JAN DONNAWELL, derivatively on behalf of DEVRY, INC. Plaintiff,
DANIEL HAMBURGER, CHRISTOPHER B. BEGLEY, DAVID S. BROWN, GARY BUTLER, CONNIE R. CURRAN, DARREN R. HUSTON, WILLIAM T. KEEVAN, LYLE LOGAN, JULIA A. McGEE, FERNANDO RUIZ, HAROLD T. SHAPIRO, RONALD L. TAYLOR, and LISA W. WARDELL, Defendants, and DEVRY, INC., Nominal Defendant.
MEMORANDUM OPINION AND ORDER
GEORGE M. MAROVICH, District Judge.
Plaintiff Jan Donnawell ("Donnawell") filed a shareholder derivative complaint against individual defendants Daniel Hamburger ("Hamburger"), Christopher B. Begley, David S. Brown, Gary Butler, Connie R. Curran, Darren R. Huston, William T. Keevan, Lyle Logan, Julia A. McGee, Fernando Ruiz, Harold T. Shapiro, Ronald L. Taylor and Lisa W. Wardell and against nominal defendant DeVry Inc. ("DeVry"). The individual defendants are members of the Board of Directors of DeVry. Defendants have filed a motion to stay this case and a motion to dismiss. For the reasons set forth below, the Court denies the motion to stay and grants the motion to dismiss.
At some point, DeVry adopted the Incentive Plan of 2005 and the Amended and Restated Incentive Plan of 2005 (the "2005 Plan"). Under the 2005 Plan, the company was allowed to award stock options to certain employees of the company. The company could not, however, make an award of stock options under the 2005 Plan that exceeded 150, 000 shares of DeVry stock per person per year. Notwithstanding the limit in the 2005 Plan, DeVry granted CEO Daniel Hamburger ("Hamburger") stock options of 184, 100 shares in August 2010, 170, 200 shares in August 2011 and 255, 425 shares in August 2012.
Based on these stock options awards, DeVry shareholder Milton Pfeiffer ("Pfeiffer") filed a shareholder derivative suit in the Circuit Court of DuPage County on October 15, 2012. Pfeiffer alleged that the Board of DeVry breached its fiduciary duty in awarding stock options in excess of the limits of the 2005 Plan (Count I), that the stock option awards were a waste of corporate assets (Count II) and that the awards constituted unjust enrichment to CEO Hamburger (Count III).
Less than a month later, on November 12, 2012, plaintiff Donnawell filed her shareholder derivative suit here. Donnawell, like Pfeiffer in state court, challenges the stock options awarded to Hamburger in amounts greater than 150, 000 shares under the 2005 Plan. Like Pfeiffer alleged in state court, Donnawell alleges that the Board members breached their fiduciary duty by granting awards in excess of 150, 000 shares (Count I), that the Board members wasted corporate assets (Count III) and that the awards unjustly enriched Hamburger (Count V). Donnawell also makes two additional claims that Pfeiffer did not make in his state-court case. In Count IV, Donnawell asserts that the individual defendants violated Section 14(a) of the Securities Exchange Act by including false or misleading statements in a Form DEF 14A proxy statement (the "2012 Proxy") that it filed with the Securities and Exchange Commission ("SEC") and distributed to DeVry shareholders. Specifically, Donnawell alleges that "the 2012 Proxy was false and misleading because it falsely implied that that [sic] gains on the stock options awarded to defendant Hamburger will be entitled to tax deductibility under section 162(m), when in fact the violation of the 150, 000 share limit put at risk the tax deductibility of such awards and the gains thereon." (Donnawell Complt. ¶ 41). In Count II, Donnawell alleges that defendants breached their fiduciary duty "by disseminating the 2012 Proxy, which they knew contained material omissions..." (Donnawell Complt. ¶ 59).
Defendants have filed two motions. First, defendants move the Court to stay this case on the grounds of Colorado River abstention. Second, defendants move to dismiss this suit. With respect to their motion to dismiss, defendants argue that three of Donnawell's claims are moot and that the other two fail to state a claim upon which relief may be granted.
In connection with defendants' argument that three claims are moot, defendants have admitted that Donnawell is correct that the 2005 Plan limited stock option awards to 150, 000 shares per person per year. They have also admitted that DeVry erred by making stock option awards to Hamburger in excess of 150, 000 per year under the 2005 Plan. Finally, defendants have put forth evidence that DeVry has already corrected the problem. Specifically, DeVry determined that the grants in excess of 150, 000 were ineffective and proceeded to grant Hamburger stock options within the limits. Effectively, DeVry changed the grants so that Hamburger was awarded stock options of 150, 000 shares under the 2005 Plan for the year 2010; 150, 000 shares under the 2005 Plan for the year 2011; and 150, 000 shares under the 2005 Plan for the year 2012. In addition to the awards under the 2005 Plan, DeVry also granted Hamburger stock options of 87, 910 shares for the year 2012 under a different plan, the 2003 Stock Incentive Plan.
Finally, the Court takes judicial notice of the fact that, on or about June 7, 2013, a state-court judge decided that Pfeiffer's state-court claims are moot and that the case will be dismissed after the judge rules on Pfeiffer's motion for attorneys' fees.
A. Motion to stay
Defendants ask the Court to abstain from hearing this case because a similar case is pending at the Circuit Court of DuPage County. The Court may, under certain circumstances, abstain from hearing a case over which it has jurisdiction. In Colorado River Water Conservation Dist. v. United States, 424 U.S. 800 (1976), the Supreme Court explained that:
there are principles unrelated to considerations of proper constitutional adjudication and regard for federal-state relations which govern in situations involving the contemporaneous exercise of concurrent jurisdictions, either by federal courts or by state and federal courts. These principles rest on considerations of [w]ise judicial administration, giving regard to conservation of judicial resources and comprehensive disposition of litigation.' Generally, as between state and federal courts, the rule is that the pendency of an action in the state court is no bar to proceedings concerning the same matter in the Federal court having jurisdiction.
Colorado River, 424 U.S. at 817 (internal citations omitted) (emphasis added). The reason the state suit is no bar to the federal suit is "the virtually unflagging obligation of the federal courts to exercise the jurisdiction given them." Id. The "duty to exercise jurisdiction rests on the undisputed constitutional principal that Congress, and not the Judiciary, defines the scope of federal jurisdiction within the constitutionally permissible bounds.'" Adkins v. VIM Recycling, Inc., 644 F.3d ...