Freedman v. Mulva et al

Filing 68

MEMORANDUM ORDER - OVERRULING Plaintiff's Objections and ADOPTING the Report and Recommendations - re 42 MOTION to Dismiss for Failure to State a Claim ***Civil Case Terminated. Signed by Judge Leonard P. Stark on 12/30/14. (rwc)

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF DELAWARE

IN RE CONOCOPHILLIPS
DERlV ATIVE LITIGATION

C.A. No. 11-686-LPS-SRF
(Consolidated Action)

MEMORANDUM ORDER
WHEREAS, Magistrate Judge Sherry R. Fallon issued a Report and Recommendation
(D.l. 62) ("the Report") recommending that the Court grant the motion to dismiss (D.I. 42) filed
by James 1. Mulva, Kenneth M. Duberstein, Ruth R. Harkin, Harold W. McGraw III, Robert A.
Niblock, Harald 1. Norvik, William K. Reilly, Victoria J. Tschinkel, Kathryn C. Turner, William
E. Wade Jr., Richard L. Armitage, Richard H. Auchinleck, James E. Copeland Jr., Willie C.W.

Chiang, Greg C. Garland, Alan 1. Hirschberg, Ryan M. Lance, and ConocoPhillips (collectively,
the "Defendants");
WHEREAS, Plaintiffs Robert Freedman and Patricia Swords ("Plaintiffs") filed
objections to the Report on June 30, 2014 (D.1. 66) ("Objections");
WHEREAS, Defendants responded to the Objections on September 12,2014 (D.l. 67);
WHEREAS, the Court has reviewed the Report de novo, see 28 U.S.C. § 636(b)(1)(B);
Fed. R. Civ. P. 72(b)(3);
NOW, THEREFORE, IT IS HEREBY ORDERED that the Objections are OVERRULED
and the Report is ADOPTED.
1.

Magistrate Judge Fallon recommended granting Defendants' motion to dismiss

because Plaintiffs failed to satisfy the demand requirement, which is a prerequisite to his
derivative suit. (See Report at 10; see also Fed. R. Civ. Proc. 23.1) Judge Fallon relied on the

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Delaware Supreme Court's decision in Aronson v. Lewis, 473 A.2d 805 (Del. 1984), overruled in
part on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). Under Aronson, whether

demand is required is based on:
[t]wo related but distinct questions: (1) whether threshold
presumptions of director disinterest or independence are rebutted
by well-pleaded facts; and, if not, (2) whether the complaint pleads
particularized facts sufficient to create a reasonable doubt that the
challenged transaction was the product of a valid exercise of
business judgment.
Levine v. Smith, 591 A.2d 194,205 (Del. 1991), overruled in part on other grounds by Brehm v.
Eisner, 746 A.2d 244 (Del. 2000). Demand is excused if either condition is satisfied. See In re
J P. Morgan Chase & Co. S 'holder Lirig., 906 A.2d 808, 820 (Del. Ch. 2005).

2.

The Report concluded that the Defendant directors are disinterested and

independent because they have no financial interest in compensation awards to executives under
the ConocoPhillips 2011 Omnibus Stock and Performance Incentive Plan (the "2011 Plan").
(Report at 7) In addition, the Report stated that the business judgment rule applied because
Plaintiff failed to allege a material misstatement or omission in the proxy statement distributed to
ConocoPhillips' shareholders in preparation for the annual meeting held on May II, 2011 (the
"Proxy Statement") constituting a disclosure violation. (Id. at 8-9) Finally, even if the requisite
misstatement or omission was adequately alleged in the Complaint, the Report found that the
business judgment rule still applies because Plaintiffs did not allege that the directors made a
knowing and intentional decision to violate the terms of the 2011 Plan. (Id. at 10)
3.

The Court agrees with the Report that Plaintiffs only challenge the compensation

of executives, not compensation of the Defendant directors themselves. Plaintiffs argue that in
this respect the Report misidentifies the challenged transaction. (Objections at 2) Specifically,
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Plaintiffs contend that their Complaint challenges the non-tax-deductibility of compensation
under the entire 2011 Plan, including compensation to directors that allegedly far exceeded usual
and customary directors' fees. (ld. at 2-3) Defendants respond that Plaintiffs are trying to
recharacterize the Complaint to include the compensation of directors under the 20 II Plan. (D.l.
67 at 5) As Defendants correctly state, the Complaint repeatedly refers to executive
compensation (e.g., D.L 1 at ~ 19) ("Wrongful Acts and Omissions") and specifically seeks relief
with respect to executive compensation (e.g., id. at '11'1161, 56). By contrast, the Complaint fails to
refer even once to director compensation. (See D.I. 67 at 5) ("Plaintiffs' claims relate only to
their highly speculative assertion that certain executive compensation - in which only one of the
thirteen directors has any interest - will not be tax deductible, and that the disclosure relating to
the 201 I Plan was therefore misleading.") Thus, the Complaint fails to allege that the director
Defendants were interested in a manner that would excuse demand. (See also id. at 5-6 n.4)
(addressing directors' fees argument)l
4.

Nor have Plaintiffs shown that demand is excused based on Aronson's second

prong. For this contention, Plaintiffs rely on their nondisclosure claims. To adequately plead a
proxy statement nondisclosure claim, a complaint must allege with particularity "which
disclosures were misleading, when the Company was obligated to make disclosures, what
specifically the [c]ompany was obligated to disclose, and how the [c]ompany failed to do so." In

re Citigroup Inc. S'holder Derivative Litig., 964 A2d 106, 133 (Del. Ch. 2009). Plaintiff relies
on the portion of the Proxy Statement which states that the purpose of the vote is to "preserve our

lDirectors are "interested" when divided loyalties are present and when a director will
financially benefit from a transaction more than shareholders. See Blasband v. Rales, 971.2d
1034, 1048 (3d Cir. 1992).
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ability to fully deduct performance-based awards under the 2011 Plan under section 162(m) of
the Internal Revenue Code for a five-year period." (D.I. 43, ex. A at 82; see also D.I. 1 at ~ 11)
However, the Proxy Statement addresses the potential tax deductibility of compensation as a
consideration for the Directors when they award compensation. (D.I. 43, ex. A at 86) ("(T]he
Compensation Committee may award compensation that is or may become non-deductible, and
expects to consider whether it believes such grants are in the best interest of the Company,
balancing tax efficiency with long-term strategic objectives.") Therefore, Plaintiffs have again
failed to plead demand futility, as the Complaint does not contain "particularized facts that
'create a reasonable doubt that, as of the time the complaint is filed, the board of directors could
have properly exercised its independent and disinterested judgment in responding to a demand. '"

In re Citigroup Inc. S 'holder Derivative Litig., 964 at 120 (quoting Rales, 634 A.2d at 934).
Accordingly, IT IS FURTHER ORDERED that the motion to dismiss (D.1. 42) is
GRANTED. The Clerk of Court is directed to CLOSE this case.

December 30, 2014
Wilmington, Delaware

UNITED STATES DISTRICT JUDGE

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