In an Opinion and Order dated February 23, 2012, Judge Michael Mosman adopted the January 11, 2012 Findings and Recommendations of Magistrate Judge John Acosta to dismiss the derivative lawsuit against the Board of Directors of Umpqua Holdings Corporation ("Umpqua") for breach of fiduciary duty. Magistrate Judge Acosta recommendation to dismiss the say-on-pay" lawsuit was the first of its kind. Judge Mosman agreed that plaintiffs' failure to make a presuit demand was not excused under the arguments they raised regarding the Board members' exercise of the business judgment rule or their lack of independence or disinterest. Plaintiffs have until March 26, 2012 to amend their complaint.
In 2009 and 2010, Umpqua limited compensation for certain executives (under an agreement with the Government, who had made a capital investment in the company). When those limitations were lifted in 2010, the company's compensation committee decided to "normalize" compensation. Following an executive compensation study and a benchmarking study (which provided guidance) the Board approved a compensation package on February 25, 2011. According to plaintiffs, the 2010 executive compensation program increased the compensation for each executive officer by approximately 60% and up to 160%, although the 2010 return to shareholders was a negative 7.7%.
On April 22, 2011, the shareholders voted against the compensation plan by a 62% to 35% margin in an advisory vote mandated under the Dodd-Frank Act,. The plaintiffs, two pension funds, filed a derivative action against the Umpqua Board on May 25, 2011. On June 27, 2011, the defendants moved to dismiss, arguing, among other things that plaintiffs failed to allege facts raising certain reasonable doubts that would excuse a presuit demand. Defendants' two-pronged argument was that: (1) plaintiffs failed to adequately allege that the Board majority was independent and disinterested; and (2) the Board's decision was the product of a valid business judgment.
As discussed here, on January 11, 2012, Magistrate Judge Acosta recommended the dismissal of the lawsuit because plaintiffs failed to make the presuit demand as required for a derivative suit and their arguments regarding the Board members' exercise of the business judgment rule or their lack of independence or disinterest did not excuse the demand requirement. Plaintiffs filed their Objections to the Findings and Recommendations on January 25, 2012.
Judge Mosman began his decision by discussing the standard of review, noting that he was required to make a de novo review to those portions of the findings or recommendation to which plaintiffs had objected, but also noted that he was "free to accept, reject, or modify any part of" the findings and recommendations. His brief Opinion and Order focused on the two objections raised by plaintiffs.
First, Judge Mosman rejected plaintiffs' argument that Magistrate Judge Acosta applied the wrong futility standard, holding that suing an entire board does not negate the demand requirement or the necessity to make particular allegations as to why specific directors are not sufficiently disinterested or independent. The standard "only means a plaintiff may establish futility via specific factual allegations that some interested directors controlled an entire board. Here, as Judge Acosta concluded, there are no specific allegations of that nature."
Second, Judge Mosman rejected plaintiffs' argument that they overcame the presumption that the Board's exercised business judgment because the members lowered Umpqua’s earnings per share goals in order to justify the increases, but did not disclose this fact to shareholders. The Court stated that "the fact that Umpqua may have lowered performance goals after repeated failures to accomplish its prior goals during an economic downturn is not sufficient to rebut the presumption in the Individual Defendants’ favor." In addition, the Court concluded that the lowering of the earnings-per-share was disclosed in the proxy statement cited by plaintiff.
Judge Mosman concluded by adopting the Findings and Recommendations and directing plaintiffs to file an Amended Complaint by March 26, 2102 (or the lawsuit will be dismissed).