filed: December 16, 1993; As Corrected January 6, 1994.
On Appeal From the United States District Court For the Western District of Pennsylvania. D.C. Civil Action No. 91-02112.
Before: Becker, Hutchinson and Roth, Circuit Judges.
This case arises from a dispute over monetary awards from corporate incentive funds to officers and employees of Westinghouse Electric Corporation ("Westinghouse"). Alexander Garber, a holder of Westinghouse common stock, brought a shareholder derivative suit against the individual members of Westinghouse's board of directors in response to the incentive awards. The derivative suit sought damages on behalf of Westinghouse, jointly and severally against the individual directors, for their actions relating to the incentive awards.
Garber is a citizen of Florida and Westinghouse is incorporated in Pennsylvania. The district court had diversity jurisdiction under 28 U.S.C. § 1332. Defendants filed a motion to dismiss, contending that Garber failed to sufficiently establish the reasons for not making a pre-complaint demand on Westinghouse to secure the corporation's enforcement of the actions Garber sought. The district court dismissed Garber's amended complaint without prejudice for failure to comply with the pre-complaint demand requirement of Federal Rule of Civil Procedure 23.1 and Pennsylvania Rule of Civil Procedure 1506.*fn1
We agree with the district court and will affirm its decision.
At issue in this appeal is whether Garber sufficiently set forth the reasons for not making a pre-complaint demand. His amended complaint acknowledges that no demand was made on Westinghouse's board of directors. Instead, his amended complaint sets forth the reasons why such a demand would have been futile. This appeal is concerned solely with the question of whether Garber set forth sufficient pleadings to excuse demand pursuant to Federal Rule 23.1 and Pennsylvania Rule 1506.
The genesis of this suit was action taken by Westinghouse to reward its top employees. Specifically, Garber objected to awards provided by Westinghouse pursuant to its Annual Performance Plan for "key" employees ("Key Plan") and at least one other incentive plan for other employees. The shareholder approved Key Plan is designed to provide payments to Westinghouse's key employees as an incentive to enhance efficiency and profitability. The Key Plan is administered by the five members of the Management Compensation Policy Committee ("Compensation Committee") of the board of directors. At the time of the awards which are the subject of Garber's suit, the Compensation Committee was comprised of Robert Campbell, John B. Carter, David T. McLaughlin, Rene C. McPherson, and Richard R. Pivirotto. Each served as a director on Westinghouse's board, and all are named defendants in this suit.*fn2 The five members of Compensation Committee were non-employee, non-management directors. Garber does not allege that any of these individuals received incentive awards.
Under the Key Plan, the Compensation Committee is authorized to determine when, to whom, in what form, in what amount, over what period of time and under what terms, conditions, and limitations awards will be made. The Compensation Committee's determinations are conclusive, except that the Key Plan may be amended or terminated at any time by the board of directors. Participation is limited to "key" employees, defined as employees selected by the Compensation Committee who are in a position to influence the results of Westinghouse's operations. Joint Appendix ("JA") at 25. Under the Key Plan, total annual awards can not exceed five percent of the consolidated net income of the corporation and its subsidiaries during such year, before deducting income taxes and any provision for such additional compensation, plus any unused incentive fund amounts carried forward from the previous year. If the full amount available under the Key Plan is not allocated in a given year, such portion of the balance as determined by the Compensation Committee may be carried forward and be available for incentive awards in any subsequent year or years.
In his amended complaint, Garber avers that in or about January 1991 the Compensation Committee made awards under the Key Plan and other incentive plans totalling $168,490,050 for the three year period ending December 31, 1990.*fn3 Garber does not aver whether this amount was approved in one action by the Compensation Committee in January 1991 or whether the amount is the sum of annual awards approved by the Compensation Committee in separate actions in 1988, 1989, and 1990. While the amended complaint is ambiguous, it is apparent from proxy statements filed with the Securities and Exchange Commission by Westinghouse that the amount pleaded by Garber represents annual awards made over the three year period between 1988 and 1990. The district court found that the Compensation Committee awarded $28 million in Key Plan awards to 292 Westinghouse employees on January 29, 1991.*fn4 This total included compensation awards to board members Paul Lego and Theodore Stern, the only board members employed as officers of the corporation.
Prior to the time the awards were approved by the Compensation Committee, Westinghouse reported consolidated net income of $1,403 million for 1990. On February 27, 1991, Westinghouse restated its consolidated net income before taxes for 1990 to reflect a re-valuation of certain Westinghouse Credit Corporation assets,*fn5 the effect of which was to reduce Westinghouse's consolidated net income by $975 million, from $1,403 million to $428 million before taxes.*fn6
Garber contends that prior to the incentive awards, defendant Lego was advised that the assets held by Westinghouse Credit had substantially deteriorated. He further contends that individual members of the Compensation Committee and the board of directors "knew or were told that a major write-down could be pending which would eliminate or substantially reduce Westinghouse's reported net income for 1990." JA at 7 (Plaintiff's Amended Complaint P 14). Garber alleges that, despite this knowledge, the Compensation Committee and board "intentionally or recklessly" proceeded to make or approve the incentive awards and that, after the write-down was announced, the individual defendants "intentionally or recklessly" approved or acquiesced in the awards and did nothing to cancel or recover them. Id. at 8 (Plaintiff's Amended Complaint P 14).
Garber asserts that the incentive awards "constituted such a gross misuse and abuse of the Key Plan and the other plans as to amount to waste" and that because the Compensation Committee knew of the write-down, the incentive awards exceeded the limits imposed under the Key Plan. Id. at 11 (Plaintiff's Amended Complaint PP 15, 16).
Garber also avers that he made no pre-complaint demand on Westinghouse's board of directors because doing so would have been futile. In support of this assertion, Garber contends that such action would have been futile because Westinghouse's directors would not sue themselves, having acted intentionally or recklessly in making, approving, or acquiescing in the incentive awards despite their knowledge of the impending write-down. Garber's brief to this court asserts that this pleading complied with Federal Rule 23.1 and Pennsylvania Rule 1506 governing shareholder derivative suits.
Garber filed his original complaint on December 12, 1991, and an amended complaint on April 28, 1992. On May 15, 1992, defendants filed a motion to dismiss. On October 2, 1992, the district court filed an order granting defendant's motion to dismiss Garber's amended complaint for failure to comply with the pre-litigation demand requirement of Federal Rule 23.1 and Pennsylvania Rule 1506. In its order, the district court adopted the Magistrate Judge's July 10, 1992, report as the opinion of the district court. Garber filed a timely notice of appeal.
The district court had jurisdiction over this diversity action under 28 U.S.C. § 1332. Appellate jurisdiction for this appeal from a final order of the district ...