Opinion
CASE NO. 02-20170-CIV-GOLD/SIMONTON
January 20, 2004
ORDER DENYING MOTIONS TO DISMISS
I. INTRODUCTION
This Cause is pending upon Defendants' Motions to Dismiss ((DE #122), filed October 30, 2002 and (DE #167), filed March 21, 2003) the complaints in this action. As explained in the Statement of the Case, infra, there are three sets of Plaintiff's in this case: the Oorbeek Plaintiff's, the Klein Plaintiff's, and the Phillips Plaintiff's (collectively "Plaintiff's"). The Oorbeek Plaintiff's filed their Opposition (DE #216) on November 3, 2003; the Klein Plaintiff's filed their Opposition (DE #213) on October 31, 2003, and the Phillips Plaintiff's filed their Opposition (DE #210) on October 31, 2003. Defendants filed their Reply (DE #223) on November 24, 2003. The Plaintiff's also filed motions to strike certain of the Defendants' exhibits to appendices filed in support of their motions to dismiss ((DE #233), filed December 5, 2003, and (DE #236), filed December 11, 2003). The Defendants filed their Opposition to the Motion to Strike on December 17, 2003 (DE #237). The Court heard oral argument on the pending motions on December 18, 2003. The transcript of the proceedings of December 18, 2003 is filed as (DE #235) and is referred to in this Order by the designation "Transcript at" followed by the cited page number. Upon review of the parties' arguments, applicable statutes, and case law, the Court DENIES the Motions to Dismiss, for the reasons stated below.
II. STATEMENT OF THE CASE
This section sets forth a general description of the background of the case and provides a list of the documents filed in support of the parties' arguments.
A. The Oorbeek and Berman Complaint
On January 15, 2002, Plaintiff's Oorbeek and Berman (the "Oorbeek" Plaintiff's) filed a three-count Verified Complaint (DE #1) against nominal Defendant FPL, Inc., and 21 various individuals who were either high level executives, officers and/or directors of FPL during the relevant time. The Oorbeek Plaintiff's are shareholders who seek a declaratory judgment and damages on behalf of nominal Defendant FPL with respect to two matters, which are described in the Complaint as follows: a) the issuance of materially false and misleading proxy statements with respect to a Long-Term Incentive Plan ("LTIP") for highly compensated officers of FPL and it principal subsidiary, Florida Power and Light Company; and b) payments made under that plan. (Complaint ¶ 1). The Oorbeek Plaintiff's allege that the Defendants have committed corporate waste by making LTIP payments at the expense of the FPL and its shareholders. ( Id..)
Count 1 of the Complaint alleges a violation of Section 14(a) of the 1934 Securities Exchange Act, 15 U.S.C.' 781, based upon allegedly false and misleading 1999 and 2000 Proxy Statements concerning change-of-control payments that were made to, and retained by, high level executives based upon shareholder approval of a merger, even though the merger was not ultimately consummated (Complaint ¶¶ 66, 68, 69), and concerning the fact that some change-of-control payments may not be tax deductible (Complaint ¶¶ 67, 70). The bases for claiming that the Proxy Statements were false and misleading are various, specified, allegedly material omissions from those Statements. Oorbeek claims that this Count is not a derivative action; FPL claims that it is in essence a derivative claim, regardless of the characterization by Oorbeek (See, e.g., DE #135 n. 1). The remedy sought in Count I is a declaratory judgment declaring the 1999 vote in favor of the change-of-control provisions to be null and void, declaring the 2000 vote in favor of the merger null and void, and ordering the executive Defendants to return the payments to FPL. The Plaintiff's also request that the other Defendants pay compensatory damages as well as costs and attorney's fees.
Counts II and III of the Oorbeek Complaint state derivative claims against members of the FPL Board of Directors ("Board") that issued the 1999 and 2000 Proxy Statements, and against the six non-Board executive recipients of the LTIP change-of-control cash payments. In Count II, Plaintiff's assert a derivative action under Section 14(a) of the Securities Exchange Act based upon the same allegedly false and misleading Proxy Statements that formed the basis for Count I. In Count III, Plaintiff's assert a derivative claim under Florida law, against all Defendants except FPL, for corporate waste, alleging: (1) that the Board approved materially false and misleading 1999 and 2000 Proxy Statements and caused FPL to make LTIP payments which were ultra vires because the shareholder votes which approved them were invalid, and that the Board failed to require repayment (Complaint ¶ 83); (2) that the Board allowed payments which were unreasonably disproportionate to any benefit to the company or services rendered by the executives (Complaint ¶¶ 84, 86), (3) and that the Board allowed payments which were not tax deductible (Complaint ¶ 85). Oorbeek claims that the LTIP did not authorize payment until a merger was consummated, and that the Proxy statements were thereby misleading. With respect to the derivative claims in Counts II and III, the Plaintiff's allege that no demand was made on the Board of Directors of FPL to institute this action because such a demand would have been futile (Complaint ¶¶ 74, 75, 76). The remedy sought in Count II is to declare the 1999 and 2000 votes null and void; to order the executive Defendants to return the change of control payments to FPL, and to order the Defendants to pay compensatory damages as well as attorney's fees and costs. The relief sought in Count III is essentially the same.
B. The Klein Complaint
Plaintiff William Klein filed a one-count Verified Derivative Complaint on March 8, 2002, against nominal Defendant FPL and 17 individuals who were directors and/or senior executive officers of FPL or its subsidiaries during the relevant time. (Case No. 02-20758-CIV, (DE #1), filed March 8, 2002). These 17 individuals are included within the group of individual Defendants in the Oorbeek Complaint. Klein alleges that the Board of FPL recklessly approved approximately $52 million in payments and accelerated benefits to high level executives under the LTIP, when such payments were not authorized because there was no change in control that would trigger the obligation. (Klein Complaint ¶ 6). Specifically, Klein contends that the change-of-control was not triggered by shareholder approval of the merger, but was only triggered upon consummation of the merger (Complaint ¶¶ 6, 7). In substance, the Complaint seeks: (1) a declaratory judgment and compensatory damages from the individual Defendants based upon gross and reckless breaches of fiduciary duty in approving such payments and failing to demand their return, (2) restitution from Defendants who received such payments, (3) a declaration that no LTIP payments are owed, and (4) an order requiring FPL to implement effective internal controls designed to monitor FPL's compliance with federal and state laws (Complaint ¶ 71).
Oorbeek has also sued Defendants Lawrence Kelleher (Vice-President of Human Resources), Armando Olivera (Sr. Vice-President of Power Systems), Antonio Rodriguez (unspecified executive position) and Roger Young (President and a Director of FPL), who are not named in the Klein Complaint.
Klein made a written demand upon the Board of Directors on January 17, 2002 to bring this action (Complaint ¶ 9). On February 5, 2002, the Board acknowledged receipt of the Demand Letter, and stated that a Demand Evaluation Committee had been created, but as of the filing of the Complaint on March 8, 2002, Klein had received no other response to the Demand Letter (Complaint ¶ 10). Klein further alleges that FPL has publicly stated that it has no intention of seeking the return of executive payments (Complaint ¶ 11).
C. The Phillips Complaint
On January 28, 2003, Plaintiff's Donald and Judith Phillips filed a Complaint against the same Defendants sued in the Oorbeek Complaint. (Case No. 03-20202-CIV, DE #1). On March 6, 2003, the Phillips case was consolidated into the Klein and Oorbeek cases, and was administratively closed (Case No. 02-20202, DE #9). The Phillips complaint is substantially similar to the Oorbeek complaint. It contains in Count I a claim against all director Defendants for violations of Section 14(a) by issuing false and misleading proxy statements (Phillips Complaint ¶ 66); a derivative claim against all Defendants in Count II, except FPL Group, Inc., for violations of Section 14(a) by issuing false and misleading proxy statements, and, in Count III, a derivative claim against all Defendants, except FPL Group, Inc., for corporate waste under the Florida Statutes ( Id. ¶ 81). Similar to the Oorbeek Complaint, the Phillips Complaint seeks recovery of the change-of-control payments and compensatory damages. The Phillips Complaint was preceded by a demand letter dated November 26, 2002.
None of the Complaints claim that FPL committed corporate waste by virtue of adopting the "change-of-control provisions" assuming the trigger point was at the time of shareholder approval, as compared to consummation of the merger.
D. FPL's Response and Statement of the Issue
FPL established an Evaluation Committee on May 14, 2001, initially in response to a demand letter received from a shareholder, Margaret Carlozzi, who is not a named plaintiff in any of these actions (Report, DE #112, filed September 27, 2002, at 3). The Committee only had the authority to make recommendations; that is, the Board reserved to itself the final determination on whether to proceed with the litigation. ( Id. at 2). The Committee was comprised of three outside directors: Willard D. Dover, Robert M. Beall II, and Armando Codina. ( Id. at 2-3). According to the Report, the Committee's mandate was later expanded to cover the matters raised by the Plaintiff's in the first two consolidated cases (DE # 112 at 2 n. 2.).
The Report of the Evaluation Committee to the Board of Directors was initially filed under seal (Case No. 02-20170-CIV, DE #99, filed August 30, 2002; Case No. 02-20758, DE #97, filed August 30, 2002).Subsequently, the Report was filed publicly, and is docketed as DE # 112 (in 02 20170 CIV) and DE # 111 (in 02-20758-CIV). References to the Report in this Order refer to the docket entry in 02-20170.
On June 21, 2002, in response to a motion filed by FPL, I stayed all proceedings in these cases, except for document production, until September 20, 2002 (later extended until September 27, 2002), pending the completion of the Report of the Evaluation Committee (DE #86). On August 29, 2002, the Evaluation Committee issued its Report, which was furnished to FPL and filed with the Court (DE #112). The Committee recommended that the Board seek dismissal of the shareholder lawsuits. FPL advised the Court that the Board of Directors met on September 12, 2002 (without the participation of the two interested directors. Lewis Hay and Paul Evanson) and agreed with the Report that pursuit of these lawsuits was not in the best interests of FPL or its shareholders generally. The Board authorized the Evaluation Committee, through counsel, to file a Motion to Dismiss (DE #111), Accordingly, the ultimate determination was made by the Board in accordance with Fla. Stat. § 607.07401.
DE #85 is a transcript of the hearing regarding the entry of this stay.
Fla. Stat. § 607.07401(3)c permits the Board, as one of the groups specified, to make a determination in good faith after conducting a reasonable investigation upon which its conclusions are based that the maintenance of the derivative suit is not in the best interests of the corporation. As further discussed below, the Statute also provides that such a determination may be made by a majority vote of the Evaluation Committee, or by a panel of one or more independent persons appointed by the court upon motion by the corporation.
On October 30, 2002, FPL filed its Motion to Dismiss both lawsuits (DE #122). The grounds for this motion are as follows:
(1) as to the Oorbeek Complaint, the plaintiff shareholders Oorbeek and Berman failed to make a demand on the board of directors of FPL before instituting the present derivative litigation and (2) as to the Klein Complaint, a majority of the board of directors of FPL has determined that it would not be in the best interests of FPL or its shareholders generally to pursue the claims sought to be asserted derivatively by plaintiff Klein.
(DE #122 at 2).
On March 21, 2003, FPL filed an initial Motion to Dismiss as to the Phillips Complaint, which it also stated was intended to serve as a supplement to the Motion to Dismiss previously filed as to the Klein Complaint (DE #167 at 2). The basis for this Motion is that Plaintiff's in both cases failed to make substantive demands on the Board prior to filing these lawsuits; specifically, FPL claims that the demand letters were "purely formal" and were insufficient to satisfy the requirement of a substantive demand under Florida law (DE #167 at 3). At oral argument, FPL abandoned its arguments that the Oorbeek Complaint should be dismissed for failure to make a demand, and that the Klein and Phillips Complaints should be dismissed because they failed to make substantive demands. (Transcript at 37, 38). Accordingly, I shall not address the demand issues in this Order. The sole remaining issue is whether FPL has met its burden of proving by the preponderance of the evidence under Fla. Stat. § 607.07401(3)" . . . the independence and good faith of the group making the determination and the reasonableness of the investigation," Even so, FPL, in its Reply brief, for the first time, sought to dismiss the Oorbeek and Phillips Complaints in their entirety because they purportedly "failed to plead actionable Section 14 claims, and the Committee and outside directors so concluded based on a good faith, reasonable investigation of the Section 14 claims. . . ." (Reply, DE #223, at 44).
At oral argument, FPL agreed that it had to sustain its burden in accordance with the "preponderance of the evidence" standard. (Transcript at 12, 15).
Even though this matter was not initially raised by FPL, and therefore not responded to by the Plaintiff's, I do not reach the merits of this issue because I find that FPL has not met its burden on "independence."
E. Exhibits in Evidence
None of the parties has moved for summary judgement in accordance with Fed.R.Civ.P. 56, nor has FPL moved to dismiss pursuant to Fed.R.Civ.P. 12(b)(6). FPL's motions to dismiss arise solely under Fla. Stat. § 607.07401, subsection (3). Since no motion for summary judgment has been filed, the requirements of Southern District of Florida Local Rule 7.5, specifying a concise statement of material facts which are, or are not, in dispute, have not been met. As discussed below, the Florida Statute does not address the nature of the hearing that is to be conducted by which the court is to determine whether the corporation's motions to dismiss the derivative actions should be granted. Nonetheless, the parties requested, and the Court granted, discovery and permission to file depositions, affidavits and other documents in support of their respective positions. The following is a description of the exhibits filed in evidence in this case by the parties.
FPL had moved to dismiss the Klein and Phillips Complaints under Fed.R.Civ.P. 23.1 but abandoned this ground when it abandoned the insufficiency of demand argument. (Transcript at 36-39). As discussed in Part IV.B. infra, subsection (3) permits the court to dismiss a derivative suit on motion by the corporation.
By Court Order, entered on September 26, 2003, discovery proceeded as to those issues raised in the Report and in FPL's Motion to Dismiss (DE #192).
FPL submitted five exhibits with its Motion to Dismiss: Declaration of Willard D. Dover (Def. Exh. A), Declaration of J. Hyatt Brown (Def. Exh. B), Declaration of Paul A. Tregurtha (Def. Exh. C), Declaration of Bruce Coolidge (Def. Exh. D), and FPL's May 24, 2002 Notice of Annual Meeting of Shareholders (Def. Exh. E). Defense Exhibit A included six attachments: Board of Director Proposed Resolutions (Attachment A), Minutes of the February 11, 2002 Board meeting (Attachment B), a letter dated April 2, 2002 from Wilmer Cutler Pickering (Attachment C), Minutes of the August 16, 2002 Board meeting (Attachment D), Slides the Evaluation Committee presented to the Board on August 16, 2002 (Attachment E), and Minutes of the September 12, 2002 Board meeting (Attachment). Defense Exhibit D includes the Evaluation Committee's Witness Interview List (Attachment A). Defendants filed the Phillips demand letter with their Motion to Dismiss the Klein and Phillips Complaints. (DE #167, filed March 21, 2003).
FPL later filed a different version of the September 12, 2002 minutes that it states is "the corrected version." Accordingly, when citing to the minutes, the Court will cite to FPL's Corrected Filings, (DE #241), filed January 8, 2004, at Tab 1 ("FPL's Corrected Filings at Tab 1") instead of Attachment F when referring to the September 12, 2002 minutes.
The Oorbeek Plaintiff's filed an Appendix (DE #209, filed October 31, 2003) of thirty exhibits (Oorbeek Exhs. 1-30) in support of their Opposition to the Motion to Dismiss. These exhibits consist of FPL's 1994 Proxy Statement (Oorbeek Exh. 1), FPL's 1999 Proxy Statement (Oorbeek Exh. 2), FPL-Entergy 2000 Merger Proxy Statement (Oorbeek Exh. 3), a Miami Herald editorial dated April 5, 2001 (Oorbeek Exh. 4), an excerpt from FPL's Form 10-K for fiscal year 2000 (Oorbeek Exh. 5), FPL's 2001 Proxy Statement (Oorbeek Exh. 6), the Carlozzi demand letter (Oorbeek Exh. 7), Fla. Stat. § 607.07401 (Oorbeek Exh. 8), an excerpt of an internal question and answer session dated April 1, 2001 (Oorbeek Exh. 9), an excerpt of a teleconference on April 2, 2001 (Oorbeek Exh. 10), excerpts of the Codina deposition (Oorbeek Exh. 11), a Miami Herald article dated April 3. 2001 (Oorbeek Exh. 12), a Times-Picayune article dated April 8, 2001 (Oorbeek Exh. 13), excerpts of the Kromer deposition (Oorbeek Exh. 14), FPL's Schedule 14A Information filed April 11, 2001 (Oorbeek Exh. 15), excerpts of the Dover deposition (Oorbeek Exh. 16), excerpts of the Beall deposition (Oorbeek Exh. 17), excerpts of the Malek deposition (Oorbeek Exh. 18), a January 16, 2002 press release (Oorbeek Exh. 19), excerpts of the June 17, 2002 hearing transcript (Oorbeek Exh. 20), excerpts of the Coolidge deposition (Oorbeek Exh. 21), excerpts of the Brown deposition (Oorbeek Exh. 22), a June 27, 2002 memorandum to FPL (Oorbeek Exh. 23), a Miami Herald article dated January 17, 2002 (Oorbeek Exh. 24), various correspondence from AIG Technical Services and AEGIS (Oorbeek Exh. 25), FPL's Form 10-K for fiscal year 2001 (Oorbeek Exh. 26), FPL's teleconference transcript dated April 2, 2001 (Oorbeek Exh. 27), a Sun Sentinel article dated January 17, 2002 (Oorbeek Exh. 28), a Palm Beach Post article dated January 17, 2002 (Oorbeek Exh. 29), and FPL's Supplemental Answers to Klein's First and Second Set of Interrogatories dated October 10, 2003 (Oorbeek Exh. 30).
Plaintiff Klein concurrently filed thirty exhibits (DE #214, Klein Exhs. 1-30) with its Opposition to the Motion to Dismiss. Plaintiff's' counsel deposed the three members of the Evaluation Committee: Dover (Klein Exh. 1), Beall (Klein Exh. 2), and Codina (Klein Exh. 3). Plaintiff's also deposed FPL's Vice President of Corporate Communications (Mary Lou Kromer, Klein Exh. 4), FPL Group Director Frederic v. Malek (Klein Exh. 5), Compensation Committee Chair J. Hyatt Brown (Klein Exh. 6), and Evaluation Committee Attorney Bruce Coolidge (Klein Exh. 7). Plaintiff's' remaining exhibits (Klein Exhs. 8-30) consist of the following: Kromer Interview Notes, Brown Interview Notes, Dover Dep. Exh. 27, Broadhead Statement, Broadhead interview Notes, Coyle Interview Notes, Dover Dep. Exh. 25, May 28, 2002 Brown Interview Notes, Coolidge Dep. Exh. 19, Kromer Dep. Exh. 8, Kromer Dep. Exh. 9, Coolidge Dep. Exh. 14, Coyle Interview Notes, Broadhead Handwritten Interview Notes, August 5, 2002 Brown Interview Notes, June 26, 2002 Brown Interview Notes, FPLSUP 000002 (chart of total payouts by officer), Coolidge Dep. Exh. 13, Criser Interview Notes, Leonard Statement, Witness Interview Chart, Dover Dep. Exh. 24, and FPL's supplemental answers to Klein's first and second set of interrogatories.
On November 24, 2003, FPL filed thirteen exhibits (DE #s 222, 224) (Def. Reply Exhs. 1-13): Coolidge Declaration, Report of Determination Committee, Camaren Declaration, Thaman Declaration, Codina Deposition, Beall Deposition, Brown Deposition, Malek Deposition, Dover Deposition, Wilmer Memorandum dated July 2, 2002, Wilmer Memorandum dated May 8, 2002, Wilmer Interview of Tregurtha, and Unpublished Cases. Defendants filed additional declarations the same day: Camaren's (DE #225), Michael H. Thaman's (DE #226) and Coolidge's (DE #227). Finally, the parties filed a joint Submission of Information Pursuant to the Court's Request at Oral Argument ((DE #240), filed December 31, 2003), which consisted of a chart indicating which individuals were members of various groups at relevant times.
After reviewing these documents and exhibits, I conclude that there are no issues of material fact, or questions of credibility, which require an evidentiary hearing to resolve. None of the parties requested an evidentiary hearing, nor have their briefs disclosed material issues of fact. Accordingly, I am able to find that the following material facts are not in dispute based on the entirety of the record submitted.
FPL requested an evidentiary hearing at oral argument only after I raised the issue. (Transcript at 10-11). In effect, the Company argued that there should be an evidentiary hearing if I felt I needed one. ( Id..)
See the discussion in Part IV B, infra, where this subject is discussed in more detail.
III. FINDINGS OF UNDISPUTED FACTS
A. Development of the LTIPIn early 1994, FPL's Compensation Committee began developing an LTIP. (Report at 26). At the time, the Compensation Committee consisted of Brown (Chairman), and Board members Arnelle, Beall, Blumberg, Davis, Lewis, and Tregurtha. Arnelle, Beall, Brown and Tregurtha are named as Defendants in this litigation. (DE #240). With the assistance of FPL's advisors, including the law firm of Steel, Hector Davis (Steel Hector), Dennis Coyle, FPL's General Counsel, collected examples of LTIPs that had recently been adopted by other companies. (Report at 26). He chose one of these plans as the basis for the 1994 LTIP. (Report at 26). The 1994 LTIP included a definition of "change-of-control" which purportedly triggered the automatic acceleration and payment in cash of LTIP payments upon shareholder approval. (Report at 27-28). The 1994 LTIP and severance agreements were adopted "word for word" from a 1989 Wachtell Lipton model definition of a "change of control" event. (Report at 6). As far as the Evaluation Committee was able to determine, directors and officers of FPL in 1994 did not discuss the merits of the "change-of-control" definition or consider alternatives to the definitions adopted. (Report at 28). Nor did they question whether the trigger event should be transaction consummation or shareholder approval. (Report at 29). The Board approved the LTIP and proxy statements relative to it in 1994. (Report at 26). At the time, Defendants Arnelle, Bealle, Brown, Dover, Malek and Tregurtha were members of the Board. (DE #240). In 1994, FPL shareholders approved the 1994 LTIP on the basis of proxy statement disclosures. (Report at 8).
James Broadhead, former Chair and CEO of FPL, recruited Coyle from Steel Hector to become FPL Counsel in 1989. (Report at 23).
See Part III.C.2, infra, for a further discussion of Steel Hector and Coyle's roles in developing the LTIPs at issue.
The Compensation Committee approved a revised version of the severance agreement in 1999, and the Board subsequently approved the LTIP as well. (Report at 33-34). At this time, the Compensation Committee consisted of Defendants Brown, Arnelle, Beall, Codina, and Tregurtha and non-Defendants Dolan and Lewis. (Oorbeek Exh. 2). FPL then sought shareholder approval, and in conjunction with this objective, distributed in its 1999 proxy statement a description of the LTIP's so-called "single trigger" change-of-control provision. (Report at 34). This description reads as follows:
In the event of a "change of control" of the Corporation, automatically in the case of the Covered Officers, (I) all performance criteria of the performance-based awards will be deemed fully achieved and all such awards shall be fully earned and vested and (ii) all outstanding awards will be canceled and the holder will be paid in cash therefor on the basis of the "change in control price" as of the date that the change of control occurs or such other date as the Compensation Committee may determine prior to the change of control.
(Report at 34).
The 1999 proxy also provided that a change of control is deemed to have occurred if "the Corporations' shareholders approve a merger . . . with respect to which the Corporation's shareholders immediately before the transaction do not own at least 75% of the voting securities of the corporation resulting from the transaction." (Report at 34-35). At the annual shareholder meeting in 1999, the shareholders approved the LTIP on the basis of these proxy materials. (Report at 9).
B. The Proposed Merger, Board Approval and Shareholder Approval
1. Board Approval of the Proposed Merger.
In January 2000, discussions began regarding the possibility of a merger between FPL and Entergy Corporation, a public utility holding company. (Report at 36). FPL retained Cravath, Swaine Moore ("Cravath") as its outside legal advisor for the merger (Report at 37) although Broadhead and General Counsel Coyle were primarily responsible for negotiating the terms of the merger on behalf of FPL. (Klein Exh. 1 at 78). The Board, with one exception, did not involve itself in the negotiations. ( Id. at 78). On one occasion, two Board members, Codina and Tregurtha, participated at the suggestion of Entergy's chairman. ( Id. at 80).
Cravath attorney Henry Morgenbesser believed that the LTIP clearly obligated FPL to accelerate LTIP awards upon a shareholder vote, and he therefore never discussed with any FPL director or officer a different trigger, such as consummation. (Report at 38). All FPL personnel with whom Morgenbesser spoke, including Coyle and Kelleher, shared his understanding that LTIP accelerations and payments would occur upon shareholder approval of the proposed merger. (Report at 38-39). Morgenbesser so advised the Board, such that at the time the Board voted on the merger, it understood from Morgenbesser that shareholder approval would trigger benefits. (Klein Exh. 3 at 43). At the time, the Board sought no other legal advice, nor did it consider whether there was any equitable or legal grounds under Florida law to avoid making payments. (Klein Exh. 3 at 88-90).
Codina testified during his deposition that he voted in favor of the merger knowing these facts. He stated: "And I had no reason to question that issue, except in connection with being asked to serve on this committee [Evaluation Committee], where we were asked to take a step back and look at it with a set of fresh eyes and determine whether that was correct or not." (Klein Exh. 3 at 43, 44 (emphasis added)). He was asked, "So from the time the board voted on the merger in 2000, until the present date, you have always been of the belief that it was a shareholder approval only trigger as opposed to a consummation trigger?" Codina responded: "I was asked to go back and question it and I did and we have looked at it and we were open to — was there an issue of interpretation. Could we have gone back and did we not hear right what counsel said. We revisited all the issues and no, I have had no reason to believe that I should change my mind. I still feel that way." ( Id. at 45).
On July 30, 2000, the Board approved the merger. (Report at 40). The Evaluation Committee found no evidence that any FPL directors or officers focused on the possibility that LTIP payments would be made even though the merger might be abandoned. (Report at 8). At the time, all the named Defendants were members of the Board. (DE #240).
2. Shareholder Approval and LTIP Payments.
On November 7, 2000, FPL and Entergy issued a joint proxy statement. (Report at 41). The proxy statement described material aspects of the proposed merger and contained a recommendation by FPL's Board that the shareholders approve the merger. (Report at 42). One section of the proxy reads as follows:
Upon approval of the merger by FPL Group's shareholders, all performance-based . . . awards, restricted stock and other stock-based awards held by the eight executive officers named in this section under FPL Group's 1994 Long-Term Incentive Plan will be deemed fully achieved, and all awards shall be fully earned and vested. . . .
(Report at 42).
The proxy also stated that "there may be a significant amount of time" between the dates when the shareholders vote on the merger and the date when the merger is completed. (Report at 43). Further, the proxy indicated that the merger might not occur at all, but it did not discuss what effect this non-occurrence would have on the LTIP payments. (Report at 44). The Report does not state which Board members voted to approve the proxy statement. As of November 2000, the following Defendants were members of the Board: Arnelle, Barrat, Beall, Codina, Dover, Dreyfoos, Malek, Tregurtha, Criser, Lewis, Broadhead, and Evanson. (DE #240; Oorbeek Exh. 6 at 2-4). Further, in November 2000, Defendant Coyle was General Counsel and Secretary of FPL. (Report at Appendix 7).
On December 15, 2000, FPL shareholders approved the merger. (Report at 44). Concerns regarding the honesty of an Entergy officer's disclosures arose around this time, and perhaps before, but there was no consideration of delaying the shareholder vote. (Klein Exh. 1 at 93). According to Dover, at the time of the vote, the Board had not considered what would happen if the shareholders approved the merger, the payments were made, and the merger was subsequently abandoned. (Klein Exh. 1 at 90). Although the Board thought that the merger would be consummated, it was aware of the normal risks of a merger. (Klein Exh. 1 at 90-91; see Report at 8). Prior to the Board vote, the Compensation Committee voted in favor of making the payments. Defendant Board members Arnelle, Brown, Tregurtha, Codina, and Beall served on that Committee (Oorbeek Exh. 6 at 8), and although the record does not state whether all five of them joined in the vote, it does reflect that at least Brown, Beall, and Codina did. (Klein Exh. 6 at 91). The Compensation Committee's vote was premised on the assumption that the LTIP trigger was based on shareholder approval rather than consummation. ( Id.) The matter was also submitted to the Board for approval. (Klein Exh. 2 at 22; Klein Exh. 5 at 24.) Although the record does not state precisely which Board members voted to make the payments, Defendant Malek stated in his deposition that he fell into that category. ( Id..)
Following shareholder approval, FPL made $92,265,318 in LTIP payments on December 20, 2000 to 696 employees, including $62,448,407 to the eight most senior FPL executives. (Report at 47). The eight most senior executives were James Broadhead (received $22,686,674), Paul Evanson ($10,395,654), Lewis Hay ($6,696,320), Dennis Coyle ($6,349,587), Lawrence Kelleher ($6,204,490), Thomas Plunkett ($5,902,937), Armando Olivera ($3,151,517), and Antonio Rodriguez ($1,061,227). (Report at 45-46). The remaining Thirty Million Dollars was paid to an additional 688 officers/employees (Klein Exh. 1 at 11). In November 2001, the Board modified the LTIP "in a manner that would avoid a repetition of the unforeseen LTIP payments made in December 2000." (Report at 7).
3. Merger Abandoned.
The Report states that concerns regarding the merger arose in January or February of 2001. (Report at 8). According to one news account, FPL officials began raising questions about Entergy's financial condition, and requesting documents from the company, just five days after the shareholder vote. (Klein Exh. 7 at 128). During a Board meeting in February, Broadhead voiced a number of problems he had with Entergy, including discrepancies between financial projections Entergy had given him and numbers Entergy had provided to its own board. (Klein Exh. 12; Report at 48). Coyle, however, stated that "FPL management thought that Entergy's projections were optimistic, so the numbers were discounted when FPL Group was considering whether to agree to the merger." (Klein Exh. 13 at 7-8).
Codina accompanied Broadhead to a meeting with Entergy in March 2001. (Klein Exh. 3). A month later, on April 1, 2001, FPL and Entergy terminated their merger agreement (FPL Form 8-K dated April 1, 2002). On April 2, 2001, Broadhead told the public that the merger was being terminated because he did not trust Entergy's conflicting financial projections. (Klein Exh. 11 at 67). Over the next several days, FPL spokesperson Kromer, at the direction of LTIP recipient and General Counsel, Coyle, informed the public that the LTIP payments were proper. (Orbeek Exhs. 12, 13, and 14 at 39-43).
C. Formation of the Evaluation Committee
1. Forming the Evaluation Committee and Selecting Members.
In response to the Carlozzi demand letter, the Board resolved on May 14, 2001 to form an Evaluation Committee to evaluate the LTIP payments. (Def. Exh. A. ¶ 4; Def. Exh. A at Attachment A). Subsequently, on February 11, 2002, evaluation of the Oorbeek Complaint and the Klein letter were added to the Committee's mandate. (Def. Exh. A at Attachment B).
Defendant Broadhead asked Dover, Beall, and Codina to serve on the Evaluation Committee. (Klein Exh. 3 at 104-105; Klein Exh. 2 at 5-6; Klein Exh. 1 at 112; Oorbeek Exh. 11 at 119-120). According to Codina, Broadside specifically told him he "needed him" to serve. (Klein Exh. 3 at 104-105). Defendants admit in their Reply that Broadhead discussed the selection of the Evaluation Committee members with FPL's Board to help it identify persons who were well-qualified to serve. (FPL Reply Exh. 5 at 6; FPL Reply Exh. 6 at 6-7). He and Evanson, the other officer-director at the time, however, did not actually participate in the vote to establish an Evaluation Committee and the decision to select Dover, Beall, and Codina as its members. (Def. Exh. A. at Attachment A). The remaining members of the Board, including Dover, Beall, and Codina, participated in these decisions. ( Id.) At the time of selection, the Board did not consider whether each member of the Evaluation Committee could independently participate in the investigation. (Klein Exh. 1 at 95).
The selected Evaluation Committee members had not received LTIP payments, and they were all outside, non-officer members of the FPL Board. (Report at 2; Def. Exh. A ¶¶ 12, 16; Def. Exh. B ¶ 9; Def. Exh. C ¶ 9). All three members, however, had served on the Board at the time it approved the 1999 changes to the LTIP at issue in this litigation, the proxy materials in 1999, and the proxy solicitation in connection with the merger in 2000. (Oorbeek Exhs. 2, 6). Codina had participated in a merger discussion between Entergy and FPL, along with Broadhead. (Klein Exh. 1 at 80). Further, Codina and Beall were Compensation Committee members at the time they were selected to serve on the Evaluation Committee, and they voted in favor of making payments under the LTIP based upon a shareholder trigger. (Klein Exh. 1 at 80, 94; Klein Exh. 6 at 91). None of these factors were discussed or evaluated when the selection of the Evaluation Committee members were approved by the Board, or when the Evaluation Committee first met with its counsel. ( Id. at 83).
According to Frederic Malek, one of the outside directors, no Board member suggested any other method of choosing the Evaluation Committee members, other than accepting the nominees of Broadhead. (Klein Exh. 5 at 37-38).
The first Evaluation Committee meeting took place on June 20, 2001. (Report at 3). At the meeting, Dover was elected chairperson. (Def. Exh. A ¶ 6). Also at that meeting, the Committee determined that each member could independently participate in the investigation. (Report at 3). In making this decision, it did not consider the fact that Codina had participated in a merger discussion between Entergy and FPL, but it did consider the fact that Codina and Beall were Compensation Committee members. (Klein Exh. 1 at 80, 94).
2. Counsel to the Committee.
Dennis Coyle was General Counsel to FPL He both received "change-of-control payments" and advised the company's media spokesperson to say these payments (presumably, his own as well) were legal and authorized by the shareholder's proxy. Both of these matters went to the heart of the demand letters and the various shareholder Complaints. He helped draft the Company's press response to the Oorbeek lawsuit. (Klein Exh. 4 at 43). The press release stated that the documents the shareholders received clearly stated that if the deal was approved, certain awards under the incentive plan would be fully earned and paid. Id. at 44-45.
Coyle also was active in the selection of the initial counsel for the Evaluation Committee. He recommended to Dover that the Evaluation Committee retain Steel Hector, his former law partnership, as legal counsel. (Klein Exh. 1 at 49-50). No other outside counsel was considered. ( Id. at 48). Prior to that time, Steel Hector had been involved in the development of the LTIP at issue. (Report at 23-25, 32-33). In late 1998 and early 1999, FPL asked Steel Hector to review the company's change-of-control protections and advise it on appropriate changes to the plans. (Report at 32). Regarding the change-of-control definition, Steel Hector recommended changing the percentages relating to post-merger changes in shareholder ownership and Board membership, but suggested no other changes to the definition. (Report at 32-33). Steel Hector did not comment on whether company might consider a transaction consummation trigger rather than a shareholder approval trigger. (Report at 33). In sum, the Board and Evaluation Committee were advised, at different times, by its General Counsel who had received change-of-control payments, opined on their legality, and was instrumental in choosing as initial counsel to the Evaluation Committee his prior law firm, which had participated in drafting the change-of-control language at issue.
Codina was not aware that Colye had worked at Steel Hector at the time the Evaluation Committee retained the firm, although he was aware that the firm had performed work on FPL's LTIP. (Klein Exh. 3 at 66-67). He later concluded that it "made sense that we get counsel that had nothing to do with this matter." ( Id. at 66). Regretfully, such counsel was not retained until some eight months after the Evaluation Committee commenced its work.
As initial counsel to the Evaluation Committee, Steel Hector gave the Committee an opinion that its members were "independent" at its first meeting. (Klein Exh. 1 at 57, 58). No legal citations or authorities were analyzed, (/of. at 58). Each member was considered independent if he was "non-interested," that is, if he had no direct or indirect interest in the outcome. (Klein Exh. 1 at 128-129). Steel Hector performed witness interviews, including an interview of its ex-partner Coyle, and reviewed documents. (Klein Exh. 28). About eight months into the investigation, the Evaluation Committee decided that it needed to hire new outside counsel because Steel Hector had a past and ongoing relationship with FPL and its senior officers. (Report at 4). The Report acknowledged the following:
Steel Hector also advised the Evaluation Committee members that it could function as an independent counsel. ( Id. at 57-58).
Approximately eight months into the investigation the Committee determined that Steel Hector's past and ongoing relationship with FPL and its senior officers, which initially appeared desirable because of Steel Hector's knowledge from many years as FPL's principal law firm, could create a conflict on issues that arouse in the Committee inquiry.
( Id.) Defendant Dover recollected that this decision may have been prompted by the Oorbeek Complaint and Klein demand letter. (Klein Exh. 1 at 23-30, 34, 41-46). He also specifically testified, "It became obvious to us from the investigation that the firm [Steel Hector] had been involved, rather heavily, in the instruments that we were looking at." ( Id. at 59). Ultimately, in April 2002, the Committee retained Wilmer Cutler Pickering ("Wilmer Cutler"). (Klein Exh. 1 at 68). Wilmer Cutler re-interviewed each of the witnesses interviewed by Steel Hector unless it concluded that doing so was unnecessary. (Def. Exh. D ¶ 14). In the course of the investigation, counsel reviewed nearly 100,000 pages of documents, conducted a large number of interviews, and reviewed various legal materials. (Report at 4-5). With regard to issues of independence, however, Wilmer Cutler did not discuss with the Evaluation Committee whether to recommend a new evaluation committee or to alter the members of the Evaluation Committee. (Klein Exh. 7 at 68).
3. Comments Regarding the LTIP Payments Prior to the Committee's Evaluation
On May 12, 2001, before the Evaluation Committee investigation was completed, FPL filed a proxy statement on SEC Schedule 14A for the 2001 Annual Shareholder's Meeting. (Klein Exh. 10 at 12). The proxy included a report of the Compensation Committee stating that the December 15, 2000 shareholder vote triggered the Company's obligation to pay "change-in-control" payments under the 1994 LTIP. (Klein Exh. 10 at 10-12). The actual language stated: "FPL Group Shareholders' December 15, 2000 approval of a proposed merger with Entergy Corporation resulted in a change of control under the definition in FPL Group's 1994 long term incentive plan. Upon the change of control all performance criterial of performance-based awards, restricted stock and other stock-based awards held by the executive officers were deemed fully achieved and all such awards were deemed fully earned and vested." (Klein Exh. 1 at 117). The Compensation Committee at that time consisted of Beall, Codina, Brown (chair), Arnelle, and Tregurtha. ( Id..) All outside directors saw this language before it was filed. (Klein Exh. 2 at 109). In response to the question, "[I]f you knew that Beall and Codina had voted in favor of that language, at the time this document was prepared, would that make a difference in your estimation of their independence as committee members?" Dover stated, "It would disturb me." ( Id. at 119).
While the Evaluation Committee was meeting, company representatives were making public statements about the merits of the claims in the press. For instance, an article that appeared in the Sun Sentinel on January 17, 2002 stated that "FPL on Wednesday said in a statement that upon shareholder approval of the proposed merger, certain awards under FPL's Group's long-term incentive plan would be deemed fully earned and vested and would be paid out." (Oorbeek Exh. 28). Upon questioning regarding the premature public statements, Beall agreed that, ". . . in an ideal world it would probably be better had it not occurred." ( Id. at 16).
Mary Lou Kromer, Vice-President of Corporate Communications reported directly to Broadhead, FPL's Chairman and CEO, and, later, his replacement, Lew Hay. She was, from time to time, the spokesperson for the company. (Klein Exh. 4 at 1-4). She specifically talked to Broadhead about what the press would be told relative to the change of control payments. ( Id. at 23). Broadhead told her that he had no intention of returning the monies paid. ( Id. at 25). Ms. Kromer also discussed her press comments with Coyle, FPL's General Counsel, with respect to the payments. ( Id. at 27). Coyle told her that the payments were consistent with the LIIP and that the merger proxy clearly spelled out the change of control provisions. ( Id. at 28). These discussions occurred in 2001 and 2002. ( Id..) Coyle also approved a question/answer" summary of what would be told the investors about the payments. ( Id. at 34). The answers were consistent with his position that the payments were legal and authorized. ( See id..)
Furthermore, the Company filed its 10-K for the fiscal year ending December 31, 2001, while the Evaluation Committee was meeting, in which it was stated that "FPL Group and FPL believe they have meritorious defenses to the pending litigation discussed above [the Oorbeek and Klein Complaints] and are vigorously defending these suits." (Oorbeek Exh. 26). The entire Board had the opportunity to review the 10K and no one commented on these paragraphs. (Klein Exh. 2 at 31). Dover admits that he wishes he had reviewed this statement more carefully than he did before it went into the SEC filing. (Klein Exh. 1 at 108).
D. Evaluation Committee Report
1. Early Draft of the Report
In early August, the Evaluation Committee received an initial draft of the Report, written by Wilmer Cutler, as "counsel for the Committee." (Def. Exh. A ¶ 10; Klein Exh. 1 at 7). The Committee members made minor comments and suggestions regarding the draft. (Klein Exh. 1 at 9). After incorporating these changes into the document, Wilmer Cutler provided a new draft to the Committee members in advance of the Board meeting August 16, 2002. ( Id..)
At Dover's request, LTIP recipients Hay and Evanson did not participate in the August 16, 2002 Board meeting. (Def. Exh. A ¶ 11). Bruce Coolidge, an attorney from Wilmer Cutler, recommended that these two directors, the only officer-directors of FPL at the time, continue to be recused from all discussions regarding the shareholder claims. (Def. Exh. A at Attachment D). The Committee told the Board that the other Directors were independent and should exercise their independent business judgment in deciding whether to pursue the claims. ( Id..) The Committee's determination was based on consultations with counsel regarding the meaning of independence. (Klein Exh. 1 at 770). The remaining directors at the August 16 meeting were Defendants Arnelle, Barrat, Beall, Brown, Codina, Dover, Dreyfoos, Malek, and Tregurtha and non-defendant Zarb. (FPL's Corrected Filings at Tab 1).
By this time, Hay had replaced Broadhead as Chair and CEO of FPL. (FPL Proxy Statement dated May 24, 2002 at 2, 12).
2. Report Conclusions
The Report concluded that the "shareholder approval" trigger was within the norm of equity plans among public companies, and that there existed a rational basis for having such a trigger rather than a "transaction consummation" trigger. (Report at 13, 15-16). The Committee did not focus on the issue of whether these other companies were utilities or otherwise highly regulated. (Klein Exh. 1 at 86-87). Further, the Committee concluded that each of the current non-officer directors of FPL was independent within the meaning of Florida law for purposes of considering the appropriate response to shareholder claims. (Report at 10). The Report concluded that there were two distinct but related requirements for a director to be independent: (1) the director must be disinterested, such that the director has no material personal financial or other interest in the decision; and (2) the director must be independent from the influence of other interested parties, such that the director can exercise his or her own judgment free of the dominance or control of a third party. ( Id. at 92). Applying these tests, the Report concluded that no outside director had a disabling interest preventing fair consideration of the matters reviewed.
Be all commented during his deposition regarding the process the Evaluation Committee used to make their determination that the outside directors were independent and should exercise their independent business judgment in deciding to pursue the claims. He stated: "I would say it was partly a common sense exercise. It was just evaluating the relationships that might exist and just determining on a common sense basis, are these people independent or not. . . . [a]nd we concluded after that discussion and after considering . . . whether anyone was under the sway of anyone else, whether anyone stood to benefit, any of the directors, monetarily from this. . . . we concluded that the board and the committee were independent." (Klein Exh. 2 at 35).
3. Board Approval of the Final Report
The final version of the Report (dated August 29, 2002) was filed on August 30, 2002. (DE #112). The Committee discussed the Report with the Board on September 12, 2002. (Def. Exh. A at ¶ 14). During the portions of the meeting where the members discussed the Report, the officer-directors of FPL did not participate in the meeting. (Def. Exh. A at ¶ 14). The Report was presented by Bruce Coolidge, counsel for the Evaluation Committee. (Klein Exh. 5 at 89). Apparently, at that point, Coolidge also was acting as counsel for the independent directors. (Oorbeek Exh. 21 at 3, 25), Individual directors looked to the Committee and Wilmer Cutler to give the matter a "fresh look." ( Id. at 88). The nine-named Defendant Board members unanimously voted to abide by the Evaluation Committee's Report. (Def. Exh. A at ¶ 14; FPL's Corrected Filings at Tab 1). Each of the nine directors who voted lacked a personal financial interest in the outcome. Report at 92-97; Def. Exh. A ¶ 2, 12; Def. Exh. B ¶ 2; Def. Exh. C ¶ 2. At the meeting, there was no consideration of whether there were any principles under Florida contract law that would vitiate an obligation to pay under the LTIP. (Klein Exh. 6 at 85). The Board considered the Report during two meetings, with a discussion between two to three hours during the first meeting, and less time spent during the second meeting. ( Id. at 85), As observed by Defendant Malek in his deposition, "[w]e were of a mind whatever that committee came back with, we were to act on it." (Klein Exh. 5 at 83). Evaluation Committee members Beall, Codina and Dover joined the other outside Board members in voting to bring the subject Motion to Dismiss and approve the recommendation of the Evaluation Committee. (DE #240). The portion of the Board meeting minutes regarding the vote contain no indication that anyone questioned whether the Evaluation Committee members should participate as Board members in deciding to accept their own recommendations, and, whether their doing so affected their independence as addressed by the Florida Statute. (FPL's Corrected Filings at Tab 1). Also at the meeting, the nine outside directors unanimously decided to assert a claim on FPL's behalf of approximately $9 million against the eight senior executives who received LTIP payments in December 2000. (Def. Exh. B ¶ 11). In the spring of 2003, a successor committee of the FPL Board, known as the "Determination Committee," was formed to continue the Evaluation Committee's tasks. (FPL Reply Exhs. 2-4).
The Oorbeek Plaintiff's move to strike (DE #233, filed December 5, 2003) FPL Reply Exhibits 2, 3 and 4. The Klein Plaintiff's have also filed a Motion to Strike (DE #236, filed December 11, 2003). In addition to requesting that FPL Reply Exhibits 2, 3, and 4 be stricken, the Klein Plaintiff's move to strike paragraphs 5 and 6 of the Coolidge Declaration in FPL Reply Exhibit 1. Defendants filed their Opposition (DE #237) on December 17, 2003.
Upon consideration of the record, the parties' arguments, and relevant authority, the Court GRANTS the Oorbeek Plaintiff's' Motion to Strike, GRANTS the Klein Plaintiff's= Motion to Strike FPL Reply Exhibits 2, 3, and 4, and DENIES the Klein Plaintiff's= Motion to Strike portions of the Coolidge Declaration. Local Rule 7.1(C) prohibits reargument in the reply. The composition of the Evaluation Committee forms a large part of the controversy in this litigation. FPL's attempt to ratify the work of the Evaluation Committee members by introducing arguments based on an entirely new committee=s work constitutes a reargument within the meaning prohibited by Rule 7.1(C). This Rule provides that reply memorandum "shall be strictly limited to rebuttal of matters raised in the memorandum in opposition without reargument of matters covered in the movant's initial memorandum of law." Accordingly, the Oorbeek Motion (DE #233) is GRANTED in its entirety, and the Klein Motion (DE #236) is GRANTED in part.
The new paragraphs of the Coolidge Declaration discuss equitable remedies, which the Court concludes is not material to the issue of whether the Board and Evaluation Committee was independent. The Court does not base its decision to deny dismissal on whether the Committee discussed equitable remedies. Thus, paragraphs 5 and 6 of the Coolidge Declaration have no bearing on the Motion to Dismiss. Further, these new paragraphs do not create unfair surprise. They are simply offered in response to specific arguments the Plaintiff's make in their Oppositions. See Klein Opposition at 3, 33 (stating that no equitable remedies were discussed); Oorbeek Opposition at 45-46 (same). Accordingly, Klein's Motion to Strike (DE #236) portions of the Coolidge Declaration are DENIED.
E. Insurance Coverage
The Carlozzi Demand Letter was forwarded to the National Union Fire Insurance Company of Pittsburgh who had issued a Directors, Officers and Corporate Liability Insurance Policy for the FPL Group Inc. (Oorbeek Exh. 25, July 20, 2001 letter). By memorandum, dated July 20, 2001, AIG Technical Services, Inc., who was working with National Union, advised FPL's representative that, ". . . National Union must reserve its rights under the terms and conditions of the Policy with respect to this matter." ( Id.) According to the memorandum, the Policy's Aggregate Limit of Liability was $35,000,000, subject to a $2,000,000 retention for Securities Claims. ( Id.) The memorandum acknowledged that Carlozzi demanded that the Board institute suit to recover the $60,000,000" paid to the executives. ( Id.).
By memorandum dated October 1, 2002, AIG acknowledged receipt of the Oorbeek and Klein Complaints. (Oorbeek Exh. 25). It again advised". . . . National Union must reserve its rights under the terms and conditions of the Policy with respect to this matter." ( Id., October 1, 2002 memorandum at 2).
The Carlozzi Demand Letter, together with the Oorbeek and Klein lawsuits, were sent to Associated Electric Gas Insurance Services Limited and its managing agent, AEGIS Insurance Services, Inc., with regard to its policy of insurance covering the FPL Group, Inc. ( See id., June 25, 2002 letter). The responding letter, signed by AEGIS' Senior Litigation Counsel, discussed the Directors and Officers Liability Insurance Policy. It advised that the Policy provides an aggregate limit of liability of $35 million for each covered Wrongful Act. The letter identifies ten "actual and potential coverage issues that may result in a limitation or loss of coverage under the Policy with respect to the Claim." The fourth reservation advised as follows:
Fourth, Section III(B)(4) of the Policy provides that AEGIS shall not be liable under Insuring Agreement I(A)(1) to make payment for any Ultimate Net Loss arising from any Claims made against any Director or Officer where such payments would be contrary to applicable law. The Lawsuits and the Demands allege Wrongful Acts which may be uninsurable under applicable law.
( Id., June 25, 2002 letter at 6 (emphasis added)). It concluded with a "reservation of rights" provision. ( Id. at 8). The Fifth reservation warned that any damages in the nature of "disgorgement" may not constitute "damages" under the policy. It stated, "AEGIS would not be liable for amounts the Insureds become legally obligated to pay, or relief ordered against the Insureds, that is not within the definition of Ultimate Net Loss." ( Id. at 6).
Neither the Evaluation Report, nor the minutes of the Board meetings, reflect any discussion by Committee or Board members about the status of their liability insurance coverage, or how, if at all, it affected their independence, particularly where coverage was reserved. FPL failed to disclose as part of the record in this case any communication between the Wilmer Cutler firm and the Board concerning insurance coverage issues. More specifically, the record fails to disclose whether Wilmer Cutler advised the Board that, prior to its vote adopting the Evaluation Committee's recommendations, a specific finding on their part that LTIP payments were made contrary to law, which was the heart of the Oorbeek and Klein Complaints, could possibly result in a loss of insurance coverage, at least under the AGEIS policy, or that "disgorgement," if ordered, may not be a covered damage. The Evaluation Report was patently silent on the issue, even though the AEGIS memorandum was sent to FPL's representative several months prior to the Board vote. Notwithstanding, in response to the question in his deposition ". . . are you certain that if you're found liable, insurance money will be there to prevent you from having to pay out-of-pocket?", Beall commented "Certain? I don't think there's any such certainty now." (Klein Exh. 2 at 41).
The Report did advise that "[i]n light of the statutory qualified immunities provided to directors of Florida corporations (generally precluding personal liability absent willful misconduct or conscious disregard), and in light of the advice provided by Cravath to the board of directors concerning FPL's contractual obligations, the Committee concluded that the risk of personal liability of a non-officer director is remote." ( Id. at 94).
IV. LEGAL ANALYSIS
In explaining my reasons for denying Defendant's Motion to Dismiss, I will first discuss the application of Florida law to the controversy, and then I will explain why an evidentiary hearing is not required under the Florida statute on derivative actions. Finally, I will discuss my conclusion that the Committee and Board did not act independently.
A. Discussion of Which Law Governs
In Burks v. Lasker, 441 U.S. 471, 99 S.Ct. 1831, 60 L.Ed.2d 404 (1970), the United States Supreme Court held that the power to terminate a derivative action depends on the law of the incorporating state. Here, since FPL is incorporated in Florida, and Florida is the forum state, Florida law applies in determining the motion to dismiss. Jacobs v. Adams, 601 F.2d 176, 179 (5th Cir. 1979) ("We . . . look to Florida law, since Florida is both the forum state and the state of . . . incorporation, to determine whether a demand on shareholders, or an alleged excuse for not so demanding, is a necessary prerequisite to bringing a derivative action in Florida's state or federal courts."); Peller v. Southern Co., 911 F.2d 1532, 1536 (11th Cir. 1990) ("The district court found, and the parties agree, that under Burks v. Lasker, 441 U.S. 471, 478,99 S.Ct. 1831, 1837, 60 L.Ed.2d 404 (1979), issues relating to Southern, as a Delaware corporation, are governed by Delaware law, and issues relating to Georgia Power, as a Georgia corporation, by Georgia law.").
The parties agree that Florida law governs this dispute.
The applicable Florida law which governs is Fla. Stat. § 607.07401 (3) which provides that a court "may" dismiss a derivative proceedings if, on motion by the corporation, the court finds that one of the groups specified in the statute has made a determination in good faith after conducting a reasonable investigation upon which its conclusions are based that the maintenance of the derivative suit is not in the best interests of the corporation. Under the statute, the corporation has the burden of proving the independence and good faith of the group making the determination and the reasonableness of the investigation. Id. The statute offers no definition of "independence," "good faith," or "reasonableness." Nor does the statute set forth any specific procedure to be followed in order for the court to exercise its discretion. Although the statute is silent, the parties agree that the Company must meet its burden by the "preponderance of the evidence" standard. The three groups contemplated by the statute include (1) a majority of independent directors present "at a meeting of the board of directors, if the independent directors constitute a quorum;" (2) a majority of a committee consisting of two or more independent directors appointed by a majority of the independent directors, and (3) "a panel of one or more independent persons appointed by the court upon motion by the corporation." In this case, the Evaluation Committee only made a recommendation to the Board, and not a decision as it was empowered to do by statute (if so directed by the Board). Instead, the Board reserved to itself the ultimate decision-making authority, although it heavily relied on the Evaluation Committee's recommendation. Because the Board's ultimate decision gave significant weight to the Evaluation Committee's recommendation, and the decision-making process was blended between the Evaluation Committee and the Board, it is necessary to consider the "independence" of the Evaluation Committee as well as the Board.
This conclusion is supported by the fact that the "reasonable investigation" prong must be measured here by the Evaluation Committee's efforts and report since the Board did not make an investigation independent from that of the Evaluation Committee.
While the Florida statute controls to the extent it speaks to the subject, there is scant case law interpreting the statute as last amended. Given these circumstances, the district court must make an educated prediction as to what Florida courts would do in an area where there is no significant Florida case law. Peller v. Southern Co., 911 F.2d 1532, 1536 (11th Cir. 1990) ("while the parties agree that Georgia law should incorporate the relevant parts of the far more extensively developed Delaware corporate case law, they debate whether Zapata specifically represents an innovation which has gained `majority' acceptance among the states. Resolution of this issue requires an educated prediction as to what Georgia courts would do in an area where there is no significant Georgia case law." (emphasis added)). Accordingly, it is necessary to predict what the Florida courts would do in deciding whether a "totality of the circumstances test," or some other legal standard, should apply in determining such issues as "independence" as well as the evidentiary context in which to apply the test in the first place.
When considering the application of Florida corporate law, "Florida courts have relied upon Delaware corporate law to establish their own corporate doctrines." Int'l Ins. Co. v. Johns, 874 F.2d 1447, 1459 n. 22 (11th Cir. 1989); see First Am. Bank and Trust v. Frogel, 726 F. Supp. 1292, 1298 (S D Fla 1989)("Since Florida courts have turned to Delaware for guidance, Delaware case law is relevant to issues arising in derivative litigation.").
B. Is an Evidentiary Hearing Required under the Florida Statute?
As discussed above, the Florida statute does not provide guidance as to how, or in what manner, the court is to determine whether the corporation's burden of proof has been met. Without explicitly ruling on the matter, some courts have treated a motion to terminate as one for summary judgment brought under Fed.R.Civ.P. 56. See, e.g., Gaines v. Haughton, 645 F.2d 761 (9th Cir. 1981) (interpreting California law). Other courts have treated the type of motion as one which ultimately arises under Fed.R.Civ.P. 23.1. See, e.g., Peller v. Southern Co., 911 F.2d at 1535-1536 (11th Cir. 1990) (applying Delaware law).
Because the "demand" issues have been withdrawn, the parties agree that Rule 23.1 does not apply in resolving the issue of whether, and under what circumstances, an evidentiary hearing is required. (Transcript at 36-39).
Here, the issue presented by FPL arises by motion to dismiss under subsection (3). In their briefs, neither side has specifically requested an evidentiary hearing to resolve the subsection (3) issue. Nor has either side identified an issue of material issue of fact or credibility that would require resolution by way of an evidentiary hearing. While Section 607.07401 envisions some form of hybrid preliminary review by the lower court, it is by no means clear that the motion cannot be determined on the basis of the depositions, documents and affidavits filed.
In its reply memorandum, FPL argues that the Rule 56 standard is inapplicable in this setting because Rule 56 is premised on the notion that a court should reserve all factual determinations to the jury, while under the Florida statute, the duty of considering the evidence with respect to independence, reasonableness and good faith rests with the judge. (DE #223 at 6). Through its sworn affidavits, exhibits, and depositions, however, FPL in effect is asking this Court to determine that it has met its burden of proof under the statute without resort to an evidentiary hearing.
No Florida case has directly decided if an evidentiary hearing is required on a motion to dismiss pursuant to the statute, although the Fourth District Court of Appeal, in Moya v. Fernandez, 559 So.2d 644 (Fla. 4th DCA 1990), recognized that "the objections raised were sufficient to require either the protection of a summary judgment proceeding or an evidentiary hearing with respect to the disputed issues of bias, conflict of interest, objectivity and reasonableness in the preparation and presentation of the report." There, the shareholders contended that they had been deprived of an evidentiary hearing and the opportunity to cross-examine on these issues. Moya, 559 So.2d at 645. Initially, the trial court determined that the issues raised by the motion to terminate would be decided at an evidentiary hearing. Id. The issues to be resolved by the anticipated evidentiary hearing would include the good faith and disinterested nature of the report, whether the recommendation to dismiss was objectively reasonable and whether the trial court concurred. Id. In the course of a pretrial conference, however, based upon representations made by receiver's counsel, the court accepted the receiver's unsworn submissions subject only to the shareholder's right to file a memorandum in opposition. Id. The Fourth District disagreed with the trial court's decision, and ultimately concluded that, in the absence of sworn testimony, it had "an insufficient record upon which to evaluate the court's conclusions on these issues."
The Fourth District expressly did not determine whether the second stage determination required by Zapata, requiring the exercise of independent business judgment by the court, in addition to accepting the report, is mandated in all cases, Id. at 645-46, although it did note, without further comment, that "the recently adopted 1990 Fla.Sess. Law Serv. 89-154 (West) (Florida Business Corporation Act) did not include the second stage determination." Id. at 646 n. 1. It also noted that this second stage determination was required under Delaware law under the circumstances forth in Zapata Corp V Maldonado, 430 A.2d 779 (Del. 1981).
A full evidentiary hearing is costly and time consuming. It is unnecessary if the parties agree, or the court independently finds, that there are no material issues of fact as to any of the criteria to be applied, and the matter may be decided as a matter of law on the evidentiary record. If, however, the court finds that there are material issues of fact, or there is a need for credibility determinations, then the court, consistent with the direction of the Florida Fourth District Court of Appeal in Moya, should hold an evidentiary hearing on the material issues of fact in dispute, and determine matters of credibility, in order to decide whether to exercise its discretion under the Florida Statute to dismiss the derivative proceeding. As I stated above, I find no material issue of fact in dispute as to, for instance, the question of "independence." The question of "independence" is, instead, an ultimate question of law based on the undisputed facts.
In Lewis v. Anderson, 615 F.2d 778 (9th Cir. 1979), cert. denied, 449 U.S. 869, the Ninth Circuit concluded that the district court properly determined that no jury trial was required to determine what was essentially a "standing" issue. Id.
C. Has FPL Met its Burden of Proving Independence of the Group Making the Determination by the Preponderance of the Evidence?
I conclude that it has not. Although the Board appointed an Evaluation Committee composed of three of its outside directors, and reserved to itself the ultimate authority to make a determination to proceed with the litigation, that was not its only possible course of action. As noted in Kloha v. Duda, 226 F. Supp.2d 1342, 1344 (M.D.FIa. 2002), "Under Fla. Stat. § 607.07401(3)(c), the Company could have allowed the Court to appoint `a panel of one or more independent persons,' a procedure likely to have prevented the issues addressed herein." Likewise, if FPL had requested the subsection 3(c) option, it may well have simplified the company's burden to establish "independence" by the preponderance of the evidence. Furthermore, the Board also could have achieved a high degree of protection for the decision to terminate by delegating full power to determine the company's position to a Special Litigation Committee under subsection 3(b). If a Special Litigation Committee possessing such power and composed of truly independent directors (i.e. those who had become directors after the occurrence of the challenged transactions) conducted a proper and good faith review of the matters before it and reached a business judgment that the action was not in the company's best interest, then the action may well have been dismissed. See In re Par Pharmaceutical, Inc. Derivative Litigation, 750 F. Supp. 641, 646-47 (S.D.N.Y. 1990) (citing cases applying Delaware and New York law).
By offering this observation, I, like the district judge in Duda, am not suggesting that the court appointment of independent persons, and the appointment of a Special Litigation Committee, are the only alternatives to assure independence, particularly since the statute offers another option which refers to action by a "majority vote of `independent directors' present at a meeting of the board of directors, if the independent directors constitute a quorum." § 607.07401(3)(a). Yet, the use of the word "independent" in the statute in all three contexts is highly significant. Under general rules of statutory interpretation, it must be presumed that the Florida legislature had the same definition or concept of independence in mind in each instance. Goldstein v. Acme Concrete Corp., 103 So.2d 202, 204 (Fla. 1958) ("[In both statutes] the lawmakers use similar phrasing in dealing with construction projects. We may assume that in both chapters they intended certain exact words or exact phrases to mean the same thing."). This is particularly so since the Florida Legislature, in adopting and amending Chapter 607, Florida Statutes, did not follow the Revised Model Business Corporation Act [on which the Florida Act was based] by excluding from consideration of independence the following three criteria: (1) the nomination or election of the director by persons who are defendants in the derivative proceedings or against whom action is demanded; (2) the naming of the director as a defendant in the derivative proceedings or as a person against whom action is demanded, or (3) the approval by the directors of the act being challenged in the derivative proceeding or demand if the act resulted in no personal benefit to the director. Compare Section 7.44(c)(1)-(3) of the Revised Model Business Corporation Act.
The rule of noscitur a sociis has been summarized in 48A Florida Jur.2d, Statutes, § 124, at 438 as follows: "The aim of judicial construction of a statute should be to discover the connotation of the legislature attached to the words, phrases, and clauses it employed so that the provisions may be read as they were intended to be read. Hence, it is familiar policy in the construction of terms of a statute to take into consideration the meaning naturally attaching to them from the context. In the interpretation of statutory terms, the doctrine of construction noscitur a sociis prevails. That is, the meaning of particular terms in a statute may be ascertained by reference to words associated with them in the statute. General and specific words that are capable of an analogous meaning when associated together take color from each other. . . ." It is also a basic tenet of statutory interpretation that a statute should be interpreted to give effect to every clause in it, and to accord meaning and harmony to all its parts. Jones v. ETS of New Orleans, Inc., 793 So.2d 912, 914-915 (Fla. 2001) ("A basic tenet of statutory interpretation is that a `statute should be interpreted to give effect to every clause in it, and to accord meaning and harmony to all of its parts.'" (citation omitted)).
As noted by the Magistrate Judge in her well-reasoned Order on Pending Discovery Motions (DE #192), "it is important to note that although the above statute [Section 607.074301] is based on the Model Business Corporation Act, there are key differences between the Model Act as defied, the modified version of the Model Act enacted by the Florida legislature, and the Model Act as enacted by various states. For example, the Model Business Corporations Act states that the Court `shall' dismiss the derivative proceedings if the specified conditions exist, whereas the Florida Business Corporations Act uses the seemingly more discretionary `may dismiss' language. In addition, although decisions rendered by the courts of Delaware are frequently regarded as persuasive by other courts, including Florida, Delaware has no statute substantially similar to the above provisions of the Florida statute. However Delaware law provides a framework for analysis." Id. at 11 (emphasis added).
Since there is no statutory definition of independence, no statutory restrictions comparable to those in the Revised Model Business Corporation Act under the Florida statutes, and no definitive applicable Florida case law (other than as discussed below) addressing indicia of independence, I conclude that the Florida courts would look to Delaware and New York law to establish their own corporate doctrines. International Insurance Co. v. Johns, 874 F.2d at 1459 n. 2 ( citing Davidson v. Ecological Science Corporation, 266 So.2d 71 (Fla. 3d DCA 1972) (relying on Delaware case law to interpret Fla.Stat.Ann. § 608.39(3) (now repealed))); De La Rosa v. Tropical Sandwiches, Inc., 298 So.2d 471 (Fla. 3d DCA 1974) (relying on Delaware case law to interpret Fla.Stat.Ann. § 608.19(1) (now repealed)); Naples Awning Glass, Inc. v. Cirou, 358 So.2d 211 (Fla. 2d DCA 1978) (relying on Delaware case law to interpret Fla. Stat. Ann. § 608.13(9)(b) (now repealed)); see also Greco v. Tampa Wholesale Co., 417 So.2d 994, 996-997 (Fla. 2d DCA 1982) (relying on New York case law to interpret Fla.Stat.Ann. § 607.247(10) (West 1977)).
Under Delaware law, a court must review the "totality of the circumstance" to determine whether the members of a Special Litigation Committee ("SLC") are "in a position to base [their] decision on the merits of the issue rather than being governed by extraneous, considerations and influences." Kaplan v. Wyatt, 499 A.2d 1184, 1189 (Del. 1985). See also In re Oracle Securities Litigation, 852 F. Supp. 1437, 1441 (N.D.Cal. 1994) (applying Delaware law to the same affect); Johnson v. Hui, 811 F. Supp. 479, 486 (N.D.Cal. 1991) (same). Delaware courts generally look to a number of factors when applying the "totality of the circumstances" test: (1) a committee member's status as a defendant, and potential liability; (2) a committee member's participation in or approval of the alleged wrongdoing; (3) a committee member's past or present business dealings with the corporation; (4) a committee member's past or present business or social dealings with individual defendants; (5) the number of directors on the committee; and (6) the "structural bias" of the committee, Id.
At oral argument, counsel for FPL concurred that the "totality of the circumstances" test was appropriate. (Transcript at 106 (" I would say that I think the issue of independence, your Honor, is one of the totality of the facts. That I do agree with.")).
These factors were further discussed in Johnson v. Hui, 811 F. Supp. at 486 as follows: A1. Status as a defendant, and potential liability: Courts have found SLC's independent and unbiased even though a member of the SLC is a nominal defendant or subject to small or indirect liability. However, where liability may be direct and substantial the SLC's independence may be questioned. Mills v. Esmark, Inc., 544 F. Supp. 1275, 1283 (N.D.III. 1982) (merely nominal defendant); compare In re General Tire Rubber Co. Securities Litigation, 726 F.2d 1075, 1083-84 (6th Cir. 1984) and Lewis v. Anderson, 615 F.2d 778 (9th Cir. 1979) with Abbey v. Control Data Corp., 603 F.2d 724 (8th Cir. 1979).
2. Participation in or approval of the alleged wrongdoing: Once again the participation and/or approval must be substantial, and not the result of innocent or pro forma involvement or affiliations. Mills v. Esmark, Inc., 544 F. Supp. 1275, 1283 (N.D.Ill. 1982); Kaplan v. Wyatt, 499 A.2d 1184, 1189 (Del. 1985); see Bach v. National Western Life Insurance Co., 810 F.2d 509, 513 (5th Cir. 1987).
3. Past or present business dealings with the corporation: Hasan v. CleveTrust Realty Investors, 729 F.2d 372, 378-79 (6th Cir. 1984); Rosengarten v. Buckley, 613 F. Supp. 1493 (D.Md. 1985); In re General Tire Rubber Co. Securities Litigation, 726 F.2d 1075, 1083-84 (6th Cir. 1984).
4. Past or present business or social dealings with individual defendants: Lewis v. Fuqua, 502 A.2d 962, 966-67 (Del.Ch. 1985); Hasan v. CleveTrust Realty Investors, 729 F.2d 372, 378-79 (6th Cir. 1984).
5. The number of directors on the SLC: The larger the number of directors, the less weight accorded to any disabling interest affecting only one director. Lewis v. Fuqua, 502 A.2d 962, 967 (Del.Ch. 1985).
6. The "structural bias" of the SLC: Here the court considers whether manner in which the SLC was appointed and proceeded was one which was inevitably bound to be empathetic to defendants, and, therefore, biased in favor of terminating the litigation. Lasker v. Burks, 567 F.2d 1208 (2d Cir. 1978); Joy v. North, 692 F.2d 880 (2d Cir. 1982)."
Significantly, these factors apply under Delaware law where the SLC possesses unconditional authority to act on behalf of the board in investigating the allegations of a suit and in establishing the corporation's position with respect to the suit. Where, as here, the Evaluation Committee's role is only advisory, it is entitled to less deference. Biondi v. Scrushy, 820 A.2d 1148, 1156 (Del.Ch. 2003) ("If the committee is not fully empowered to act for the company without approval by the full board . . . its ability to instill confidence is, at best, compromised, and, at worst, inutile."); In re Par Pharmaceutical, Inc. Derivative Litig., 750 F. Supp. 641, 547 (S.D.N.Y. 1990) ("[A] mere advisory role of the Special Litigation Committee fails to bestow sufficient legitimacy on the Board's decision to warrant deference to the Board by this Court."). Notwithstanding, the "totality of the circumstances" test, as a means of measuring independence, can be applied to the determination of both the non-binding Evaluation Committee and the "independent" directors of the full Board.
The Evaluation Committee's recommendation cannot be disassociated from the Board's determination because the Board, including the three Evaluation Committee members themselves (FPL's Corrected Filings at Tab 1), were clearly prepared to accept, and did accept, the Committee's recommendation without any additional independent inquiry.
While issues of "dominance and control" or "financial interest" are certainly factors to be considered as components of the test, the Florida statute does not make them "exclusive" factors in determining independence. In my view, a broader test is required under the Florida statute which is ultimately a determination, based on the totality of the circumstances, as to whether "a director is, for any substantial reason, incapable of making a decision with only the best interest of the corporation in mind." See Parfi Holding AB v. Mirror Image Internet, Inc., 794 A.2d 1211, 1232 (Del.Ch. 2001) ("The [defendant director] lacks the independence to determine whether Mirror Image should sue Xcelera, a corporation to whom he owes the strict fidelity of a fiduciary. Indeed, in that sense, [the defendant director] is in fact `beholden' to Xcelera."), rev'd in part on other grounds, 817 A.2d 149 (Del, 2002), cert denied, 123 S.Ct. 2076 (2003); In re Oracle Corp. Derivative Litigation, 824 A.2d 917, 938 (Del.Ch. 2003) ("This court [citing Parfi] has previously held that the Delaware Supreme Court's teachings on independence can be summarized thusly: At the bottom, the question of independence turns on whether a director is, for any substantial reason, incapable of making a decision with only the best interests of the corporation in mind. That is, the Supreme Court cases ultimately focus on impartiality and objectivity" (emphasis added)).
Applying the Florida statute, two federal district courts, although not addressing the "totality of the circumstances" test as such, concluded, after examining various factors that the corporation's motion to dismiss under Fla. Stat. § 607.07401(3) should be denied. In Kloha v. Duda, 226 F. Supp.2d 1342 (M.D. Fla. 2002), a minority shareholder brought a derivative action against the corporation and six of the corporations' ten directors, alleging that the directors knowingly caused the corporation to be less profitable, and that the corporation's refusal to initiate a derivative lawsuit was not based on independent, good faith investigation of the shareholder's allegations. The board appointed two directors, Nagle and Goode, to investigate the claims. Both Nagle and Goode received annual compensation from the Company for their board positions, but did not own Company stock or other interests. Because the district court concluded that Nagle and Goode were not independent, it did not consider the reasonableness of their investigation. The district court found offered three reasons for determining a lack of independence. First, the court concluded that "Nagle and Goode are not independent because of the possible personal liability they face as a result of the [shareholder's] lawsuit." Id. at 1344. The shareholder represented that her damages were between $63 and $210 million, an amount vastly in excess of the indemnification policy that the defendants contended rendered Nagle and Goode independent. Second, the court considered that the payments of an average salary of $30,000 per year for ten years, plus retirement benefits, implicated their independence. Id. Third, the court concluded that "controlling case law" dictated that the defendants' motion to dismiss must be denied, citing McDonough v. American Int'l Corp., 905 F. Supp. 1016, 1020-21 (M.D.FIa. 1995). According to the Duda court, the McDonough court held that the "corporation did not meet its burden of demonstrating that the two members of the independent committee were independent when they were also corporate directors." Id. at 1344. Of note, the McDonough court reached this conclusion even though the Committee hired outside special counsel to advise it. See McDonough, 905 F. Supp. at 1019. The district court in Duda stated, "Unlike the instant case, the McDonough court made this determination even though the independent committee members were not defendants and faced no personal liability." 226 F. Supp.2d. at 1344, citing McDonough, 905 F. Supp. at 1019.
After considering the Florida federal district court precedent in McDonough and Duda, and the "totality of the circumstances" test as articulated under Delaware law, I conclude that FPL has failed to meet its burden by a preponderance of the evidence that both the Evaluation Committee and the ten directors who collectively voted to terminate the derivative action were independent at the time of making their determination. In reaching this conclusion, I do not disparage the integrity of the members of the Evaluation Committee or the Board. The issue is not their integrity but their objectivity and impartiality, both in fact and in perception. The issue is whether their decision was anything but the exercise of considered and unbiased judgment. No lesser standard of independence should be permitted for directors who hold a fiduciary responsibility to their shareholders, and, in the case of FPL, to the public at large because the Company is a public utility.
The totality of the following reasons, which incorporate several of the totality-of-circumstances factors, negate disinterest, impartiality and objectivity. First, the Evaluation Committee and Board who decided not to pursue the shareholder derivative claims consisted of the very individuals who had been involved in approving the transactions at issue and who are Defendants in this action. Second, the formation of the Evaluation Committee and the selection of its counsel do not support a finding of independence. Third, public statements by FPL officials supporting the LTIP payments during the pendency of review is inconsistent with independence. I will discuss each of these issues in turn.
First, the Evaluation Committee and outside Board members who made the determination to preclude pursuit of the corporate claim had previously approved the challenged transactions, and are Defendants to the lawsuit. Beall and Codina, a majority of the Evaluation Committee, were also members of the Compensation Committee which, in 1999, approved a revised version of the severance package agreement. Beall and Codina, along with other named Defendants, were members of the Board that voted to approve the LTIP and approve the 1999 proxy statement at issue in the litigation. (Report at 33, 34; Oorbeek Exh. 2). Both Beall and Codina, as members of the Compensation Committee, voted in favor of making the "change-of-control" payments after shareholder approval was obtained. (Klein Exh. 6 at 91). They joined other named Board member Defendants in approving the payments based on the assumption that the LTIP was triggered by shareholder approval rather than merger consummation. Id. While the Evaluation Committee was preparing its Report, Beall and Codina, as Compensation Committee members, approved a proxy statement stating that the December 15, 2000 shareholder vote triggered the Company's obligation to pay "change of control" payments under the 1994 LTIP. This was one of the core issues the Evaluation Committee was investigating. Dover, the Evaluation Committee Chairperson, acknowledged that if he had known of Beall's and Codina's votes as members of the Compensation Committee, it would have disturbed him.
Where the so-called independent directors had authorized the challenged transaction and were subject to personal liability as Defendants in the lawsuit, the Second Circuit Court of Appeals, in Galef v. Alexander, 615 F.2d 51, 60-61 (2nd Cir. 1980), concluded that such directors stand in a "dual relation" which prevents an unprejudiced exercise of judgment. Relying of Eight Circuit precedent, the court stated, "We are not aware of any case that has determined that directors against whom a claim has been asserted and who have determined that the claim against them should not be pursued, do not `stand in a dual relation which prevents an unprejudiced exercise of judgment.'" Id. at 60. The court further stated, "Indeed, the Eighth Circuit has opined, obiter, that "where the directors themselves, are subject to personal liability in the action (they) cannot be expected to determine impartially whether it is warranted." Id. at 51 (citation omitted). Citing New York precedent, the court stated, ". . . one district court has termed it inconceivable that directors who participated in and allegedly approved of the transaction under attack can be said to have exercised unbiased business judgment in declining suit based on that very transaction." Id. at 61 (citation omitted).
Here, both the Oorbeek and Klein Complaints alleged personal liability against the named board members. It cannot be said, given the allegations, that the Board members are only nominal Defendants. The inherent problem is that each director stood in a dual relation which, on its face, precludes an unprejudiced exercise of judgment. Here, however, the situation is worse. The amount of damages at issue is alleged to exceed 92 million dollars in LTIP payments, including over 62 million dollars to the eight most senior FPL executives. The former Chairman and CEO, James Broadhead, received $22,686,587 of the total amount. The Oorbeek and Klein Complaints seek discouragement of these sums and recovery from Board members of uncollected amounts.
Given these circumstances, FPL was on notice before the Evaluation Committee Report was approved that both its insurance companies reserved rights on coverage for its directors. More specifically, AEGIS advised FPL that ten actual and potential coverage issues may result in a limitation or loss of coverage, including if the payments were made contrary to law. FPL was specifically advised that the lawsuits and the demands allege wrongful acts which maybe uninsurable under applicable law. In other words, if the Board members took action contrary to the conclusions and recommendations in the Evaluation Committee's Report, that very action could have possibly deprived them of their director's insurance coverage. Yet, inconceivably, this issue was not addressed by the Board at the time of its determination in terms of evaluating its own independence. Under the reasoning in Kloha v. Duda, the ten outside directors on the Board were not independent because of the possible liability they faced as a result of the Complaints, and because any action determining their prior position on the "change-of-control payments" was illegal could possibly result in the loss of their liability coverage. See Kloha v. Duda, 226 F. Supp. at 1344.
Second, the formation of the Evaluation Committee and its choice of counsel fails to support a finding of independence by the preponderance of the evidence. To the extent the Board intended to rely on the report of the Evaluation Committee, it had a duty to appoint independent directors who lacked even the appearance of non-objectivity. The problem here is that the CEO and Defendant, Broadhead, who had a significant financial interest at risk, was, without dispute, personally instrumental in selecting the members of the Evaluation Committee. He solicited each member to serve, and the Board, thereafter, approved his selection without considering any other candidates, or evaluating the issue of independence. By then, each member had a proven voting record on the matter at issue, which, obviously, was well-known to Broadhead. Again, while I have no doubt of the personal integrity of each of the members, Broadhead's involvement in the selection process at all raises obvious concerns about the appearance of potential bias and control. This is especially true given prior voting record of Beall, Codina and Dover on the merits of the issue, including their approval of public filings which acknowledged the legal validity of the LTIP payments. This lack of impartiality is compounded by the acknowledgment of Codina that, at the time he joined the Evaluation Committee, he already believed that the LTIP payments were required upon shareholder approval, although he was willing to give the matter a "fresh look." (Klein Exh. 3 at 43-44). These factors hinder, rather than further, the Court's confidence in the Evaluation Committee's ability to give the matter a "fresh look," in the manner contemplated by Codina.
The following is an exchange that transpired during Codina' S deposition (Klein Exh. 3 at 44):
Q: And at that time it was your understanding that it was a shareholder approval only trigger?
A: Yes.
Q: And then when you were appointed to the Evaluation Committee, in 2001, was that still-at the time of your appointment, was that still your belief?
A: That was my belief, yes.
The problems inherent with the selection of the Evaluation Committee's members were exacerbated by the choice of Steel Hector as initial counsel. As the Evaluation Committee belatedly recognized some eight months into its deliberations, the choice of Steel Hector carried with it some obvious conflicts. First, Steel Hector was previously involved in developing the "change-of-control" language at issue. (Report at 19, 23-25, 32-33). Second, Steel Hector was recommended for selection by Coyle (Klein Exh. 1 at 49-50) who previously was a member of the law firm (Report at 23) and who already had received over 6 million dollars in change-of-control payments (Report at 45-46). Coyle's retention of payments was then at issue as a result of the Carlozzi demand letter and the Oorbeek and Klein Complaints. Third, Steel Hector was representing the Evaluation Committee and Board members in proceedings before this Court and had opined on the lack of merit of the Complaints. This occurred in March, 2002, some five months before the completion of the investigation. Under such circumstances, Steel Hector could hardly be considered "independent counsel." Such counsel should be free of any conflicts that might interfere with its ability to render unbiased legal advice. See, e.g., Stepak ex rel. Southern Co. v. Addison, 20 F.3d 398, 405 (11th Cir. 1994) ("Selection of a law firm that has actually represented the alleged wrongdoers in proceedings related to the very subject matter that the law firm is now asked to neutrally investigate reaches in [the Eleventh Circuit's] opinion, the level of gross negligence and is incompatible with a board's fiduciary duty to inform itself of all material information reasonably available prior to making a business decision. Such a shortcoming strips a board's rejection of a shareholder demand of the protection of the business judgment rule."). See also In re Par Pharmaceutical Inc., 750 F. Supp. 641, 647 (S.D.N.Y. 1990) ("Both New York and Delaware law contemplate that a special investigation committee be represented by independent counsel"), Moreover, the fact that the Motion was filed on behalf of the members of the Committee and Board raises serious issues regarding the independence of the committee. See Bank of New York Derivative Litig., 2000 U.S. Dist. LEXIS 16502 at * 10 (no independence where members of the committee joined motion, filed while they were purportedly investigating plaintiff's claims, which argued that no wrongdoing occurred). FPL argues, however, that any inherent problems with Steel Hector's representation were cured by the appointment of Wilmer Cutler as outside counsel. The essence of FPL's argument is this: the Court should deem the Evaluation Committee's Report and Board action adopting it independent because Wilmer Cutler was independent and, after carefully evaluating the matters at issue, found that each of the current non-officer directors of FPL were independent. (Report at 10).
Specifically, FPL's Motion to Stay (DE #39, filed March 13, 2002) states, "The reality is that had FPL refused to make payments to the officers in accordance with the unambiguous LTIP and Merger Agreement, both of which received shareholder approval, the defendants would now be addressing a claim from shareholders for corporate waste for causing FPL to defend, and in all probability lose, the lawsuits by the compensated executives that would ensue." Steel Hector filed the Motion to Stay on behalf of all Defendants except Roger Young. These Defendants include Dover, Beall, and Codina, who served on the Evaluation Committee, and all those directors who voted to dismiss the derivative claims.
I find several concerns relative to FPL's argument. I fundamentally disagree with the standards, and their application, used by Wilmer Cutler to find independence. They are patently too narrow under the Florida statute. The limits of the Wilmer Cutler inquiry was (1) whether each director was "disinterested" — that is, whether he had a material personal financial or other interest in the decision, and (2) whether such director was independent from the influence of other interested parties, such that the director could exercise his own judgment free from the dominance or control of a third party. (Report at 95-97). While these are important factors, they are not the exclusive factors in proving independence under the Florida statute.
Moreover, I disagree that the "taint of conflict" was necessarily purged by Wilmer Cutler's selection by the Evaluation Committee. Simply put, Wilmer Cutler was in a difficult situation. It was hired by the Evaluation Committee which had been meeting for eight months. Upon assuming its position, it would have been extremely difficult for Wilmer Cutler, or any special counsel, to advise the Evaluation Committee that it should disband in favor of more disinterested members or in favor of court-appointed independent persons in order to meet the statutory requirement of independence. By advocating such a position, its tenure as special counsel may have been "short lived." See Einhorn v. Culea, 612 N.W.2d 78, 92 (Wis. 2000) ("[T]he test [of independence] is primarily concerned with whether factors exist at the time the committee was formed that would prevent a reasonable person from basing his or her decisions on the merits of the issue.").
While I mean no disrespect to Wilmer Cutler, its narrow evaluation of independence, coupled with its dual representation as counsel for both the Evaluation Committee and the Board, suggests a position of advocacy rather than neutrality. Following the issuance of the Evaluation Committee's Report, it is inconceivable that Wilmer Cutler, which drafted the Report, could then independently advise the members of the Board concerning the merits of the very recommendations contained in the Report (which were written by Wilmer Cutler). But, leaving this issue aside, Wilmer Cutler, at a minimum, had a duty to inform itself and advise the Board that its independence was jeopardized by the risks associated with the "reservations" voiced by the Company's liability insurance carriers. In other words, if the Board members did not approve the Evaluation Committee's recommendations, but, instead, found that FPL acted illegally in making the LTIP payments, each member, as a named Defendant, risked a possible loss of liability coverage, exposing him to potential compensatory damages in the very litigation at issue. The fact that the firm did not do so limits the weight that I give to Wilmer Cutler's involvement and to the argument that its participation purged the inherent conflicts I have described, such that I can concur with Wilmer Cutler's assessment of independence.
it is not dear to the Court whom Wilmer Cutler was representing. It has identified its client or clients, at various times, as the Evaluation Committee, the "independent members of the Board of Directors of the Company, and/or the Company itself. ( See Oorbeek's Exh. 20 at 5. 20; Klein Exh. 7 at 3, 25; Motion of Bruce E. Coolidge and Michael E. Gordon to appear pro hac vice on behalf of the FPL Group, Inc., DE #69, filed May 10, 2002).
Third, additional factors affect my discretion as applied to the criteria of independence that Wilmer Cutler did not consider. It is troublesome that the Company's management issued public statements opining on the legality of the issues in question prior to the Board taking final action on the Evaluation Committee Report. ( See supra Part III.C.3). It is further troubling that such action was taken with the advice of the Company's General Counsel who directly had benefited from the LTIP payments. (Klein Exh. 4 at 43), Such action by management and General Counsel does not create an atmosphere conducive to an independent review and judgment by the so-called independent directors, particularly when those same directors authorized the payments at issue as well as the merger. It is also troubling that, immediately after shareholder approval of the merger, and the distribution of the LTIP payments, the merger failed for reasons that only then became apparent to management. While admittedly there is no allegation of fraud in the Complaints, the very sequence of events that occurred imposed upon the Board a need for careful scrutiny of the demands and the Complaints, utilizing procedures that were beyond reproach in fact and perception. It is difficult enough for a board of directors to judge its own actions, let alone to do so when the Company's management has publicly opined on the subject and where its Chairmen and CEO, who had the most to gain from a favorable Board determination, directly involved himself in selecting of his own judges. Yet, "[o]ne of the key reasons for the formation of a special litigation committee is to insulate the company's decision making process from the influence of those under suspicion." Biondi v. Scrushy, 823 F.2d 1148, 1156 (Del.Ch. 2003). In Biondi, the court held that the company's public statements absolving the management of wrongdoing, while the SLC investigation was ongoing, were facts precluding independence of the SLC. Id. at 820 A.2d at 1156, 1165-66 ("How can the court and the company's stockholders reasonably repose confidence in an SLC whose Chairman has publicly and prematurely issued statements exculpating one of the key company insiders whose conduct is supposed to be impartially investigated by the SLC? The answer is that they cannot, Even if the SLC later issues a report in favor of dismissal that reads well and that appears to be factually supported, there will always linger a reasonable doubt that its investigation was designed to paper a decision that had already been made.").
The Evaluation Committee's Report itself concluded that the events that occurred here-large `change in control' payments even though no merger ensued-were "unforeseen" and "unfortunate." (Report at 8). The Report is silent on the issue of whether Broadhead and senior management could have discovered with proper diligence that the merger with Entergy was no in the best interests of the shareholders before asking the shareholders to vote to approve it. At this stage, it is uncertain, as argued by Klein in his memorandum, if equitable principles of Florida law would apply if senior management was negligent or if the merger was permitted to go to vote through proxy if it was known that the merger would be abandoned after shareholder approval. (DE #231 at 4, 5). By making these observations, I am not addressing the merits, nor invoking a "second stage" Zapata review, or even suggesting that such a review is appropriate under Florida law. I am merely emphasizing the degree of potential conflict management had in opining on legality while the review was in process.
As noted by the Delaware Supreme Court in Zapata v. Maldonado, 430 A.2d 779, 786-88 (Del. 1991), ". . . [W]e must be mindful that directors are passing judgment on fellow directors in the same corporation and fellow directors, in this instance, who designated them to serve both as directors and committee members."
The same reasoning applies here. I review management's actions as part of the "totality of the circumstances" precluding a finding of independence by the preponderance of the evidence.
Because I have determined that the Company has failed to establish independence by a preponderance of the evidence, I do not reach the remaining issues posed by the parties in their briefs, including whether an interpretation of Florida law allowing disinterested directors to dismiss a derivative suit would conflict with the underlying policy of ss (13)(a) and (14) of the Securities Exchange Act.
IV. ORDER
It is hereby ORDERED AND ADJUDGED:1. The Oorbeek Plaintiff's' Motion to Strike (DE #233) is GRANTED.
2. The Klein Plaintiff's' Motion to Strike (DE #236) is GRANTED in part and DENIED in part. The Motion to Strike FPL Reply Exhibits 2, 3, and 4 is GRANTED. The Motion to Strike portions of FPL Reply Exhibit 1 is DENIED.
3. Defendants' Motions to Dismiss (DE #122, 167) are DENIED.
DONE AND ORDERED.