You might remember the derivative action filed against the board of directors of Duke Energy Corporation stemming from its 2012 merger with Progress Energy. It received a lot of publicity. The merger was concluded long ago, but there’s finally been a ruling from the Business Court dismissing the derivative action. It’s Krieger v. Johnson, 2014 NCBC 13.
The lawsuit challenged the severance payment due to Progress’ former CEO, Bill Johnson, following the merger. Johnson was set to be the CEO of the combined entity following the merger, but he was removed as CEO a few hours after the merger became final. This entitled Johnson to as much as $44.4 million in payments under his new (and very short-lived) employment agreement with Duke Energy.
Krieger made claims for unjust enrichment and for the directors’ breach of fiduciary duty with regard to what he condemned as a grossly excessive payment for "scant hours of service." Op. ¶16.
Unjust Enrichment Claim Was Dismissed
Judge Jolly dismissed the unjust enrichment claim given Johnson’s written employment agreement with Duke Energy. He wrote that:
[e]ven assuming the payments to Johnson might be considered excessive as Plaintiff alleges, the existence of a contract between the parties concerning the subject matter of the unjust enrichment claim is dispositive.
Op. ¶16. He also said that "[a]n assertion that the express terms of a contract were ultimately unfavorable to one of the contracting parties, without more, does not state a claim for unjust enrichment." Op. ¶16 & n.13.
Derivative Claims Were Dismissed Due To Plaintiff’s Failure To Make A Demand
Krieger’s derivative claims were also dismissed, due to his failure to make a demand on the Duke board of directors to pursue the claims. That took some analysis by Judge Jolly, first on the point whether the law of North Carolina or Delaware (Duke’s state of incorporation) should control. Delaware law won out, because this was a matter of the internal affairs of the corporation, and only the state of incorporation can exercise the authority over "matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders." Op. ¶21.
That was only a minor win for Krieger, who was arguing that a demand on the board of directors was excused because it would have been futile, due to the board’s alleged inability to make an independent and disinterested decision on the subject of the lawsuit. Delaware recognizes the futility exception to the demand requirement, but North Carolina does not.
Plaintiff Couldn’t Show That A Demand Would Have Been Futile
But Krieger couldn’t meet the Delaware standard for showing futility, which requires a showing that there is a "reasonable doubt as to (a) director disinterest or independence or (b) whether the directors exercised proper business judgment in approving the challenged transactions." Op. ¶23.
He argued that the board would be exposed to personal liability for agreeing to such excessive compensation, but Judge Jolly held that:
Mere allegations that directors participated in or approved of the alleged wrongs as a showing of directorial interest have been consistently rejected by Delaware courts.
Krieger argued that the grant of severance benefits to Johnson violated the corporation’s publicly disclosed compensation mandates. Those mandates said that compensation was designed to attract and retain talented executive officers, was to be performance based and was meant to reward individual performance.
But that got the Plaintiff nowhere. The Court found those statements to be "aspirational," and said that they "should not be contorted into affirmative mandates or representations that could give rise to a substantial likelihood of liability. . . . " Op. ¶31.
The only other attempt by Krieger at proving demand futility lay in his effort to raise a reasonable doubt that the challenged transaction was the product of a valid exercise of business judgment. Krieger argued that the payment to Johnson constituted waste, and asserted that what Duke had received in exchange for the millions of dollars of severance payments was "so inadequate that no person of ordinary, sound business judgment would deem it worth" what Duke had paid. Op. ¶35.
Judge Jolly observed that "Delaware courts have developed an exacting standard by which to evaluate claims of corporate waste." Op. Par. 36. Krieger had to "plead specific facts from which it can be inferred that ‘the decision [by the board] is so beyond the bounds of reasonable judgment that it seems essentially inexplicable on any other grounds." Krieger’s argument that $44.4 million for less than a day’s work didn’t meet that standard.
So, since Krieger had not made any demand on the Duke board to pursue this litigation, all of his claims were dismissed.
If you are affronted by the payment of $44.4 million to Johnson for "a few hours work," here are some things that you should know: (1) the Amended Complaint referred to only about $10 million in payments (Op. Par. 11 & n.8), (2) Johnson would have been due substantial severance benefits under the Progress Management Change-In-Control Plan even if his Employment Agreement with Duke had never been formalized, and (3) Duke received agreements from Johnson in consideration of the severance payments, like (a) a release of claims against Duke; (b) an agreement to cooperate with Duke in respect to transition matters and (c) non-competition, non-solicitation, non-disparagement and confidentiality covenants. Op. ¶37.