Sherry v. Chioini

219 F.Supp.3d 608

Donald E. SHERRY, Plaintiff,

v.Robert L. CHIOINI et al., Defendants.

Case No. 15-14198

United States District Court, E.D. Michigan, Southern Division.

Signed October 25, 2016

Diana Gjonaj, Paul F. Novak, Milberg LLP, Detroit, MI, Michael H. Rosner, William J. Fields, Levi & Korsinsky LLP, New York, NY, for Plaintiff.

Andrew J. Kolozsvary, Dykema Gossett, Detroit, MI, Lori M. McAllister, Dykema Gossett, Lansing, MI, David W. Potts, Birmingham, MI, for Defendants.

OPINION AND ORDER (1) GRANTING DEFENDANTS' MOTION TO DISMISS (ECF # 15) WITH RESPECT TO COUNTS I, III, AND IV OF PLAINTIFF'S COMPLAINT AND (2) ORDERING SUPPLEMENTAL BRIEFING WITH RESPECT TO COUNT II

MATTHEW F. LEITMAN, UNITED STATES DISTRICT JUDGE

This is a shareholder derivative action under Michigan law. Plaintiff Donald E. Sherry ("Sherry") is a shareholder of nominal Defendant Rockwell Medical, Inc. ("Rockwell"). Sherry alleges that Rockwell's Board of Directors (the "Board") and certain corporate officers improperly enriched themselves by granting and/or accepting (1) so-called "spring loaded" stock options and/or (2) a greater number of stock options than permitted under the company's compensation plan.

Prior to filing this action, Sherry sent a letter to the Board identifying this alleged wrongdoing and demanding that Rockwell investigate it and take appropriate action (the "Demand Letter"). In response, Rockwell asked the Oakland County Circuit Court (the "OCCC") to appoint attorney S. Thomas Wienner ("Wienner") as a disinterested person to investigate Sherry's allegations and to determine whether Rockwell should pursue claims based upon the allegations. After the OCCC appointed Wienner, he conducted an investigation and determined that it would not be in Rockwell's best interest to pursue claims arising out of Sherry's allegations.

The Defendants now move for dismissal of Sherry's claims. They seek that relief under a Michigan statute that, under certain circumstances, requires a court to dismiss derivative claims that a court-appointed disinterested person has determined should not be pursued. (See ECF # 15.) For the reasons explained below, the Court DISMISSES the claims that were the subject of Wienner's determination (Counts I, III, and IV of the Complaint).

In a separate claim that was neither raised in the Demand Letter nor investigated by Wienner (Count II of the Complaint), Sherry alleges that the Board issued a misleading proxy statement to Rockwell's shareholders in 2014. The Defendants have moved to dismiss this claim on the ground that, among other things, Sherry lacks standing to assert it. For the reasons explained below, the Court concludes that it cannot rule on the motion to dismiss Count II until it receives and reviews supplemental briefs with respect to that claim.

I

A

Rockwell is a publicly-traded medical device and biopharmaceutical company. (See Wienner Report at 4, ECF # 15-10 at 5, Pg. ID 435.) For most of its history, "the great majority of [Rockwell's] revenues have been derived from the manufacture and sale of concentrate solutions used during hemodialysis." (Id. at 6, ECF # 15-10 at 7, Pg. ID 437.)

Rockwell's President and CEO is Defendant Robert Chioini ("Chioini"). (See id. at 4, ECF # 15-10 at 5, Pg. ID 435.) Chioini also serves as Chairman of the Board. (See id. ) The Board includes three outside directors: Defendants Patrick Bagley ("Bagley"), Ronald Boyd ("Boyd"), and Kenneth Holt ("Holt"). (See id. at 4-5, ECF # 15-10 at 5-6, Pg. ID 435-36.) Bagley, Boyd, and Holt comprise the Board's "Compensation Committee." (See id. ) The remaining Defendants in this action—Thomas Klema ("Klema"), Ajay Gupta ("Gupta"), and Raymond Pratt ("Pratt")—are Rockwell corporate officers. (See Compl., ECF # 1 at ¶¶ 16-19, Pg. ID 6.)

In 2007, Rockwell's shareholders approved, and the Board adopted, a "Long Term Incentive Plan" (the "Plan"). (See Wienner Report at 7, ECF # 15-10 at 8, Pg. ID 438.) The Plan authorizes the Board's Compensation Committee "to grant various equity awards [i.e., stock options] to themselves, any other non-employee directors, executive officers, other employees, and consultants of [Rockwell]." (Compl., ECF # 1 at ¶ 21, Pg. ID 7.) The Plan further provides that "the exercise price of stock options [granted under the Plan] be set at no less than Rockwell's ‘Fair Market Value’ on the date of the grant." (Id. at ¶ 36, Pg. ID 12.) The Plan defines "Fair Market Value" as "the closing price of [Rockwell's] Common Stock on the [NASDAQ] Stock Exchange for the Grant Date." (Id. )

On April 4, 2014, the Board filed a Schedule 14A Proxy Statement with the United States Securities and Exchange Commission in which the Board "solicited shareholder approval of amendments to the Plan" (the "2014 Proxy Statement"). (Id. at ¶ 5, Pg. ID 4.) In the 2014 Proxy Statement, the Board sought to increase the number of stock options that the Compensation Committee could grant in a single fiscal year. (See id. ) Rockwell's shareholders approved the amendment on May 22, 2014. (See id. at ¶ 68, Pg. ID 23.)

B

The fall of 2014 was an important and busy time for Rockwell. For years, "Rockwell [had been] attempting to transition from being a medical supplier of dialysis concentrate products to being a specialty pharmaceutical company with higher margins." (Wienner Report at 5, ECF # 15-10 at 6, Pg. ID 436.) Rockwell's "primary effort" in this transformation had been "the development of a drug called Triferic, which is used to replace iron and maintain hemoglobin during hemodialysis treatments." (Id. ) In the fall of 2014, the Food and Drug Administration (the "FDA") was nearing a decision on whether to approve Triferic, and it had scheduled a public session to review the drug on November 6, 2014. (See id. at 6-7, ECF # 15-10 at 7-8, Pg. ID 437-38).

In this same time frame, Rockwell was also negotiating a transaction with Baxter Healthcare Corporation ("Baxter"). (See Compl. at ¶ 4, Pg. ID 3.) The proposed transaction called for Baxter to "serve as the exclusive distributor of Rockwell's hemodialysis concentrate and ancillary products in the United States and selected foreign countries." (Id. ) Chioini, "in his capacity as [P]resident of [Rockwell]" was the person negotiating with Baxter on Rockwell's behalf. (Wienner Dep. at 116, ECF # 32-1 at 31, Pg. ID 826.)

On October 1, 2014, the Board met to address the Baxter transaction. (See id. ) The Board voted to "authorize[ ]" the Baxter transaction and to give Chioini the "authority" to complete his negotiations and close on the transaction. (Id. )

At the conclusion of the full Board meeting, the Compensation Committee met. (See Wienner Report at 9, ECF # 15-10 at 10, Pg. ID 440.) During that meeting, the Compensation Committee granted an aggregate of 825,000 stock options (the "Option Awards") as follows: 500,000 options to Chioini, 120,000 options to Klema, 50,000 options each to Gupta and Pratt, and 35,000 options to each member of the committee. (See id. at 9-10, ECF # 15-10 at 10-11, Pg. ID 440-41.) The "exercise price of the [Option Awards] was $8.88 per share, which, consistent with [the Plan], was the closing price on the NASDAQ exchange [of Rockwell's stock] on October 1, 2014." (Id. at 10, ECF # 15-10 at 11, Pg. ID 441.) The Option Awards were set "to vest in three equal, annual installments beginning in October 2015." (Id. )

Chioini completed his negotiations with Baxter on October 1 and 2, and the two companies issued a joint press release announcing the transaction on October 3. (See Compl. at ¶ 29, Pg. ID 9.) The press release explained that Baxter would become "the exclusive distributor of Rockwell's hemodialysis concentrate and ancillary products in the U.S. and selected foreign countries" in exchange for a $20 million cash payment to Rockwell and a $15 million purchase of Rockwell's stock. (Id. )

The day Rockwell announced the Baxter transaction, Rockwell's stock closed at $10.63 per share, or nearly 20-percent higher than the $8.88 per share closing price two days earlier. (See id. at ¶¶ 31-32, Pg. ID 11.) The increase in Rockwell's share price was short lived. On October 8, 2014, less than a week later, Rockwell's share price retreated to $8.89. (See Wienner Report at 6, ECF # 15-10 at 7, Pg. ID 437.)

C

Sherry has owned shares of Rockwell's public stock since October 2011. (See Compl. at ¶ 10, Pg. ID 5.) On January 8, 2015, Sherry and a second Rockwell shareholder sent the Demand Letter to the Board. (See Demand Ltr., ECF # 15-10 at 21-26, Pg. ID 451-56.) In the Demand Letter, Sherry claimed that the granting of the Option Awards was improper for two reasons. First, Sherry argued that the Compensation Committee had improperly timed their granting of the Option Awards in order to "take advantage of the expected stock gains that would occur after the announcement of the deal with Baxter." (Id. at 25, Pg. ID 456.) He complained that:

[t]he Compensation Committee granted [the Option Awards] just prior to the release of material information that caused Rockwell's stock price to rise, and made these grants with the intent of circumventing the shareholder-approved restriction requiring that the exercise price [of any option award] be no less than the fair market value of [Rockwell's] common stock on the date of the grant. This practice—known as ‘spring loading’—constitutes a violation of the terms and objectives of the Plan and is a breach of fiduciary duty.

(Id. at 23, Pg. ID 453). Sherry contended that the timing of the Option Awards was suspicious because the Compensation Committee normally issued option awards in January and/or June, not October. (See id. )

Second, Sherry argued that the Compensation Committee granted Chioini more options in one fiscal year than he was entitled to receive under the Plan:

Section 7.3 of the Plan, as most recently approved by shareholders in May 2014, provides that during any fiscal year no individual employee may be granted awards of stock options

...