How To Confer A $6.9 Million Benefit For Less Than A Half Dollar
In March 2011, the three-member compensation committee of EchoStar Corporation awarded options to purchase 1.5 million shares of company stock to its Chairman, Charles W. Ergen. According to EchoStar’s proxy statement for its 2012 annual meeting, the aggregate grant date fair value of the award was $21.6 million. There was just one problem, the plan under which the awards were granted provided “no Participant may be granted Awards . . . in the aggregate in respect of more than 800,000 Shares in any one calendar [sic] year. . . .” In December of that same year, a stockholder filed a derivative suit without making demand on board. Three weeks later, another stockholder filed a derivative suit also challenging the award and also without making a demand on EchoStar’s Board of Directors. In January 2013, Mr. Ergen filed an amended Form 4 reporting the cancellation of options to purchase 7oo,ooo shares:
As previously reported on a Form 4 filed on April 4, 2011 by the reporting person, the reporting person reported acquiring stock options to purchase 1,500,000 shares of common stock vesting over five years pursuant to the Company’s 2008 Stock Incentive Plan. However, the Company subsequently determined that stock options to purchase 700,000 shares of common stock were not validly granted pursuant to the Company’s 2008 Stock Incentive Plan because they exceeded the limit on the number of stock options that may be granted to any individual participant in any one calendar year. Accordingly, the attempted grant of these excess stock options was ineffective, and they were never granted to the reporting person. The reporting person is filing this amendment to report the correct amount of stock options acquired.
U.S. District Court Judge Jennifer A. Dorsey ultimately dismissed the first derivative suit with prejudice for failure to plead demand futility. Jacobi v. Ergen, 2016 U.S. Dist. LEXIS 35345 (D. Nev. Mar. 17, 2016) That dismissal is being appealed to the Ninth Circuit Court of Appeals. Despite being second in line after a case dismissed with prejudice, plaintiff’s counsel in the second derivative nonetheless sought to recover attorneys’ fees. This is how Judge Dorsey described the effort:
Baldly claiming that its second-filed suit was the catalyst for EchoStar’s cancellation of the improperly issued stock options that saved the company $6.9 million, the Fund renews its motion and asks me to order the corporation to pay the Fund’s lawyers $1,384,600 for their efforts—which represents 20% of the value of that benefit—under the common benefit doctrine.
Chester Cty. Emples. Ret. Fund v. Ergen, 2017 U.S. Dist. LEXIS 119568 (D. Nev. July 31, 2017). Judge Dorsey called three strikes against the plaintiff in the second action:
- The plaintiff’s action was not meritorious when filed because it failed to plead facts to show that its pre-suit demand on the Board was excused as futile;
- The plaintiff failed to demonstrate that a substantial benefit was conferred to an ascertainable class because EchoStar simply moved the excessive grant into the next year; and
- The plaintiff failed to demonstrate that it was the catalyst for EchoStar’s action because the first lawsuit had put EchoStar on notice of the issue.
This case is an excellent example of how wasteful the current system is. Neither plaintiff made a demand. Had either one of them sent a letter to EchoStar’s board of directors, it is entirely possible that EchoStar would have addressed the problem. So instead of the cost of a postage stamp, we have years of litigation whose only point seems to be to feed the lawyers.