Court Opinion

ID: 5112519
Source: CourtListenerOpinion
Date Created: 2021-10-02 16:19:16.166403+00
Date Added: 2024-06-11T08:21:38.853494
License: Public Domain

GARY W. LYNCH, P.J.
Regardless of whether the Pension Fund’s allegations of demand futility upon the Board are sufficient, as addressed by the majority opinion, the allegations of demand futility upon the shareholders are not. I respectfully dissent and would affirm the trial court’s judgment.
To begin with, the petition’s allegations that shareholder demand would be burdensome do not support demand futility. While the majority opinion recites these allegations, it did not and could not rely on them to support shareholder demand futility for two reasons: the Pension Fund did not raise or mention this issue in its brief, and such a conclusion would be contrary to the holding in a case from the Eastern District of our court, see Saigh ex rel. Anheuser-Busch, Inc. v. Busch, 396 S.W.2d 9 (Mo.App.1965). By not mentioning these allegations in its brief, the issue was abandoned by the Pension Fund on appeal. See Kline v. City of Kansas City, 334 S.W.3d 632, 650 n. 3 (Mo.App.2011) (quoting Jones v. Jones, 296 S.W.3d 526, 528 n. 1 (Mo.App.2009) (“Issues ... that are unsupported by argument ... are deemed abandoned.”)). In any event, the issue has no merit because “[t]he size of the corporation and the delay and expense *463in circularizing stockholders widely scattered does not excuse the failure to seek action from the stockholders.” Saigh ex rel. Anheuser-Busch, Inc., 396 S.W.2d at 24.
Before addressing the grounds for shareholder demand futility actually raised in the Pension Fund’s brief, the petition’s allegations related to the challenged stock options must be put into proper perspective. The Pension Fund alleges the facts that statistical analysis of the stock options granted to the individual defendants during the relevant time period show a “1 in 1,000,000” chance that the option grant dates selected by Leggett were chosen randomly and that the bulk of the challenged grant dates coincided with periodic lows in the market price of Leggett’s stock. Assumed as true, under our standard of review, these allegations are sufficient to support a reasonable inference that in-the-money stock options were granted to the individual defendants. See S.E.C. v. Shanahan, 646 F.3d 536, 541-42 (8th Cir.2011).
As explained in S.E.C.:
A company whose common stock is registered with the SEC and publicly traded ... must disclose to shareholders and investors the compensation paid to its executives. One common form of compensation is the stock option, which grants a recipient the right to purchase a specified number of shares of the company’s stock at a specified price, referred to as the “exercise” or “strike” price. When the market price of a publicly traded stock is equal to an option’s exercise price, the option is said to be “at the money.” When the market price exceeds the exercise price, the option is “in the money.” If an option is “at the money” when granted, it will only enrich the recipient if the stock price rises in the future. But if the option is granted “in the money” and can be exercised immediately, it is to that extent equivalent to a cash bonus if the recipient is an employee. The grant of “in-the-money” options rewards favored employees without requiring cash outlays by the company. But it also affects investors because it dilutes the position of shareholders when the option is exercised.
Id. at 539-40.
A related employee compensation practice, sometimes referred to as “backdating,” occurs by setting a grant date in a stock option that precedes the date the decision is made to award it, presumably when the stock price was lower on the grant date than on the decision date. Id. at 540. This results in the award of immediate in-the-money compensation to the employee recipient. Id. This practice “is not itself illegal under the securities laws[ 1 *464nor is it improper under accounting principles [2].” Id. (quoting Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc., 594 F.3d 783, 788 (11th Cir.2010)).
In its brief, the Pension Fund raises two grounds supporting shareholder demand futility based upon the allegations in its petition. First, the grant of in-the-money stock options to the Individual Defendants could not be ratified by the shareholders because they were ultra vires acts, in that they were prohibited by the shareholder adopted stock option plan. Second, the shareholders could not ratify Leggett’s financial statements issued for the time periods during which in-the-money stock options were granted to the Individual Defendants because those financial statements were illegal, in that they misrepresented Leggett’s financial position due to such grants. Neither ground has any merit.
First, the Pension Fund argues that the grant of in-the-money stock options constitutes ultra vires acts, i.e., acts that are beyond “the scope of the power allowed by [the Corporation’s] charter or statute.” Wolgin v. Simon, 722 F.2d 389, 393 (8th Cir.1983). Notwithstanding that the stock option plan is not part of Leggett’s charter or mandated by statute, the Pension Fund points to the provisions of Leggett’s shareholder-adopted stock option plan to support its claim that the plan prohibits the grant of such options. That language is essentially the same as that found in the plan in S.E.C. There, the option plan stated that “[t]he option price of shares subject to any Stock Option shall be the closing price of the Stock on the date that the Stock Option is granted, [,]” S.E.C., 646 F.3d at 540 (emphasis added); here, the stock option plan states that the “purchase price ... shall be no less than the Fair Market Value of the Shares at the time the Option is granted.” (Emphasis added.) The Eighth Circuit has expressly determined that a stock option with a grant date before the decision date complied with this language and was not prohibited by the plan. Id. at 540. While I find S.E.C. persuasive on this issue, even if I did not, it cannot be said that it is an unreasonable interpretation of the plan’s language. This reasonable view of the plan’s language, which is contrary to the Pension Fund’s prohibitory interpretation of that language, means that, from the Pension Fund’s perspective, the plan’s language is, at best, ambiguous as to whether an option’s grant date may precede its decision date. The Pension Fund directs us to no authority, and I can find none, that would foreclose the body of Leggett shareholders from resolving such an ambiguity in its own stock option plan by considering whether to ratify the grant of these stock options.
“[C]ompensation and other privileges which officers and directors of corporations receive are matters [that] can be ratified by the shareholders, and any complaint about these matters must be *465brought to the attention of the shareholders for their action before a suit can be brought.” Wolgin, 722 F.2d at 393. Thus, even if the alleged actions arguably fell outside the scope of Leggett’s stock option plan under the Pension Fund’s interpretation of the plan’s language, because the underlying issue involves the resolution of ambiguous plan language related to executive compensation, it is within the purview of the shareholders to ratify the actions of its board of directors and officers. That issue should have been presented to Leg-gett’s body of stockholders.
The Pension Fund’s second argument— Leggett’s financial statements were illegal in that they misrepresented Leggett’s financial position due to the challenged stock options — also fails. To succeed on this argument, the Pension Fund was obligated to allege facts that, if true, show the resulting financial statements rise to the level of misrepresenting Leggett’s financial position. This it has failed to do. No allegation in the Pension Fund’s petition points to any particular content in any financial statement that is alleged to be inaccurate or a misrepresentation. “In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.” Rule 55.15. Moreover, averments of demand futility in a derivative action such as this must be pleaded with particularity. Rule 52.09. Here, however, the Pension Fund relies only upon repeated conclusory allegations that on each of the challenged decision dates, Leggett and Individual Defendants engaged in 'illegal backdating of stock options and thus necessarily filed misleading and false financial statements.3 These legal conclusions are not supported by any particular factual assertions related to any financial statement but are merely circular arguments relying upon the fallacy that the backdating of stock options is by definition and under all circumstances illegal, which it is not. See S.E.C., 646 F.3d at 540.
In conclusion, it is important to note the issues that are not addressed or decided in this appeal: whether any alleged backdating occurred; whether in-the-money stock options were issued or, if they were, whether they were issued in accordance with the stock option plan or whether, if given the opportunity to do so, the Leggett shareholders would ratify those grants; or whether Leggett’s financial statements were misleading. Rather, the dispositive issue to be decided in this appeal is whether the Pension Fund pleaded with particularity sufficient facts to relieve it of the obligation to make demand upon Leggett’s shareholders as required by Rule 52.09.
For the above reasons, I conclude that the Pension Fund has failed to show with particularity through its allegations in its *466latest petition that serving demand on Leggett’s body of shareholders would have been a futile act. Thus, in the absence of an allegation that demand was made upon the body of shareholders, the Pension Fund has not met the requirements of Rule 52.09 and had no standing to bring this derivative action. I would affirm the trial court’s judgment dismissing the petition.

1. I disagree with the biased definition used by the majority that "[bjackdating occurs when [a stock] option’s grant date is altered to an earlier date with a lower, more favorable price to the recipient.” Slip. op. p. 4, n. 4 (quoting In re CNET Networks, Inc., 483 F.Supp.2d 947, 950 (N.D.Cal.2007)). The explanation of this definition from In re Zoran Corp., also relied upon in the majority opinion, is also biased in that it not only assumes that a grant date cannot precede the decision date, like the definition from CNET, but also that stock options with a grant date preceding the decision date are always accompanied by a failure to properly account for the corresponding compensation expense. Both of these propositions, authored by a lone district court judge, William Alsup, sitting as the trial judge in both CNET and Zoran, are squarely rejected by the 8th Circuit Court of Appeals in S.E.C. The majority opinion's reliance upon Judge Alsup’s definitional assumptions and use of biased language, such as “grant date is altered,” "pretend that the grant,” “real date,” “phony grant date," "pretend no need exists to recognize an expense,” “true grant date,” “underreporting its compensation expenses,” and "proper grant date,” preordain its acceptance of and reliance upon concluso-*464ry allegations of illegal and fraudulent actions on the part of the Individual Defendants in the absence of any alleged ultimate facts supporting those conclusions.

2. According to Generally Accepted Accounting Principles Board Opinion No. 25 ("APB 25”), however, "backdated options must be recorded as a compensation expense to the corporation because they effectively give recipients immediate compensation.... A corporation that fails to follow APB 25 and record backdated options as a compensation expense will necessarily misstate its expenses and income in its financial reports.” S.E.C, 646 F.3d at 540 (quoting Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc., 594 F.3d 783, 788 (11th Cir.2010)). Here, the Pension Fund did not allege or attempt to show in its latest petition that Leggett failed to follow APB 25.

. The majority opinion’s repeated references to the quantity of allegations in the Pension Fund’s petition are no substitute for an analysis of the quality of those allegations. The mere repetition of a legal conclusion does not transmute it into an allegation of an ultimate fact. The majority opinion’s reliance upon Bennett v. Mallinckrodt, Inc., 698 S.W.2d 854, 865 (Mo.App.1985), to ignore or relax the particularity requirements of Rules 52.09 and 55.15 is misplaced. The narrow issue in Bennett was whether plaintiffs’ allegations of "various health and physical” illnesses or "injury” generally are ultimate facts or conclusions. Bennett, 698 S.W.2d at 865. The court there characterized the distinction as "really one between generality and particularity[,]" opting for the former rather than the latter in reversing the dismissal of the petition. Id. The Bennett court, however, was not operating under the particularity constraints of Rules 52.09 and 55.15, as. are we in the case before us. The majority opinion’s reliance upon Bennett to gloss over the deficiencies in Pension Fund’s petition effectively eliminates the particularity requirement in both rules.