Rawcliffe v. AnciauxRawcliffe v. Anciaux
Attorneys:
Eric L. Zagar, Robin Winchester, Kristen L. Ross, Radnor, PA, J. Ryan Mitchell, Steven J. Joffee, Salt Lake City, for appellant
Erik A. Christiansen, Alan S. Mouritsen, Salt Lake City, Douglas A. Rappaport, Lucy C. Malcolm, James Tysse, New York, NY, for appellees
JUSTICE DURHAM authored the opinion of the Court in which CHIEF JUSTICE DURRANT, ASSOCIATE CHIEF JUSTICE LEE, JUSTICE HIMONAS, and PRESIDING JUDGE ORME joined.
Having recused himself, JUSTICE PEARCE does not participate herein; COURT OF APPEALS PRESIDING JUDGE GREGORY ORME sat.
1 Other appellees are Jerry G. McClain, Ronald S. Poelman, James H. Bramble, Jim Brown, Gilbert Fuller, Kevin G. Guest, Daniel A. Macuga, David A. Wentz, Deborah Woo, and Nominal Defendant
JUSTICE DURHAM, opinion of the Court:
INTRODUCTION
¶1 James Rawcliffe, a shareholder of USANA Health Sciences, Inc., brought this action against USANA‘s board of directors and several of its officers for authorizing and receiving spring-loaded, stock-settled stock appreciation rights (SSARs). Mr. Rawcliffe concedes that USANA‘s Compensation Committee strictly complied with the company‘s compensation plan in authorizing the SSARs. Based on this and the absence of an allegation that the Compensation Committee intended
BACKGROUND
¶2 In 2006, USANA‘s board of directors approved, and its shareholders ratified, the USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (Plan). Pursuant to the Plan, the board of directors established the Compensation Committee, consisting of three members of the board of directors. The Plan gave the Compensation Committee the “exclusive power, authority, and discretion” to award SSARs to directors, officers, and other employees, as an incentive to continue working diligently for the company.
¶3 SSARs, as defined by the Plan, are a specific type of incentive award that differs somewhat from stock options. On the day that the Compensation Committee awards SSARs, called the “grant date,” the “exercise price” for the SSARs is set. The exercise price of each SSAR is equal to the average trading price of USANA‘s stock on the grant date.2 After the vesting period runs, the awardee can exercise the SSARs and receive stock as compensation. The day on which the awardee exercises the SSARs is called the “exercise date.” When the awardee exercises her SSARs, she is given stock in an amount reflecting the difference between the market price of USANA‘s stock on the exercise date, and the exercise price.3 The recipient does not need to pay an exercise price.
¶4 The lower the exercise price and the higher the value of the company‘s stock on the exercise date, the more the SSARs are worth. When the market price is lower on the exercise date than on the grant date, the SSARs are “out of the money” and return no value to the holder; if the SSARs are exercised when the market price is higher than the exercise price, they are “in the money,” and the holder then receives the difference in price in the form of USANA stock.
¶5 While the Plan allows SSARs to be granted as incentive awards, it does not explicitly mention spring-loaded SSARs. Spring-loading involves granting equity awards just prior to the release of non-public information reasonably expected to drive up the market price of the company‘s stock. Spring-loading increases the value of SSARs because the exercise price is set on a day when the good news has not yet been released, making the exercise price lower than if it were to be set after the good news was released. It makes the SSARs more likely to be “in the money” once they vest and also increases the difference between the exercise price and the market price on the exercise date.
¶6 The Plan states only that the exercise price must be at least 100 percent of the “Fair Market Value”4 of the common stock
¶7 Mr. Rawcliffe acknowledges that the issuance of the spring-loaded SSARs complied with the terms of the Plan. He argues only that it violated the underlying “spirit” of the Plan. Accordingly, he alleges that the Compensation Committee members breached their fiduciary duties and wasted corporate assets. He also alleges that one director, who was not a member of the Compensation Committee, and several officers breached their fiduciary duties and were unjustly enriched by passively receiving the spring-loaded SSARs.
STANDARD OF REVIEW
¶8 A motion to dismiss presents a question of law that is reviewed de novo, giving “no deference” to the district court‘s analysis. See State v. Ririe, 2015 UT 37, ¶ 5, 345 P.3d 1261.
ANALYSIS
¶9 We first clarify the fiduciary duties imposed on corporate directors and officers under the Utah Revised Business Corporation Act. Next, we address Mr. Rawcliffe‘s substantive claims in this case.
I. DUTIES OWED BY CORPORATE OFFICERS AND DIRECTORS
¶10 The question of whether spring-loading SSARs constitutes a breach of fiduciary duty is an issue of first impression in Utah. Corporate fiduciary duties were originally creatures of common law. Now, Utah corporations are governed by the Utah Revised Business Corporation Act (URBCA).
(4) A director or officer is not liable to the corporation [or] its shareholders . . . for any action taken, or any failure to take any action, as an officer or director, as the case may be, unless:
(a) the director or officer has breached or failed to perform the duties of the office in compliance with this section; and
(b) the breach or failure to perform constitutes gross negligence, willful misconduct, or intentional infliction of harm on the corporation or the shareholders.
(Emphases added).
¶11 As the emphasized portions show, this statute requires that a cause of action brought by a corporation or shareholder6 against a director or officer, for the official acts of the director or officer, must be for a breach of
¶12 Subsection (4) mandates that a corporation or shareholder prove two things before a director or officer can be held liable: (1) that the director or officer breached a duty enumerated in
A. Standards of Conduct Under Utah Code Section 16-10a-840(4)(a)
¶13 Under
(1) Each director shall discharge the director‘s duties as a director, including duties as a member of a committee, and each officer with discretionary authority shall discharge the officer‘s duties under that authority:
(a) in good faith;
(b) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and
(c) in a manner the director or officer reasonably believes to be in the best interests of the corporation.
¶14 A claim against a corporate officer or director must establish a breach of one of these duties or otherwise establish a breach of this subsection. Cf. McLaughlin v. Schenk, 2009 UT 64, ¶ 16, 220 P.3d 146 (“Under the [URBCA], directors and officers are required to carry out their corporate duties in good faith, with prudent care, and in the best interest of the corporation.” (citing
¶15 Mr. Rawcliffe‘s arguments only fall under the duty of good faith, identified in subsection (1)(a), and the duty to act in a manner that the director or officer reasonably believes to be in the best interests of the corporation, identified in subsection (1)(c). We now discuss the scope of these two duties, but do not address the scope of the duty identified in subsection (1)(b), because Mr. Rawcliffe does not argue a breach of that duty.
¶16 Mr. Rawcliffe cites Glen Allen Mining Co. v. Park Galena Mining Co., for the scope of the first listed duty—the duty of good faith—arguing that it requires all the acts of the directors and officers to “be for the benefit of the corporation and not for their own benefit. . . . They are not permitted to profit as individuals by virtue of their position.” 296 P. 231, 240 (Utah 1931). However, this statement conflicts with other portions of the URBCA leading us to reject it as an accurate statement of “good faith” under
(continued . . .)
duties held by corporate officers and directors, such duties are now creatures of statute and may be modified as the legislature sees fit. Thus, the common law of corporate fiduciary duties applies only insofar as it does not conflict with the statute. Whether the common law fiduciary duties exist independent of the statute remains an open question, as the parties concede that the statute applies to Mr. Rawcliffe‘s fiduciary duty claims in this case.
¶17 To breach the duty of good faith, the director or officer must typically act in bad faith. See Hansen v. Granite Holding Co., 218 P.2d 274, 280 (Utah 1950) (the defendants agreed with the formulation of the good faith standard, arguing only that “no bad faith has been shown“); Chapman v. Troy Laundry Co., 47 P.2d 1054, 1064 (Utah 1935) (stating that when a director breaches the duty of good faith, “they are guilty of bad faith“). Bad faith involves some form of “[d]ishonesty of belief, purpose, or motive.”9 Bad Faith, BLACK‘S LAW DICTIONARY (10th ed. 2014); see also In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 64–67 (Del. 2006). Thus, this duty is breached when a director or officer
the sacrifice of corporate interests, the retardation of the objects of the corporation, and more especially the destruction of the corporation itself“); In re Walt Disney, 906 A.2d at 67 (Bad faith includes “the intent to violate applicable positive law, or . . . intentionally fail[ing] to act in the face of a known duty to act, demonstrating a conscious disregard for [a director‘s] duties.” (citation omitted)).
¶18 The third duty, codified under subsection (1)(c), requires that a director act in a manner which she “reasonably believes to be in the best interests of the corporation.”
¶19 One difference between subsections (1)(a) and (1)(c) is the mental state required under the plain language of the statute. When a director breaches the duty of good faith in (1)(a), she typically does so through intentional or willful misconduct. When a director breaches (1)(c) however, she must be acting on an unreasonable belief that her actions would be in the best interest of the company.11
Thus, to adequately discharge her statutory duty of loyalty, the director must subjectively believe her actions are in the best interest of the corporation, and her subjective belief must be objectively reasonable—the reasonable person in those circumstances would likewise believe that the action would be in the best interests of the corporation. See MODEL BUS. CORP. ACT § 8.30 cmt. at 8-196 (AM. BAR ASS‘N 2013 Revision) (“The
(continued . . .)
faith in a psychological sense, but from a legal standpoint those duties are and must remain quite distinct.“(footnote omitted)). While explaining this overlap and the distinctions between these duties the court stated that, in some cases, “two states of mind coexist in the same person: subjective bad intent (which would lead to a finding of bad faith) and gross negligence (which would lead to a finding of a breach of the duty of care).” Id. at 65 n.104. Thus, there are instances in which a director may breach the duty of care and the duty of good faith through the same conduct. Intentional or willful misconduct requires us to look into the subjective mental state of the director, whereas the URBCA‘s codification of the duty of care is measured from an objective standard. See
B. Standards of Liability Under Utah Code Section 16-10a-840(4)(b)
¶20 While
¶21 Subsection (4)(b) provides that a director or officer can be liable for a breach of duty only if “the breach or failure to perform [a duty] constitutes gross negligence, willful misconduct, or intentional infliction of harm on the corporation or the shareholders.”
¶22 The mental states in subsection (4)(b) range from “utter indifference . . . at best [to] a concerted effort to destroy the business at worst.” Wachocki v. Luna, 2014 UT App 139, ¶ 10, 330 P.3d 717 (footnote omitted). Gross negligence is the minimum standard required to hold a director liable under the URBCA. “[G]ross negligence is ‘the failure to observe even slight care; it is carelessness or recklessness to a degree that shows utter indifference to the consequences that may result.‘” Penunuri v. Sundance Partners, Ltd., 2017 UT 54, ¶ 35, --- P.3d --- (quoting Blaisdell v. Dentrix Dental Sys., Inc., 2012 UT 37, ¶ 14, 284 P.3d 616).13
¶23 While this court has never expressly defined “willful misconduct” in the context of
¶24 The final mental state under subsection (4)(b) is the “intentional infliction of harm on the corporation or the shareholders.”
II. MR. RAWCLIFFE HAS FAILED TO STATE A CLAIM
¶25 Having determined the proper analysis under
A. We Apply Utah Rule of Civil Procedure 9(c) to This Case
¶26 The district court held that
need only be pled generally, we still “need not accept [as true] extrinsic facts not pleaded nor need we accept legal conclusions in contradiction of the pleaded facts.” Am. W. Bank Members, L.C. v. State, 2014 UT 49, ¶ 7, 342 P.3d 224 (citation omitted).
B. Mr. Rawcliffe‘s Claims Against the Compensation Committee
¶27 At oral argument, Mr. Rawcliffe cited two allegations in his complaint that he argues most strongly show a breach of fiduciary duty by the members of the Compensation Committee and meet the heightened pleading standard. First, the complaint alleges that “the members of the Board‘s Compensation Committee . . . knowingly and deliberately violated USANA‘s stockholder-approved equity plan.” The allegation that the Compensation Committee violated the Plan is a conclusory statement that we do not assume is true, absent additional allegations supporting it. See Am. W. Bank Members, 2014 UT 49, ¶ 7. Second, the complaint alleges that “the Compensation Committee deliberately granted the SSARs . . . [to] ensure that the SSARs carried an artificially low exercise price,” and that the committee thereby “improperly violated the Plan by granting awards which they knew would be ‘in the money’ once the positive news . . . was disclosed the following day.” At best, these two allegations combine to allege that the Compensation Committee knowingly and deliberately approved spring-loaded SSARs.
¶28 However, Mr. Rawcliffe conceded on appeal that the Compensation Committee complied with the “strict letter” of the Plan when it authorized the spring-loaded SSARs. He argues only that the Compensation Committee violated “the spirit and intent” of the Plan when they “us[ed] non-public, inside information to manipulate ‘fair market value’ to benefit themselves.” We agree with Mr. Rawcliffe that if, and we emphasize if, the directors intended to circumvent the purposes of the Plan to benefit themselves to the detriment of the corporation or its shareholders, even if they complied with the “letter” of the Plan, he has adequately pled a breach of the duty of good faith. However, we do not agree with Mr. Rawcliffe‘s analysis of what purposes the Plan intended to fulfill, and hold that spring-loading does not, per se, violate those purposes.16
¶29 The Plan is a document that governs the procedures the Compensation Committee must follow when it authorizes equity incentive awards. We interpret the governing documents of a corporation the same way we interpret a contract. Dansie v. City of Herriman, 2006 UT 23, ¶ 6, 134 P.3d 1139 (interpreting articles of incorporation “using the same approach that we apply to the interpretation of contracts generally“). Our purpose in interpreting a contract is to “ascertain the intentions of the parties to the contract.” WebBank v. Am. Gen. Annuity Serv. Corp., 2002 UT 88, ¶ 17, 54 P.3d 1139. “In interpreting a contract, [w]e look to the writing itself to ascertain the parties’ intentions, and we consider each contract provision . . . in relation to all of the others, with a view toward giving effect to all and ignoring none.” Id. ¶ 18 (alterations in original) (internal quotations marks omitted). While interpreting such a document, we look first to “the plain language of its text.” Dansie, 2006 UT 23, ¶ 6.
¶30 The plain language of the Plan clearly denotes its purposes. First, the Plan defines fair market value as the “mean between the highest and lowest selling price of a share of Common Stock on the principal exchange on which shares of Common Stock are then trading” on the date on which the equity incentive award is announced. If the board of directors and shareholders who approved the Plan intended “fair market value” to mean something different (such as the actual value of the shares based on all non-public information rather than its market value based on its current price on the stock market) they would have stated as much. We cannot read into the Plan a “spirit and intent” that runs counter to what is actually written.
(1) Closely associate the interests of management . . . with the shareholders of the Company by reinforcing the relationship between participants’ rewards and shareholder gains;
(2) Provide management and employees with an equity ownership in the Company commensurate
(continued . . .)
judgment. See Oakwood Vill. LLC v. Albertsons, Inc., 2004 UT 101, ¶¶ 12–13, 104 P.3d 1226.
with Company performance, as reflected in increased shareholder value;
(3) Maintain competitive compensation levels; and
(4) Provide an incentive to management and employees to remain in continuing employment with the Company and to put forth maximum efforts for the success of its business.
¶32 Article I ends by stating that the Plan is “intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of members of the Board . . . upon whose judgment, interest, and special effort the successful conduct of the Company‘s operation is largely dependent.” The Plan also gives the Compensation Committee the “exclusive power, authority and discretion to” determine the “number of shares of Stock” that should be issued as an incentive, and the “terms and conditions of any Award . . . including, but not limited to, the exercise price.” It is difficult to imagine that such a broadly-worded document intends to completely prohibit spring-loading when it grants the Compensation Committee such large discretion in determining the amount of SSARs that can be awarded. If the Compensation Committee believed that spring-loading would violate the Plan or a standard of conduct under the URBCA, they could have simply awarded themselves and the other defendants a larger number of SSARs to make up the difference in profit from not spring-loading their awards. The “spirit” of the Plan is detailed quite well by the Plan itself, and we cannot say that spring-loading per se violates any of these purposes.
¶33 As spring-loading is not a per se violation of the Plan, the proper question is whether the directors and officers determined, in good faith, that the amount of spring-loaded SSARs and their attendant value met the purposes laid out in Article I. Thus, Mr. Rawcliffe would have to plead facts sufficient to show: 1) that the value of the awards were determined in bad faith or that the value of the awards did not serve the best interests of the corporation, see supra ¶¶ 13–19;
¶34 In determining whether the corporation was actually harmed, or that the Compensation Committee intended to harm the corporation, we must look again to the purposes of the Plan. If the value of the spring-loaded SSARs, or the value of any equity incentive award, meets the purposes laid out in the Plan, then USANA and its shareholders have not been harmed. Indeed, if the purposes of the Plan have been met, then the spring-loaded SSARs have benefited USANA and its shareholders by incentivizing its officers. The shareholder-approved Plan details what the corporation and its shareholders believe is in their best interests. We are bound by the plainly stated purposes of the Plan in determining what is in the corporation‘s best interests. If the Compensation Committee takes an action that is in the corporation‘s best interests, then the corporation has not been harmed.
¶35 Mr. Rawcliffe alleges that the awards were “intended to and did line the pockets of the [defendants] at the expense of USANA and its shareholders.” But this does not show that the purposes of the Plan were violated. Every compensation decision enriches the recipient at the expense of the company. One of the primary purposes of the Plan is to incentivize directors and officers to stay with the corporation by enriching them. The SSARs clearly met this purpose by 1) increasing the compensation of the directors and officers and 2) maintaining a 23-to-42 month vesting period, thereby incentivizing the directors and officers to stay with the company (so that they could actually exercise the SSARs)
¶36 Mr. Rawcliffe did not allege that the defendants were over-compensated, just that they received spring-loaded SSARs. Essentially, Mr. Rawcliffe argues that spring-loaded equity incentive awards are a per se violation of the Plan‘s purposes.17 We do not
agree. To meet
¶37 We can imagine instances in which spring-loading would be a breach of one of the standards of conduct listed in
¶38 However, Mr. Rawcliffe has failed to allege any facts showing that the Compensation Committee did not meet the purposes of the Plan in awarding the spring-loaded SSARs. Additionally, he has not alleged any facts sufficient to show that the Compensation Committee was utterly indifferent or intentionally violated the purposes of the Plan. He simply alleges that the Compensation Committee “knowingly spring-loaded” the SSARs. But incentivizing the directors and officers by awarding them with bonuses is one of the primary purposes of the Plan, so we cannot see how it harmed the corporation absent something more. We affirm the district court‘s dismissal of Mr. Rawcliffe‘s breach of fiduciary duty claim against the members of the Compensation Committee.
¶39 Mr. Rawcliffe‘s claim for corporate waste against the Compensation Committee members is likewise unavailing. While we have mentioned the claim of corporate waste before, we have never actually defined its scope or applied it in a case. See, e.g., Reedeker v. Salisbury, 952 P.2d 577, 587 n.11 (Utah Ct. App. 1998) (stating that the parties argued over whether a claim for corporate waste exists in Utah, but the court “need not decide this issue“); Equitable Life & Cas. Ins. Co. v. Inland Printing Co., 484 P.2d 162, 163 (Utah 1971) (saying that “[d]irectors or officers may be liable to the corporation or stockholders for mismanagement of the business of the corporation or waste of its assets” without defining or applying any standard); Arndt v. First Interstate Bank of Utah, N.A., 1999 UT 91, ¶ 18, 991 P.2d 584 (mentioning corporate waste without applying it or addressing its scope).
¶40 On appeal, Mr. Rawcliffe does not argue what the standard should be for a claim of corporate waste. He merely spends a single paragraph making the bald assertion that spring-loaded SSARs are a waste of corporate assets because a Delaware court has said as much. He neither recites the standard for corporate waste in Delaware, nor argues why we should adopt such a standard. “[W]e are not a depository in which the appealing party may dump the burden of argument and research.” Bank of Am. v. Adamson, 2017 UT 2, ¶ 11, 391 P.3d 196 (citation omitted). This is especially true when the appellant seeks to impose liability
C. Mr. Rawcliffe‘s Claims Against the Other Director and Officers
¶41 Finally, we dismiss Mr. Rawcliffe‘s claims against the other defendants who passively received the spring-loaded SSARs. Mr. Rawcliffe brought claims against one director and several officers for breach of fiduciary duty and unjust enrichment. As we have already dismissed his claim for breach of fiduciary duty against the members of the Compensation Committee, who actively approved the SSARs, we cannot see how a director or officer who passively received the SSARs breached a fiduciary duty or violated the “spirit” of the Plan.
¶42 Additionally, we hold that Mr. Rawcliffe has failed to state a claim for unjust enrichment. We cannot see how it is inequitable for the director and officers to retain the benefit of the spring-loaded SSARs. See Desert Miriah, Inc. v. B & L Auto, Inc., 2000 UT 83, ¶ 13, 12 P.3d 580 (Unjust enrichment requires that “the acceptance or retention by the conferee of the benefit [must be] under such circumstances as to make it inequitable for the conferee to retain the benefit without payment of its value.” (citation omitted)). According to the facts pled in the complaint, the Compensation Committee approved the spring-loaded SSARs in strict compliance with the “letter” of the Plan, and the spring-loaded SSARs did not violate any of the purposes of the Plan. Unless he were to allege that the director and officers were over-compensated, or that the awards somehow violated the Plan, it is not unjust for the director and officers to keep their awards.18 We affirm the district court‘s dismissal of the remaining defendants in the action.
CONCLUSION
¶43 The Utah Revised Business Corporation Act establishes when a corporate director or officer may be held liable to the corporation or its shareholders for her official acts. Mr. Rawcliffe has failed to allege sufficient facts to establish any breach of such a duty. We cannot say that spring-loading SSARs constitutes a per se violation of USANA‘s 2006 Equity Incentive Plan, and Mr. Rawcliffe has failed to allege any facts supporting the inference that the defendants intended to harm, or actually harmed the corporation. We affirm the district court‘s dismissal of this case without prejudice.