United States District Court, N.D. Illinois, Eastern Division
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.
After the Court dismissed her original complaint, plaintiff Jan Donnawell ("Donnawell") filed an amended complaint against defendants Daniel Hamburger ("Hamburger"), Christopher B. Begley ("Begley"), David S. Brown ("Brown"), Gary Butler ("Butler"), Connie R. Curran ("Curran"), Darren R. Huston ("Huston"), William T. Keevan ("Keevan"), Lyle Logan ("Logan"), Julia A. McGee ("McGee"), Fernando Ruiz ("Ruiz"), Harold T. Shapiro ("Shapiro"), Ronald L. Taylor ("Taylor") and Lisa W. Wardell ("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 dismiss plaintiff's claims. For the reasons set forth below, the Court grants the motion to dismiss.
In November 2005, DeVry adopted the Incentive Plan of 2005 and, later, 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 grants, 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 by awarding stock options in excess of the limits of the 2005 Plan, that the stock option awards were a waste of corporate assets and that the awards constituted unjust enrichment to CEO Hamburger. Less than a month later, on November 12, 2012, plaintiff Donnawell filed her original complaint here. Like Pfeiffer had alleged in state court, Donnawell alleged 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). In Count IV, Donnawell asserted that the individual defendants violated Section 14(a) of the Securities Exchange Act by including false or misleading statements in the 2012 Proxy. Specifically, Donnawell alleged 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 alleged that defendants breached their fiduciary duty "by disseminating the 2012 Proxy, which they knew contained material omissions..." (Donnawell Complt. ¶ 59).
By the time defendants filed their motion to dismiss the original complaint, DeVry had already corrected the error. With their motion to dismiss, defendants put forth evidence that DeVry had, in essence, changed the grants such 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 for 87, 910 shares for the year 2012 under a different plan, the 2003 Stock Incentive Plan (the "2003 Plan"). Accordingly, the Court dismissed as moot Counts I, III and V of Donnawell's original complaint. The Court also dismissed Counts II and IV (the claims that defendants breached their fiduciary duty by making misstatements in the 2012 Proxy) for failure to make a demand.
In her amended complaint, Donnawell changes tack. Donnawell now asserts, in Count I, that defendants breached their fiduciary duty by designating the stock options for 87, 910 shares as having been awarded under the 2003 Plan in order to avoid liability on Donnawell's original claims-the ones the Court dismissed as moot. In Count II, Donnawell alleges that defendants breached their fiduciary duty by disseminating the 2012 Proxy, which contained false and misleading statements.
The Court takes the following allegations, from Donnawell's amended complaint, as true.
DeVry shareholders approved the 2003 Plan in November 2003. The 2003 Plan authorized DeVry to grant options for up to 2, 000, 000 shares. Two years later, DeVry had used about half of the options available under the 2003 Plan. As of June 2012, DeVry had 98, 110 shares available under the 2003 Plan. In November 2005, DeVry shareholders approved the 2005 Plan, which was amended a year later. Under the 2005 Plan, DeVry could award options for up to 150, 000 shares per person per fiscal year.
Donnawell believes that the stock-option award of 87, 910 shares to Hamburger under the 2003 Plan was a breach of fiduciary duty. Specifically, plaintiff alleges that the independent directors "retroactively designated the 87, 910 Options as having been awarded under the 2003 Plan for the sole purpose of being able to argue that those options did not count against the 2005 Plan's 150, 000 shares per person limit and therefore did not have to be rescinded." (Am. Complt. ¶ 57). Plaintiff alleges that the directors "manipulated the designation of the 87, 910 Options as having been awarded under the 2003 Plan for the sole purpose of avoiding liability in this action and thereby advantaging themselves at the expense of the company." (Am. Complt. ¶ 58). Plaintiff alleges that "DeVry has sustained damages, including, but not limited to, the value of the 87, 910 Options." (Am. Complt. ¶ 59).
Donnawell also alleges that the defendants breached their fiduciary duties by making a false and misleading statement in the 2012 Proxy, thereby depriving DeVry shareholders of their right to cast fully-informed votes at the annual meeting. "Specifically, the 2012 Proxy falsely and misleadingly stated that [g]ains on the exercise of stock options... qualify as performance-based compensation under 162(m), ' but did not disclose that the gains on the exercise of the stock options awarded to Hamburger in 2008, 2010, and 2011 did not qualify as performance-based compensation under Section 162(m) because those awards violated the terms of the 2005 Plan." (Am. Complt. ¶66).
The 2012 Proxy stated, in relevant part:
Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public companies for certain compensation in excess of $1 million per year paid to covered employees, ' defined as the chief executive officer and the three other most highly compensated officers (other than the chief financial officer) employed as executive officers at year-end. Certain compensation, including performance-based compensation, ' may qualify for an exemption from the deduction limit if it satisfies certain requirements under Section 162(m). The Compensation Committee views the tax deductibility of executive compensation as one factor to be considered in the context of its overall compensation philosophy. The Compensation Committee reviews each material element ...