Erie County Employees Retirement System v. Isenberg et al
Filing
51
MEMORANDUM AND ORDER granting 11 Joint MOTION to Dismiss 1 Complaint Joint MOTION to Dismiss 1 Complaint. (Signed by Judge Ewing Werlein, Jr) Parties notified.(kcarr, )
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
ERIE COUNTY EMPLOYEES
RETIREMENT SYSTEM,
Individually, on Behalf of
All Others Similarly Situated,
and Derivatively on Behalf of
Nominal Defendant Nabors
Industries, Ltd.,
Plaintiff,
v.
EUGENE M. ISENBERG, WILLIAM T.
COMFORT, JOHN V. LOMBARDI,
JAMES L. PAYNE, ANTHONY G.
PETRELLO, MYRON M. SHEINFELD,
MARTIN J. WHITMAN, JOHN
YEARWOOD, and NABORS
INDUSTRIES, LTD.,
Defendants.
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CIVIL ACTION No. H-11-4052
MEMORANDUM AND ORDER
Pending is Defendants’ Joint Motion to Dismiss (Document No.
11).
After carefully considering the motion, response, reply, and
the applicable law, the Court concludes that the Motion should be
granted and Plaintiff’s complaint should be dismissed.
I.
Plaintiff
Erie
Background
County
Employees
Retirement
System
(“Plaintiff”) filed this Verified Class Action and Shareholder
Derivative
Complaint
against
Eugene
M.
Isenberg,
William
T.
Comfort, John V. Lombardi, James L. Payne, Anthony G. Petrello,
Myron
M.
Sheinfeld,
Martin
J.
Whitman,
and
John
Yearwood
(collectively, “Director-Defendants”), directors of the nominal
defendant Nabors Industries (“Nabors” or “the Company”), alleging
breach of fiduciary duties in approving excessive compensation for
the Company’s Chief Executive Officer (“CEO”) and Chairman of the
Board, Eugene M. Isenberg (“Isenberg”), as well as Anthony G.
Petrello
(“Petrello”),
Nabors’s
President
and
Chief
Operating
Officer (“COO”).1
Nabors is reported to be “the largest drilling contractor in
the world and one of the largest land well-servicing and work over
contractors in the United States and Canada.”2
Isenberg became
Chairman and CEO of Nabors in 1987 when it was emerging from
Chapter 11 bankruptcy proceedings.3
The creditors’ committee
negotiated Isenberg’s employment agreement,4 which was approved by
various parties to the bankruptcy proceedings and confirmed by the
bankruptcy court.
Petrello was appointed President and COO in 1991, at which
time his employment agreement was entered into “after arm’s length
1
Document No. 1 ¶¶ 2-5 (Orig. Complt.).
2
Id. ¶ 28.
3
Id. ¶ 30.
4
Id.
2
negotiations
with the Board . . . .”5
Both employment agreements
allegedly “provided for Isenberg and Petrello to receive cash
bonuses calculated by a formula based on a percentage of the
Company’s cash flows.”6
As the Company grew and prospered, the
compensation owed to Isenberg and Petrello increased commensurately
pursuant to the agreed-upon formula.7
In 2009, the Compensation Committee--which is tasked with
“oversight of [executive compensation] agreements and consideration
from
time
to
time
of
such
amendments,
modifications,
and
or
extensions of such agreements as may be necessary or desirable”8-retained an independent compensation consultant, BDO Seidman, to
“assist in the identification and analysis of appropriate elements
and levels of executive compensation, including specifically the
evaluation and propriety of the compensation arrangements currently
in effect for Messrs. Isenberg and Petrello.”9
This review led to
new employment agreements that substantially “reduced Isenberg’s
and Petrello’s salaries and death/separation benefits,” but which
5
Id. ¶ 31.
6
Id. ¶ 32.
7
Id.
8
Id. ¶ 24(1).
9
Id. ¶ 34.
3
Plaintiff alleges were still excessive.10
As part of the new
agreements, effective April 1, 2009, Isenberg would receive $100
million (down from $263.63 million) and Petrello would receive $50
million (down from $89.6 million), upon such respective officer’s
death or termination from the Company without cause.11
The
Company
announced
on
October
28,
2011,
that
it
had
replaced Isenberg as CEO, triggering the $100 million termination
payment that is the central focus of Plaintiff’s Complaint, but
that he would continue as Chairman of the Board.12
Three weeks
later Plaintiff filed this suit.
Plaintiff complains that excessive compensation was agreed to
be paid to the officers and alleges that Isenberg’s compensation
“was significantly disproportionate to compensation paid to CEOs of
peer companies and to shareholder returns.”13
When the Company in
2011 held an advisory, non-binding vote on its compensation program
pursuant
to
the
Dodd-Frank
Wall
Street
Reform
and
Consumer
Protection Act (“Dodd-Frank”),14 57% of the Company’s shares voted
against the Company’s compensation program, but the Board allegedly
10
Id. ¶ 39.
11
Id. ¶ 38.
12
Id. ¶¶ 47-48.
13
Id. ¶ 43.
14
15 U.S.C. § 78n-1(c).
Petrello was appointed the new CEO.
4
ignored this “say on pay” vote.15
Plaintiff further alleges that
some shareholders advanced proposals to adopt a “pay-for-superiorperformance” compensation policy in 2007, which the Board rejected,
and to declassify the Board in 2010 and 2011.16
Plaintiff alleges
that “it was not until November 1, 2011 that the Board announced
that it would propose a bye-law amendment to declassify the Board
to
be
voted
upon
shareholders.”17
at
the
Company’s
2012
annual
meeting
of
On February 6, 2012, the company announced that
Isenberg agreed to forego the $100 million termination payment
under his employment agreement.18
Defendants
move
to
dismiss
Plaintiff’s
derivative
claims
pursuant to Fed. R. Civ. P. 12(b)(1), arguing that Plaintiff lacks
standing to sue based upon Bermuda company law and the English rule
announced in 1843 in Foss v. Harbottle, 2 Hare 461 (Eng. 1843)
which,
except
in
very
limited
circumstances,
generally
derivative claims from being filed by shareholders.
bars
Defendants
also move to dismiss Plaintiff’s statutory oppressive conduct claim
15
Document No. 1 ¶ 56.
16
Id. ¶ 58-60.
The bye-laws provided for
directors by plurality vote, for three-year terms.
17
election
of
Id. ¶ 60.
18
Document No. 11 at 3. Although this $100 million obligation
is at the heart of Plaintiff’s Complaint, its relinquishment has
not ended the case: Plaintiff complains that Isenberg received
other excessive compensation and that Petrello still has a contract
with the company that provides a $50 million payment upon his
termination without cause. See Document No. 42 at 2, 5-8.
5
asserted under the Bermuda Companies Act of 1981, contending that
Plaintiff fails to state a claim under that Act for which relief
can be granted.
See Fed. R. Civ. P. 12(b)(6).19
II.
A.
Legal Standards
Rule 12(b)(1)
Under Federal Rule of Civil Procedure 12(b)(1), a party can
seek
dismissal
jurisdiction.
of
an
action
for
lack
FED . R. CIV . P. 12(b)(1).
of
subject
matter
Standing to sue is an
“essential component[] of federal subject matter jurisdiction.”
McCall v. Dretke, 390 F.3d 358, 361 (5th Cir. 2004).
“The party
invoking federal jurisdiction bears the burden of establishing” its
standing.
Steel Co. v. Citizens for a Better Env’t, 118 S. Ct.
1003, 1017 (1998).
The question of subject matter jurisdiction is
for the court to decide even if the question hinges on legal or
factual determinations.
See Ramming v. United States, 281 F.3d
158, 161 (5th Cir. 2001).
The Fifth Circuit distinguishes between “facial” and “factual”
attacks to subject matter jurisdiction.
Paterson v. Weinberger,
644 F.2d 521, 523 (5th Cir. 1981); see also Irwin v. Veterans
19
Defendants Comfort, Lombardi, Whitman, and Nominal Defendant
Nabors also moved to dismiss for lack of personal jurisdiction
under Rule 12(b)(2) but, taking heed of the parties’ agreement, the
Court first considers the 12(b)(1) and 12(b)(6) motions.
See
Document Nos. 34 & 36. Defendant Comfort withdrew his motion to
dismiss under Rule 12(b)(5). See Document No. 41.
6
Admin., 874 F.2d 1092, 1096 (5th Cir. 1989).
A facial attack
consists of a Rule 12(b)(1) motion unaccompanied by supporting
evidence, challenging the court’s jurisdiction based solely on the
pleadings.
See Lawrence v. Dunbar, 919 F.2d 1525, 1529 (11th Cir.
1990); Paterson, 644 F.2d at 523.
A factual attack, on the other
hand, involves submission of evidence extrinsic to the complaint.
Paterson, 644 F.2d at 523.
“plaintiff
is
also
In response to a factual attack, the
required
to
submit
facts
through
some
evidentiary method and has the burden of proving by a preponderance
of the evidence that the trial court does have subject matter
jurisdiction.”
Paterson, 644 F.2d at 523; see also Irwin v.
Veterans Admin., 874 F.2d 1092, 1096 (5th Cir. 1989).
In sum, a
court evaluating a motion to dismiss pursuant to Rule 12(b)(1) may
consider (1) the complaint alone; (2) the complaint supplemented by
undisputed facts evidenced in the record; or (3) the complaint
supplemented by undisputed facts plus the court’s resolution of
disputed facts. Hartford Ins. Group v. Lou-Con Inc., 293 F.3d 908,
910 (5th Cir. 2002).
Here, Defendants essentially make a facial
attack on Plaintiff’s Complaint.
B.
Rule 12(b)(6)
Rule 12(b)(6) provides for dismissal of an action for “failure
to state a claim upon which relief can be granted.”
12(b)(6).
FED . R. CIV . P.
When a district court reviews the sufficiency of a
7
complaint before it receives any evidence either by affidavit or
admission, its task is inevitably a limited one.
Rhodes, 94 S. Ct. 1683, 1686 (1974).
See Scheuer v.
The issue is not whether the
plaintiff ultimately will prevail, but whether the plaintiff is
entitled to offer evidence to support the claims.
Id.
In considering a motion to dismiss under Rule 12(b)(6), the
district court must construe the allegations in the complaint
favorably to the pleader and must accept as true all well-pleaded
facts in the complaint.
See Lowrey v. Tex. A&M Univ. Sys.,
117 F.3d 242, 247 (5th Cir. 1997).
To survive dismissal, a
complaint must plead “enough facts to state a claim to relief that
is plausible on its face.”
1955, 1974 (2007).
Bell Atl. Corp. v. Twombly, 127 S. Ct.
“A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to draw the
reasonable
inference
misconduct alleged.”
(2009).
While
a
that
the
defendant
is
liable
for
the
Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949
complaint
“does
not
need
detailed
factual
allegations . . . [the] allegations must be enough to raise a right
to relief above the speculative level, on the assumption that all
the allegations in the complaint are true (even if doubtful in
fact).”
Twombly, 127 S. Ct. at 1964-65.
8
C.
Application of Foreign Law in Federal Court
A party who intends to raise an issue about a foreign
country’s law must give notice by a pleading or other
writing. In determining foreign law, the court may
consider any relevant material or source, including
testimony, whether or not submitted by a party or
admissible under the Federal Rules of Evidence.
The
court’s determination must be treated as a ruling on a
question of law.
FED. R. CIV . P. 44.1. This rule provides courts with broad authority
to conduct their own independent research to determine foreign law
but imposes no duty upon them to do so.
See Carey v. Bahama Cruise
Lines, 864 F.2d 201, 205 (1st Cir. 1988)(“[Rule] 44.1 empowers a
federal court to determine foreign law on its own, but does not
oblige it to do so.”); Bartsch v. Metro-Goldwyn-Mayer, Inc., 391
F.2d 150, 155 n.3 (2d Cir. 1968) (Friendly, J.) (same).
The parties agree that Bermuda law governs,20 and each has
offered declarations of well-credentialed legal experts in Bermuda
and/or English law to assist the Court in correctly determining and
applying Bermuda company law to the facts pled in this case.21
20
Nabors is incorporated under the laws of Bermuda and
therefore, under Texas law, Bermuda law governs this dispute. See
TEX. BUS. ORG . CODE § 1.102; see also id. § 1.105.
21
Defendants advance the opinions of Geoffrey R. Bell (“Bell”)
of Paget, Bermuda, and Robert Miles, Q.C. (“Miles”) of London,
England. Bell qualified as a solicitor in England in 1968 and was
called to the Bermuda bar in 1973. Document No. 14, ex. A
[hereinafter “Bell Decl.”] ¶ 2. He was later appointed Queen’s
Counsel for Bermuda in 1992 and Puisne Judge of the Supreme Court
of Bermuda in 2005. Id. ¶ 3. He retired from the bench in 2009
and has since been active in arbitrations and has acted as an
9
Pursuant to Rule 44.1, the Court has considered other relevant
materials and sources as well.
III.
A.
Discussion
Standing to Bring Derivative Claims
Bermuda follows the “rule in Foss v Harbottle,” which holds
that the proper plaintiff in a suit addressing a wrong done to a
company is the company itself.
See Clark v. Energia Global Int’l,
Ltd., [2001] S.C. 173 at 10 (Berm. Sup. Ct.)22 (“A fundamental
expert witness on Bermuda company law.
Id.
Bell has also
submitted a second declaration attached to Defendants’ Reply. See
Document No. 46, ex. A [hereinafter “Bell Second Decl.”].
Miles was appointed Queen’s Counsel in London in 2002 and
specializes in company, commercial and business law. Document No.
15, ex. B [hereinafter “Miles Decl.”] ¶ 2. Miles has practiced law
for over 23 years in England and has personal experience in Bermuda
law, having appeared in Bermudian courts and advised Bermudian
clients. Id. ¶¶ 3-4. He has also submitted a second declaration
attached to Defendants’ Reply.
See Document No. 46, ex. B
[hereinafter “Miles Second Decl.”].
Plaintiff presents the opinions of Robin Hollington, Q.C.
(“Hollington”) of London, England, and David Robert Kessaram
(“Kessaram”), of Hamilton, Bermuda.
Hollington was appointed
Queen’s Counsel in 1999 and has practiced Chancery litigation in
London for over 30 years, with particular experience in
shareholders’ disputes.
Document No. 42, ex. 1 [hereinafter
“Hollington Decl.”] ¶ 1. He was appointed a Recorder to hear civil
cases in 2004 and is the author of Shareholders’ Rights (Sweet and
Maxwell 6th ed. 2010). Id. Kessaram is the managing partner of
Cox Hallett Wilkinson Ltd. and has practiced commercial litigation
in Bermuda for the past 35 years.
Document No. 42, ex. 3
[hereinafter “Kessaram Decl.”] ¶ 1.
22
Hereinafter “Energia Global.”
10
principle of Bermuda law is that a company has its own legal
personality, that is separate and distinct from its shareholders,
owns its own property and acts in its name in creating obligations
and liabilities.” (citation omitted)); see also City of Harper
Woods Employee’s Retirement System v. Olver, 589 F.3d 1292, 1299
(D.C. Cir. 2009) (applying pre-2006 English company law).
On
matters of common law, “the Courts of Bermuda will accept as
binding decisions of the House of Lords.”
Bell Decl. ¶ 6 (quoting
Crockwell v. Haley, [1993] Bda LR 7 (Berm. C.A.)); see also In re
Tyco Int’l, Ltd., 340 F. Supp. 2d 94, 96 (D.N.H. 2004) (looking
“primarily to English common law to resolve questions” of Bermuda
company law); Miles Decl. ¶ 3.
Under English common law, the plaintiff bears the burden of
establishing standing to bring a derivative suit.
See, e.g.,
Prudential Assurance Co. Ltd. v. Newman Indus. Ltd. (No. 2), [1982]
Ch. 204 (C.A.) 210-211 (appeal taken from Eng.)23 (in order to
proceed with a derivative suit, a plaintiff must “establish a prima
facie case . . . that the action falls within the proper boundaries
of the exception to the rule in Foss v. Harbottle”).
The English
Court of Appeals explained the rule in Foss v. Harbottle thus:
The classic definition of the rule in Foss v. Harbottle
is stated in the judgment of Jenkins L.J. in Edwards v.
Halliwell, [1950] 2 All E.R. 1064 as follows. (1) The
proper plaintiff in an action in respect of a wrong
23
Hereinafter “Prudential (No. 2).”
11
alleged to be done to a corporation is, prima facie, the
corporation. (2) Where the alleged wrong is a transaction
which might be made binding on the corporation and on all
its members by a simple majority of the members, no
individual member of the corporation is allowed to
maintain an action in respect of that matter because, if
the majority confirms the transaction, cadit quaestio;
or, if the majority challenges the transaction, there is
no valid reason why the company should not sue. (3) There
is no room for the operation of the rule if the alleged
wrong is ultra vires the corporation, because the
majority of members cannot confirm the transaction.
(4) There is also no room for the operation of the rule
if the transaction complained of could be validly done or
sanctioned only by a special resolution or the like,
because a simple majority cannot confirm a transaction
which requires the concurrence of a greater majority.
(5) There is an exception to the rule where what has been
done amounts to fraud and the wrongdoers are themselves
in control of the company. In this case the rule is
relaxed in favour of the aggrieved minority, who are
allowed to bring a minority shareholders' action on
behalf of themselves and all others. The reason for this
is that, if they were denied that right, their grievance
could never reach the court because the wrongdoers
themselves, being in control, would not allow the company
to sue.
Prudential (No. 2) at 210-211.
Likewise, in its adherence to the
rule in Foss v. Harbottle, Bermuda law does not permit shareholder
derivative suits unless an exception to the rule applies:
(1) if
the alleged wrong is ultra vires; (2) if the alleged wrong requires
a special majority to ratify; (3) if the alleged wrong infringes a
shareholder’s
personal
rights;
or
(4)
qualifies as a “fraud on the minority.”
if
the
alleged
wrong
Tyco, 340 F. Supp. 2d at
98 (citing Edwards v. Halliwell, [1950] 2 All E.R. 1064 (C.A.) at
1066 (Eng.)); City of Harper Woods, 589 F.3d at 1299-1300; see also
Prudential (No. 2) at 210-211.
The fourth of these recognized
12
exceptions, according to the Supreme Court of Bermuda, requires the
shareholder “first [to] satisfy the Court that wrongdoer control
coupled with ‘fraud on the minority’ exists.”
Energia Global at
10.24
Plaintiff argues that its excessive compensation claims fall
within two exceptions to the rule in Foss v. Harbottle, first the
recognized exception of “fraud on the minority,” and second, what
Plaintiff argues is the exception of “unfair prejudice.” Plaintiff
also
contends
that
English
law
would
consider
a
“flexible”
procedure to allow its derivative action to proceed “where such a
technicality [of applying the exceptions to Foss v. Harbottle]
would
lead
to
manifest
injustice,”25
and
invokes
a
sort
of
overarching “interests of justice” argument. Defendants reply that
there
are
no
“unfair
prejudice”
or
“interests
of
justice”
exceptions under Bermuda law.
1.
“Fraud on the Minority”
To make a prima facie case that there has been a fraud on the
minority, which is a recognized exception to the rule in Foss v.
Harbottle, a plaintiff must show: (1) “Defendants have, in breach
of their fiduciary duty, committed fraud; that is, they have taken
24
Plaintiff does not contend that any of the first three
recognized exceptions applies.
25
Document No. 42 at 11.
13
advantage of their position to commit the company to transactions
that
benefit
themselves
at
the
expense
of
the
company”
and
(2) “Defendants were in control of the company for all practical
purposes.”
City of Harper Woods Emp. Ret. Sys. v. Olver, 577 F.
Supp. 2d 124, 135 (D.D.C. 2008), aff’d, 589 F.3d 1292, 1303 (D.C.
Cir. 2009); see also Tyco, 340 F. Supp. 2d at 99; Bell Decl. ¶18.
Plaintiff has not pled facts sufficient to satisfy either of these
elements.
a.
“Fraud”
“Fraud” in the context of “fraud on the minority” is not
actual fraud but instead is self-dealing “in which control is
misused to benefit the wrongdoers at the company’s expense.” Tyco,
340 F. Supp. 2d at 99 (citing Konamaneni v. Rolls Royce (India)
Ltd., [2002] 1 W.L.R. 1269, at 1278 (Eng. Ch. 2001); Estmanco
(Kilner House) Ltd. v. Greater London Council, [1982] 1 All E.R.
437 (Ch. 1982)); see also Energia Global at 10 (“‘[f]raud on the
minority’ means there has been some element of misappropriation of
company property”).
Plaintiff argues that the Director-Defendants breached their
fiduciary duties by approving excessive compensation agreements for
Isenberg and Petrello, and that this is the “fraud” required for
the “fraud on the minority” exception.
Plaintiff also alleges,
however, that the Compensation Committee engaged an independent
14
consulting firm, BDO Seidman, for expert advice on the employment
contracts with Isenberg and Petrello, which helped to obtain terms
substantially more favorable to the Company, and that the new
agreements were made pursuant to the Company’s bye-laws.
In other
words, the Compensation Committee and the Board, with independent
consultant assistance, did what the bye-laws charge them to do.
There is no allegation that any Compensation Committee member was
engaged in self-dealing or acted in bad faith or for improper
purposes; in fact, it is uncontested that the 2009 renegotiation
saved the company more than $163 million in potential obligation to
Isenberg, and more than $39 million in potential obligation to
Petrello.26
Plaintiff does not allege that either Isenberg or
Petrello was a member of the Compensation Committee or that either
played any role in the Company’s decision-making process and its
offer of the substantially reduced terms for their continued
employment.
Again, and most importantly, there is no allegation that any
of the Compensation Committee members personally benefitted from
the decision to approve the contracts, or any other allegation of
self-dealing on the part of the committee members.
See, e.g.,
Daniels v. Daniels, [1978] Ch. 406 at 414 (Eng.)27 (no fraud on the
minority
in
a
case
where
“the
powers
of
the
directors
26
Document No. 1 ¶ 38 (quoting the 2011 Proxy).
27
Hereinafter “Daniels.”
15
were
effectively wielded not by the director who benefitted but by the
majority of independent directors who were acting bona fide and did
not benefit”); Tyco, 340 F. Supp. 2d at 101 (directors in control
are not the same as those who benefitted); Bell Second Decl. ¶ 13
(“[T]he ‘fraud on the minority’ test is not met where, as here, the
directors on the Compensation Committee did not benefit personally
from
the
acts
complained
of.”).
In
sum,
although
Plaintiff
conclusorily asserts that “the Individual Defendants have abused
their power by granting excessive compensation to Isenberg and
Petrello, both of whom are current directors of the Company, at the
expense and to the detriment of the Company,”28 Plaintiff does not
allege that the employment contracts were the product of selfdealing either by the members of the committee that approved them
or
by
Isenberg
participated
decision.29
28
in
or
Petrello,
or
to
have
who
had
are
not
control
alleged
over
the
to
have
Company’s
Plaintiff has not raised claims of “fraud” or of self-
Document No. 42 at 13.
29
Likewise, the Director-Defendants’ opposition to filing a
derivative suit against themselves, where they do not own or
control a majority of the Company’s shares, is not self-dealing by
those Defendants such as to make a prima facie case for fraud on
the minority. The court in Tyco rejected that very argument:
Nor can a board’s decision to prevent the company from
suing its directors qualify as improper self-dealing.
The directors of a corporation always have an interest in
avoiding the personal liability and damage to their
reputations that could result from a breach of fiduciary
duty lawsuit. If allegations of this sort could satisfy
the self-dealing component of a fraud on the minority
16
dealing under Bermuda law such as to state a “fraud on the
minority” exception to the rule in Foss v. Harbottle.
b.
Control
The “fraud on the minority” exception also requires the
presence of a subgroup of wrongdoers who have control of the
company or are in the majority, and Plaintiff fails to show this as
See Burland v. Earle, [1902] A.C. 83 at 93 (Can.)30 (“But an
well.
exception is made to [the rule in Foss v. Harbottle] where the
persons against whom the relief is sought themselves hold and
control the majority of the shares in the company, and will not
permit an action to be brought in the name of the company.”); see
also Daniels (allowing a derivative suit by plaintiffs to proceed
against the defendants who held the majority of shares, where one
of the defendants bought company property at less than fair market
price and thereby benefitted at company expense); see also Winn v.
Schafer, 499 F. Supp. 2d 390, 398 (S.D.N.Y. 2007) (applying English
common law to a Cayman Islands company dispute and holding that
plaintiff
failed
to
“allege
that
these
defendants
hold
claim, the requirement would be meaningless because it
would be satisfied in every derivative action in which a
breach of fiduciary duty claim is asserted against a
sitting board of directors.
Such an interpretation
defies both precedent and reason and must be rejected.
340 F. Supp. 2d at 100 (citations omitted).
30
Hereinafter “Burland v. Earle.”
17
a
controlling number of the company’s shares or that they exercise de
facto control over those shares” or engage in “conduct sufficient
to
establish
the
requisite
self-dealing”
and
that
therefore
plaintiff did not “establish either of the requirements to invoke
the fraud on the minority exception”).
Plaintiff
does
not
contest
that
the
Director-Defendants
collectively owned and controlled fewer than 14% of the voting
shares–-nowhere near a majority--and that Isenberg and Petrello did
not exercise control over the Compensation Committee.
“Control,”
as was observed by the Court of Appeal in Prudential (No. 2),
“embraces a broad spectrum extending from an overall majority of
votes at one end, to a majority of votes at the other end made up
of those likely to be cast by the delinquent himself plus those
voting with him as a result of influence or apathy.”
Without any
showing of “control” by the Director-Defendants under the broadest
of definitions, Plaintiff nonetheless argues that the alleged
wrongdoers “are in control of the Company” because Plaintiff is
being “improperly prevented from bringing the action.”
does
not
plead
facts,
however,
that
the
Plaintiff
Director-Defendants
controlled the company such that a majority of shareholders could
not ratify the Board’s actions.
See Daniels at 412 (“[I]t is
obvious that in such an action the plaintiffs cannot have a larger
right to relief than the company itself would have if it were
plaintiff, and cannot complain of acts which are valid if done with
18
the approval of the majority of the shareholders, or are capable of
being confirmed by the majority.” (quoting Burland v. Earle at
93)).
In sum, in addition to having not raised a viable claim of
fraud under Bermuda law, Plaintiff has not presented a prima facie
case that the Director-Defendants exercised majority control of the
voting shares of the company nor that they employed such control
improperly to prevent Plaintiff from bringing this action.
See
Smith v. Croft at 185 (“[i]f it is an expression of the corporate
will of the company by an appropriate independent organ that is
preventing the plaintiff from prosecuting the action he is not
improperly but properly prevented” from bringing the action).
Plaintiff has therefore failed to plead a case sufficient under
Bermuda law to invoke the “fraud on the minority” exception to the
rule in Foss v. Harbottle.
2.
“Unfair Prejudice”
Plaintiff contends that the Court should apply an “unfair
prejudice”
expert,
exception,
advances
this
and
Hollington,
view
with
a
Plaintiff’s
prolix
English
discussion
of
law
the
Companies Act of 2006 [U.K.] (“2006 Act”). Plaintiff’s Bermuda law
expert, Kessaram, does not discuss any “unfair prejudice” exception
as applying in Bermuda, and Bell, Defendants’ Bermuda law expert,
forthrightly states that there is no exception to Foss v. Harbottle
19
as a matter of Bermuda law on the basis of “unfair prejudice.”
Bell Second Decl. ¶ 2. Hollington essentially argues that the 2006
Act in England is a codification of then existing English common
law, and therefore the “unfair prejudice” exception, statutorily
laid out in §§ 994 and 996 of the 2006 Act, should be regarded as
if it were the common law.
2006
code
undoubtedly
derivative claims:
Hollington opines that while “[t]he
changes
the
procedure
which
governs
it is almost deliberately opaque as to whether
it actually changes the substantive principles which underlie the
availability of such claims.”
Hollington Decl. ¶ 27 (emphasis
added). Miles, in reply, observes that Hollington in his book31 did
not find the 2006 Act “opaque” about substantive changes, but
declared that “the 2006 Act is clearly intended to make some
substantive changes to the law and procedure . . . .”
Decl. ¶ 8 (emphasis added).32
Miles Second
That the 2006 Act did include
substantive changes appears to be supported by the greater weight
of authority and hence, Plaintiff’s arguments on the “unfair
prejudice” statutory remedy under the 2006 Act in England for
direct shareholder claims is of virtually no value in an analysis
of Bermuda law regarding exceptions to Foss v. Harbottle’s common
31
ROBIN HOLLINGTON , SHAREHOLDERS ’ RIGHTS 132 (6th ed. 2010).
32
Other commentaries also have observed that the 2006 Act made
substantive changes in the common law in England. See, e.g., DAVID
CHIVERS AND BEN SHAW , THE LAW OF MAJORITY SHAREHOLDERS POWER USE AND ABUSE 192
(Oxford 2008).
20
law bar of derivative claims.
See Bell Second Decl. ¶¶ 2-10
(explaining that there is no “unfair prejudice” exception to the
rule in Foss v. Harbottle in Bermuda law and that the 2006 Act does
not represent Bermuda law).
In sum, the Court is not persuaded that under Bermuda law
there is an “unfair prejudice” exception to the rule in Foss v.
Harbottle.
3.
“Interests of Justice”
Plaintiff also urges the Court to consider the “totality of
the circumstances” and allow its derivative claims to proceed “in
the
interests
of
justice.”33
Plaintiff’s
expert,
Hollington,
principally relies on Judge Vinelott’s opinion in Prudential v.
Newman Industries (No. 1), [1981] Ch. 257,34 to argue that a
derivative claim may be brought “if the interests of justice”
require it.
As Defendants point out, Prudential (No. 1) was
reversed in part on appeal in an opinion in which the appellate
court explicitly criticized the notion of a separate “interests of
justice” exception.
See Prudential (No. 2) at 221 (“The second
observation which we wish to make is merely a comment on Vinelott
J.’s decision that there is an exception to the rule in Foss v.
Harbottle whenever the justice of the case so requires.
33
Id., at 11, 12.
34
Hereinafter “Prudential (No. 1).”
21
We are not
convinced that this is a practical test.”). Chief Judge Barbadoro,
in
construing
Bermuda
law
in
Tyco,
“share[d]
the
skepticism
expressed by the Court of Appeal about the viability of a distinct
interests of justice exception,” although under the allegations in
Tyco he found it unnecessary to determine if a Bermudian court
would ever recognize such an exception.
See Tyco, 340 F. Supp. 2d
at 102 (Barbadoro, C.J.); see also City of Harper Woods, 589 F.3d
at 1304 (“Finally, Harper Woods has not proven the existence of an
‘interests of justice’ exception to the Foss rule.”); Bell Second
Decl. ¶¶ 2-10; Miles Second Decl. ¶¶ 26-27.
Based on the greater
weight of legal authority, this Court is not persuaded that the
courts
of
Bermuda
would
recognize
an
“interests
of
justice”
exception to the rule in Foss v. Harbottle, and most surely not
under the facts pled in this case.
In sum, Plaintiff has failed to
plead facts that fall within an exception to the rule in Foss v.
Harbottle, and Plaintiff’s alleged derivative claims (Counts I, II,
and III) will be dismissed.
B.
Direct Claim for Oppressive Conduct
Section 111 of the Bermuda Companies Act of 1981 provides:35
Alternative remedy to winding up in cases of oppressive
or prejudicial conduct
35
Hereinafter “1981 Act.” In its Complaint, Plaintiff invokes
1981 Act § 111 as its basis for asserting its claim for oppressive
conduct. See Document No. 1 ¶ 26.
22
111
(1)
Any member of a company who complains
that the affairs of the company are being
conducted or have been conducted in a
manner oppressive or prejudicial to the
interests of some part of the members,
including himself, or where a report has
been made to the Minister under section
110, the Registrar on behalf of the
Minister, may make an application to the
Court by petition for an order under this
section.
(2)
If on any such petition the Court is of
the opinion(a)
that the company’s affairs are
being conducted or have been
conducted as aforesaid; and
(b)
that to wind up the company
would unfairly prejudice that
part
of
the
members,
but
otherwise
the
facts
would
justify a complete winding up
order on the ground that it was
just and equitable that the
company should be wound up,
The Court may, with a view to bringing to an end
the matters complained of, make such order as it
thinks fit, whether for regulating the conduct of
the company’s affairs in the future, or for the
purchase of the shares of any members of the
company by other members of the company or by the
company and, in the case of a purchase by the
company, for the reduction accordingly of the
company’s capital, or otherwise.
. . . .
1981 Act § 111.
In order to plead a direct claim for oppressive or prejudicial
conduct, Plaintiff must plead facts to show (1) that the DirectorDefendants’ conduct has been oppressive; and (2) “that it could be
23
said that the circumstances were such that, but for the fact that
a winding up order might unfairly prejudice the petitioners, it
would be just and equitable to wind the company up.”
Street Turkish Baths Ltd., [1971] 3 All ER 184,
Re Jermyn
200 (Eng. C.A.)36
(applying Companies Act 1948 § 210, England’s version of Bermuda’s
1981 Act § 111);37 see also Bell Decl. ¶ 22; Kessaram Decl. ¶ 70.
“If a director of a company were to draw remuneration to which he
was not legally entitled, this might no doubt found malfeasance
proceedings or proceedings for some kind of relief, but it would
not, in our judgment, of itself amount to oppression.”
Jermyn
Street at 199.
Here, as observed above, Plaintiff alleges that the DirectorDefendants approved excessive compensation packages for Isenberg
and Petrello, but Plaintiff also pleads that these agreements were
fully disclosed to shareholders and in SEC filings.
Plaintiff
makes no showing that the employment agreements were illegal, ultra
vires,
or
beyond
the
scope
of
the
bye-laws
of
the
company.
Plaintiff alleges only that the fully disclosed actual remuneration
agreed to by the Compensation Committee, even after obtaining the
36
Hereinafter “Jermyn Street.”
37
As to interpretation of statutes, the Bermuda court will
follow decisions of the English courts in cases where Bermuda has
adopted identical statutory language from England. Bell Decl. ¶ 9.
1981 Act § 111 is taken verbatim from Companies Act 1948 (U.K.)
§ 210. Cf. Bermuda Companies Act 1981 § 111 with U.K. Companies
Act 1948 § 210; see also Bell Decl. ¶ 11 (Bermuda’s Companies Act
of 1981 was largely based on the English Companies Act of 1948).
24
expertise and assistance of an independent consultant, was so
excessive
as
to
constitute
a
breach
fiduciary duties to the Company.
for an oppression claim.
of
Director-Defendants’
This does not meet the standard
See Jermyn Street at 199; ROBIN HOLLINGTON ,
SHAREHOLDERS’ RIGHTS 250 (6th ed. 2010) (“Thus, in general, if the
board
has
honestly
remuneration,
and
and
has
genuinely
not
dressed
exercised
up
a
the
power
dividend
to
payment
pay
as
remuneration, the court will not determine whether the remuneration
awarded was reasonable.”).
Assuming that compensation agreed to be paid to a company’s
two senior officers could under certain circumstances amount to
oppression and prejudice to shareholders,38 the statute appears to
require that the magnitude of the offending conduct, in the context
of the totality of the circumstances, be such as to warrant the
Company’s dissolution but for the “alternative remedy” provided by
section 111.
In other words, the complainant must plead that the
“circumstances were such that, but for the fact that a winding up
order might unfairly prejudice the petitioners, it would be just
and equitable to wind the company up.”
Jermyn Street at 200
(citing Companies Act 1948 (U.K.) § 210 (2)(b)); see also Kessaram
38
See, e.g., Maidment v. Attwood, et al, [2012] EWCA 998 (Eng.
C.A.) (finding unfair prejudice under section 994 of 2006 Act where
a sole director in control of a small company awarded to himself
excessive remuneration to the detriment of the minority
shareholder). In Maidment, the company was insolvent. Id.
25
Decl. ¶ 70 (“I agree that in order to achieve relief under section
111 of the Act the Plaintiffs are required to show that, were i[t]
not for the existence of the statutory remedy, it would otherwise
be just and equitable to wind up the Company.” (emphasis added))39;
1981 Act § 111; Bell Decl. at ¶ 21-22.
Plaintiff does not suggest,
let alone plead facts, that the state of this publicly traded
$5.3 billion oil drilling company, with an average annual net
income of more than $465 million for the five years of 2006 through
2010,40 had reached such a dire condition.
Indeed, Plaintiff does
not contest Defendants’ assertion that the Company should not be
wound
up
on
account
of
this
excessive
compensation
dispute.
Plaintiff fails to state a claim for which relief may be granted
under Section 111 of the Bermuda Companies Act of 1981.
C.
Whether Plaintiff Should Replead
Plaintiff did not move to amend its Complaint, but in the
closing sentence of its Response “requests leave to amend” if
Defendants’ Motion is granted in whole or in part.
39
Plaintiff has
Kessaram adds that “there is no requirement as a matter of
Bermuda procedural law for the relief claimed in the petition to
include a plea that the company be wound-up,” Kessaram Decl. ¶ 70,
which appears accurate.
However, by the plain language of the
statute and by Kessaram’s own reading of it, the state of the
company must be such that it would be time to wind up the company
if there were not another remedy.
40
Document No. 1 ¶ 51 at 23, ¶ 28 at 10.
26
offered
no
proposed
amended
complaint
nor
has
suggested any additional facts that could be pled.
it
otherwise
“‘[A] bare
request in an opposition to a motion to dismiss--without any
indication of the particular grounds on which the amendment is
sought, cf. Fed. R. Civ. P. 7(b)--does not constitute a motion
within the contemplation of Rule 15(a).’” U.S. ex rel. Willard v.
Humana Health Plan of Texas Inc., 336 F.3d 375, 387 (5th Cir. 2003)
(quoting Confederate Mem’l Ass’n, Inc. v. Hines, 995 F.2d 295, 299
(D.C. Cir. 1993)).
Moreover, Plaintiff’s Complaint is a well
crafted and detailed pleading of 38 pages.
Plaintiff has offered
support for its theories in extensive briefing in opposition to
Defendants’ Motion to Dismiss, and has incorporated therein the
expert legal opinions and arguments of Mr. Hollington, Q.C. (53
pages in length) and Mr. Kessaram (21 pages in length), plus four
additional large binders of cases and authorities.
satisfied
that
exhaustively
the
issues
submitted.
therefore denied.
have
been
Plaintiff’s
most
request
The Court is
thoroughly
to
replead
Foman v. Davis, 83 S. Ct. 227, 230 (1962).
27
and
is
IV.
Order
For the foregoing reasons, it is
ORDERED that Defendants Joint Motion to Dismiss (Document
No. 11) is GRANTED, and Plaintiff Erie County Employees
Retirement System’s derivative claims against Defendants are
DISMISSED.
The Clerk shall notify all parties and provide them with a
signed copy of this Order.
SIGNED at Houston, Texas, on this 30th day of July, 2012.
____________________________________
EWING WERLEIN, JR.
UNITED STATES DISTRICT JUDGE
28
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