What will they think of next? You hear that a lot from old guys like me when confronted with new gadgets and gizmos. However, in this case, the “they” is plaintiffs’ lawyers. I previously blogged on a lawsuit over the failure to have a succession plan in place (Apple Must Include Shareholder Proposal on Executive Compensation in Proxy). Today, we look at a shareholder derivative lawsuit filed earlier this month alleging a breach of fiduciary duty by the board of Swift Transportation Company for allowing “excessive” pledging of company stock by the founder and retired CEO.
The complaint in Stein v. Moyes, et al., alleges that, in 2010, when Swift became public (again), it adopted a policy barring directors and senior officers from pledging more than 20% of their holdings in company stock for margin loans. In 2013, the Board revised the 20% limit, lowering the cap to 15% as of July 2014 and to 10% as of July 2015. The complaint alleges, however, that:
- The founder had pledged more than $600 million of his holdings in the company, which is a quarter of all outstanding stock in the company.
- Throughout 2015 and 2016, the founder failed to reduce his borrowings to comply with the company’s policy.
- Instead of penalizing the founder for exceeding the board’s pledging limits and taking appropriate measures to prevent future misconduct, the board froze the 20% cap and gave him more time to deal with his debt.
- The board has ignored other personal loans by the founder that are not margin loans, for which he has pledged company stock.
- The board approved buybacks of stock to cause a surge in stock prices, to ease pressure on the founder’s margin loans.
- When the company’s stock fell by over 50% in 2015, the decline triggered margin calls, and the founder actually pledged additional shares to meet these margin calls.
The complaint argues that these actions alleged to have harmed the company as follows:
Moyes’ excessive borrowing and the Board’s failure to enforce corporate governance policies are detrimental to the Company’s stockholders. Firstly, more and more of Swift stock is now in the hands of creditors. Secondly, if Swift stock prices fall, and holders of pledged shares rapidly sell them, which further depresses the stock price. Thirdly, permitting executives to pledge their holdings to generate quick cash insulates them from the Company’s poor performance.
Keep in mind that these are only allegation in a complaint. Plaintiffs’ lawyers are not known for their scrupulous adherence to the facts. However, it shows that plaintiffs’ lawyers are continuing expand litigation over executive compensation and board practices—and that good governance policies adopted by the board (such as an anti-pledging policy) can work against the board if it does not follow or enforce them.