and
“conceal[ed] the fact that the Company was overpaying its directors, officers, and
employees via compensation plans premised on an illusory ‘pay for performance’ executive
compensation scheme” in the Proxy (Compl.¶¶ 9, 60-61, 106), he has not plead facts that
create a reasonable doubt that the Committee violated its own policies and metrics in
awarding performance. Further, he has failed to raise a reasonable doubt that the Board
applied these metrics in bad faith in awarding the 2010 compensation. Finally, the Proxy
did not represent that share price was the sole measure of performance relevant to
executive compensation. See O’Reilly v. Transworld Healthcare, Inc., 945 A.2d 902,
925 (Del. Ch. 1999) (“[m]ischaracterizations of the Proxy Statement cannot support a claim
for violation of the fiduciary duty of disclosure”).
Plaintiff argues, however, that he need not make a demand or show a substantial
likelihood of liability in connection with his Section 14(a) claim because whether or not to
comply with proxy rules is not a matter of business judgment, citing Seinfeld v. Barrett, Civ.
A. No. 05-298-JFF, 2006 WL 890909, at *3 (D. Del. March 31, 2006) and In Re
Westinghouse Sec. Litig., 832 F. Supp. 989, 997-98 (W. D. Pa. 1993). Seinfeld does not,
however, say that demand is per se excused for a Section 14(a) claim. Instead, in
Seinfeld, the Court concluded that demand was excused under the second part of the
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Aronson test where the plaintiff alleged that defendants falsely promised shareholders tax
deductions. 2006 WL 890909, at *3. To the extent Westinghouse takes a different
approach, the weight of authority does not support this holding. See In re CNET Networks,
Inc. S’holder Derivative Litig., 483 F. Supp. 2d 947, 966 (N.D. Cal. 2007) (citing cases);
Britton v. Parker, Nos. 06-cv-01797, 06-cv-1922, 06-cv-02017, 2009 WL 3158133, at *6 n.8
(D. Colo. Sept. 23, 2009); In re IAC/InterActiveCorp Sec. Litig., 478 F. Supp. 2d 574, 606
n.17 (S.D.N.Y. 2007).7
Plaintiff also asserts that Defendants should not be rewarded for Janus’ “poor
performance. Moreover, they should not be permitted to rely on broad, subjective factors,
as here, to escape liability.” (Pl.’s Br. in Opp’n to Individual Defs.’ Mot. at 12 n.8.) Again,
Plaintiff seeks to avoid the mandates of Delaware law. As the Court of Chancery stated
in rejecting the argument that Goldman Sachs’ compensation program may not be perfectly
aligned with shareholder interests: “This may be correct, but it is irrelevant. The fact that
the Plaintiffs may desire a different compensation scheme does not indicate that equitable
relief is warranted.” Goldman, 2011 WL 4826104, at *14; see also Brehm, 746 A.2d at 266
7

I also agree with the Individual Defendant that Plaintiff has failed to show loss causation in
connection with his Exchange Act claim. See Dominick v. Marcove, 809 F. Supp. 805, 807 (D. Colo.
1992) (“To prove that a proxy misstatement caused a shareholder’s damages the proxy solicitation must
have been the essential causal link in accomplishing the proposed action”.). To show loss causation, the
proxy must solicit “votes legally required to authorize the action proposed.” Va. Bankshares, Inc. v.
Sandberg, 501 U.S. 1083, 1102 (1991); see also Dominick, 809 F. Supp. at 807 (essential link cannot be
proven where approval by minority shareholders not legally required to authorize transaction). Here, the
advisory non-binding ‘say on pay” votes solicited by the Proxy were not legally required to authorize the
award of the executive compensation, the only loss Plaintiff claims. Plaintiff does not dispute this.
Instead, he argues the Proxy was the “essential link” that caused the “harm of a misinformed shareholder
vote on executive compensation.” (Opp’n to Indiv. Def.’s Mot. at 18.) But there is no such “harm” because
the vote was purely advisory – no corporate action was authorized. In addition, Plaintiff fails to explain
how the allegedly misleading statements tainted the vote given that shareholders voted against the
proposal. In other words, Plaintiff has failed to plead that misrepresentations in the Proxy caused the loss.
See Gen. Elec. Co. v. Cathcart, 980 F.2d 927, 932-33 (3d Cir. 1992); Britton v. Parker, Nos. 06-cv-01797,
06-cv-1922, 06-cv-02017, 2009 WL 3158133, at *11 (D. Colo. Sept. 23, 2009).

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(“mere disagreement cannot serve as grounds for imposing liability based on alleged
breaches of fiduciary duty”).
Thus, I turn to Plaintiff’s argument that the adverse vote by Janus’ shareholders is
“powerful evidence” that the Directors “breached their existing, well-established fiduciary
duties of loyalty and good faith.” (Opp’n to Janus’ Mot. at 8; see also Compl. ¶¶ 88, 92, 9495.) Dodd-Frank expressly states, however, that such a vote may not be construed “to
create or imply any change” to existing fiduciary duties. 15 U.S.C. § 78n-1(c)(2). In
rejecting a similar argument, a Georgia court stated, “[g]iven that Delaware law, which
Dodd-Frank explicitly declined to alter, places authority to set executive compensation with
corporate directors, not shareholders, this Court will not conclude that an adverse say on
pay vote alone suffices to rebut the presumption of business judgment protection.”
Teamsters Local 237 Additional Sec. Benefit Fund v. McCarthy, No. 2011-cv-197841, 2011
WL 4836230 (Ga. Sup. Ct. Sept. 16, 2011).
It is also argued that the Board faces a substantial likelihood of liability for
“maintaining the awards despite shareholders’ demand to rescind them.” (Opp’n to Janus
Mot. at 9-10; see also Compl. ¶¶ 88, 92, 95.) Plaintiff points to the fact that Janus’
shareholders soundly rejected the Board’s 2010 executive compensation plan, with
approximately 58% voting “against” this at Janus’ first Dodd-Frank mandated “say-on-pay”
vote on April 29, 2011. This allegedly places Janus as one of only a tiny handful of
companies to have its Board’s executive compensation plan voted down by shareholders.
(See Opp’n to Janus Mot. at 5.) According to Plaintiff, “[t]his resounding ‘no’ vote,
combined with the decline in Janus’ stock value under the stewardship of the Executive
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Defendants, powerfully evidences that the Board acted against the best interests of Janus
and its shareholders in hiking the executives’ 2010 pay, and, thus, breached its fiduciary
duties of loyalty and good faith.” (Id.) It also confirms, according to Plaintiff, that the Janus
Board is not entitled to the business judgment presumption. (Id.)
I also reject this argument, as it contradicts the express language of Dodd-Frank and
well-established Delaware law. Dodd-Frank states that a shareholder vote does not
“overrul[e]” a decision by a board or “create or imply any additional fiduciary duties” to
rescind or otherwise respond to a say on pay vote. See 15 U.S.C. § 78n-1(c). Given this
mandate, the McCarthy court held that “allegations that Beazer’s Board has not ‘rescinded’
the challenged 2010 executive compensation since learning the results of the [negative]
say on pay vote” do not excuse demand. 2011 WL 4836230 at § III.B.2.b. Similarly, the
Davis case rejected the plaintiffs’ argument “that the shareholder vote rejecting the
compensation package is prima facie evidence that the board's action was not in the
corporation or shareholders' best interests. . . .” 2012 WL 104776, at *7-8; see also Jacobs
Eng’g Group, Inc. Consol. S’holder Derivative Litig., No. BC454543 (Cal. Sup. Ct. March
6, 2012), Ex. L to Def.’s Notice of Additional Supplemental Authority.
I also note that the result of the advisory say on pay vote cannot rebut the business
judgment presumption because it occurred after the Board approved the 2010 executive
compensation. Delaware law forbids using events subsequent to the challenged action to
second guess a board’s business judgment. See In Re Cox Radio S’holders Litig., No.
CIV. A 4461, 2010 WL 1806616, at *14 (Del. Ch. May 6, 2010), aff’d, 9 A.2d 475 (2010);
Litt v. Wycoff, No. Civ.A. 19083, 2003 WL 1794734, at *9 (Del. Ch. March 28, 2003). As
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noted in McCarthy, the outcome of a say on pay vote, “which was not known when the
challenged decisions were made, does not suggest that in making those decisions, the
directors failed to act on an informed basis, in good faith, and in the honest belief that the
decisions were in [the company’s] best interests.” 2011 WL 4386238, at § III.B.2.a.
Delaware law also makes clear that shareholder disagreement with a board’s
business judgment does not suffice to state a breach of fiduciary duty. Directors “may take
good faith actions they believe will benefit stockholders, even if they realize that the
stockholders do not agree with them.” In re Lear Corp. S’holder Litig., 967 A.2d 640, 655
(Del. Ch. 2008). This is true even where “many, presumably most, shareholders would
prefer the board to do otherwise than it has done.” Paramount Commc’ns Inc. v. Time Inc.,
Civ. A. Nos. 10866, 10670, 10935, 1989 WL 79880, at *30 (Del. Ch. July 14, 1989), aff’d,
571 A.2d 1140 (Del. 1989); see also Am. Int’l Rent A Car, Inc. v. Cross, No. 7583, 1984 WL
8204, at *3 (Del. Ch. May 9, 1984) (no per se breach of fiduciary duty “for the Board to act
in a manner which it may believe is contrary to the wishes of a majority of the company’s
stockholders”). This is because “directors, rather than shareholders, manage the business
and affairs of the corporation.” Aronson, 473 A.2d at 811.
Plaintiff further alleges that demand on the Board should be excused “as each of the
directors has been named as a defendant in this action. . . .” (Compl. ¶ 87), and that “a
majority of the Board either was at fault for the misconduct described herein and/or is liable
for the misconduct described herein.” (Id. ¶ 93.) As such, Plaintiff claims that “the Board
members are disabled as a matter of law from objectively considering any pre-suit

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demand, rendering demand futile and excused.” (Id.) I find that these allegations are
conclusory and are insufficient to meet the demand requirement.
“In Delaware mere directorial control of a transaction, absent particularized facts
supporting a breach of fiduciary duty claim, or otherwise establishing the lack of
independence or disinterestedness of a majority of directors, is insufficient to excuse
demand.” Aronson, 473 A.2d at 817. The Aronson court noted that demand requirements
“would be rendered meaningless if “any board approval of a challenged transaction
automatically connotes ‘hostile interest’ and ‘guilty participation’ by directors. Id. at 814.
Further, the “mere threat” of personal liability by a director in the derivative action does not
render a director interested. Seminaris, 662 A.2d at 1354.
Again I find the Davis case persuasive on this issue. “The implicit premise of the
plaintiffs’ argument in Davis was “that the self-interest sufficient to trigger demand futility
is present whenever board members face the possibility of a lawsuit filed against them in
response to a decision or other board action.” Davis, 2012 WL 104776 at *5. The court
noted that under the plaintiff’s reasoning “the fact that presuit demand is itself suggestive
of impending liability is sufficient to create the type of self-interest that triggers the demand
futility exception.” Id. Davis rejected that argument, stating:
This 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. Such a result would effectively
erase the demand requirement and negate its purpose.
Id.

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Finally, Plaintiff argues that a reasonable doubt sufficient to rebut the business
judgment rule is created where, as here, Defendants have effectively conceded that
demand is futile by failing to respond to a shareholder demand (by a different Janus
shareholder).

This demand was allegedly made several months ago based upon

substantially similar state law claims. Again, I reject this argument. First, this allegation
is not made in the complaint, and Plaintiff “cannot rectify [his] pleading deficiencies by
asserting new facts in an opposition to a motion to dismiss.” Smith v. Pizza Hut, Inc., 694
F. Supp. 2d 1227, 1230 (D. Colo. 2010); see also Bauchman ex rel. Bauchman v. W. High
Sch., 132 F.3d 542, 550 (10th Cir. 1997). Second, it is clear from Janus’ motion and reply
that it does not concede the issue of futility. Finally and importantly, Delaware courts have
made clear that an earlier demand made by a different shareholder does not excuse a
demand on the board by a plaintiff in a derivative suit. Kaplan v. Peat, Marwick, Mitchell
& Co., 540 A.2d 726, 731 n.2 (Del. 1988); Decker v. Clausen, Civ. A. Nos. 10,684, 10,685,
1989 WL 133617, at *2 (Del. Ch. Nov. 6, 1989); See also In re HQ Sustainable Maritime
Indus., Inc. Derivative Litig., 826 F. Supp. 2d 1256, 1260 n. 4 (W.D. Wash. 2011). Indeed,
as noted earlier, Delaware law forbids using events subsequent to the challenged action
to second guess a board’s business judgment. Cox Radio S’holders Litig., 2010 WL
1806616, at *14.
For all of the reasons discussed above, I find that this is not “the rare case,
envisioned by the [Delaware] Supreme Court in Aronson, where defendants’ actions were
so egregious that a substantial likelihood of director liability exists.” Seminaris 662 A.2d at
1354. I also find that the facts pled by Plaintiff in the complaint fail to raise a reasonable
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doubt that the challenged transactions related to the Board’s decision on executive
compensation in 2010 “was otherwise the product of a valid exercise of business
judgment.” Aronson, 473 A.2d at 814. This is not one of those “extreme cases in which
despite the appearance of independence and disinterest a decision is so extreme or
curious as to itself raise a legitimate ground to justify further inquiry and judicial review.’”
Highland Legacy Ltd. v. Singer, No. Civ.A. 1566-N, 2006 WL 741939, at *7 (Del. Ch. March
17, 2006).
IV.

CONCLUSION
Based upon the foregoing, it is
ORDERED that Nominal Defendant Janus Capital Group, Inc.’s Motion to Dismiss

(ECF No. 29) and the Individual Defendants’ Motion to Dismiss (ECF No. 31) are
GRANTED, and this case is DISMISSED.
Dated: September 26, 2012.
BY THE COURT:

s/ Wiley Y. Daniel
WILEY Y. DANIEL,
CHIEF UNITED STATES DISTRICT JUDGE

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