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Rawcliffe v. Anciaux

Supreme Court of Utah

October 11, 2017

James Robert Rawcliffe, Appellant,
Robert Anciaux, et al., [1] Appellees.

         On Direct Appeal Third District, Salt Lake The Honorable Heather Brereton No. 140905252

          Eric L. Zagar, Robin Winchester, Kristen L. Ross, Radnor, PA, J. Ryan Mitchell, Steven J. Joffee, Salt Lake City, for appellant

          Erik A. Christiansen, Alan S. Mouritsen, Salt Lake City, Douglas A. Rappaport, Lucy C. Malcolm, James Tysse, New York, NY, for appellees

          Justice Durham authored the opinion of the Court in which Chief Justice Durrant, Associate Chief Justice Lee, Justice Himonas, and Presiding Judge Orme joined.

          Having recused himself, Justice Pearce does not participate herein; Court of Appeals Presiding Judge Gregory Orme sat.


          DURHAM, JUSTICE .


         ¶1 James Rawcliffe, a shareholder of USANA Health Sciences, Inc., brought this action against USANA's board of directors and several of its officers for authorizing and receiving spring-loaded, stock-settled stock appreciation rights (SSARs). Mr. Rawcliffe concedes that USANA's Compensation Committee strictly complied with the company's compensation plan in authorizing the SSARs. Based on this and the absence of an allegation that the Compensation Committee intended to circumvent the plan, the district court dismissed all of Mr. Rawcliffe's claims under Utah Rule of Civil Procedure 12(b)(6) without prejudice. We affirm.


         ¶2 In 2006, USANA's board of directors approved, and its shareholders ratified, the USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (Plan). Pursuant to the Plan, the board of directors established the Compensation Committee, consisting of three members of the board of directors. The Plan gave the Compensation Committee the "exclusive power, authority, and discretion" to award SSARs to directors, officers, and other employees, as an incentive to continue working diligently for the company.

         ¶3 SSARs, as defined by the Plan, are a specific type of incentive award that differs somewhat from stock options. On the day that the Compensation Committee awards SSARs, called the "grant date, " the "exercise price" for the SSARs is set. The exercise price of each SSAR is equal to the average trading price of USANA's stock on the grant date.[2] After the vesting period runs, the awardee can exercise the SSARs and receive stock as compensation. The day on which the awardee exercises the SSARs is called the "exercise date." When the awardee exercises her SSARs, she is given stock in an amount reflecting the difference between the market price of USANA's stock on the exercise date, and the exercise price.[3] The recipient does not need to pay an exercise price.

         ¶4 The lower the exercise price and the higher the value of the company's stock on the exercise date, the more the SSARs are worth. When the market price is lower on the exercise date than on the grant date, the SSARs are "out of the money" and return no value to the holder; if the SSARs are exercised when the market price is higher than the exercise price, they are "in the money, " and the holder then receives the difference in price in the form of USANA stock.

         ¶5 While the Plan allows SSARs to be granted as incentive awards, it does not explicitly mention spring-loaded SSARs. Spring-loading involves granting equity awards just prior to the release of non-public information reasonably expected to drive up the market price of the company's stock. Spring-loading increases the value of SSARs because the exercise price is set on a day when the good news has not yet been released, making the exercise price lower than if it were to be set after the good news was released. It makes the SSARs more likely to be "in the money" once they vest and also increases the difference between the exercise price and the market price on the exercise date.

         ¶6 The Plan states only that the exercise price must be at least 100 percent of the "Fair Market Value"[4] of the common stock on the date of the grant, with no mention of spring-loading. In this case, the Committee awarded SSARs on February 3, 2014, to four members of the board of directors (including the three directors serving on the Compensation Committee) and several corporate officers. These awards were made just one day before USANA announced its net sales and earnings per share figures from 2013, which greatly exceeded expectations. On February 6, 2014, each of the defendants filed a Form 4 with the Securities and Exchange Commission disclosing the SSARs awards. The SSARs' exercise price the day they were granted was $57.62. On February 5, 2014, after the announcement, the company's stock price rose to $68.46 per share, a gain of $10.84 per share or 18.8 percent in two days. While the value of USANA's stock rose 18.8 percent just two days after the exercise price was set, the SSARs did not vest, and could not be exercised, until 23 to 42 months later. Thus, the directors and officers could not realize that 18.8 percent increase until their SSARs had vested, and only if USANA's stock either maintained its $68.46 value or it increased in value during that vesting period.

         ¶7 Mr. Rawcliffe acknowledges that the issuance of the spring-loaded SSARs complied with the terms of the Plan. He argues only that it violated the underlying "spirit" of the Plan. Accordingly, he alleges that the Compensation Committee members breached their fiduciary duties and wasted corporate assets. He also alleges that one director, who was not a member of the Compensation Committee, and several officers breached their fiduciary duties and were unjustly enriched by passively receiving the spring-loaded SSARs.


         ¶8 A motion to dismiss presents a question of law that is reviewed de novo, giving "no deference" to the district court's analysis. See State v. Ririe, 2015 UT 37, ¶ 5, 345 P.3d 1261.


         ¶9 We first clarify the fiduciary duties imposed on corporate directors and officers under the Utah Revised Business Corporation Act. Next, we address Mr. Rawcliffe's substantive claims in this case.


         ¶10 The question of whether spring-loading SSARs constitutes a breach of fiduciary duty is an issue of first impression in Utah. Corporate fiduciary duties were originally creatures of common law. Now, Utah corporations are governed by the Utah Revised Business Corporation Act (URBCA). Utah Code §§ 16-10a-101 to -1804. Utah Code section 16-10a-840(4)[5] codifies when a corporate director or officer can be held liable and states that:

(4) A director or officer is not liable to the corporation [or] its shareholders . . . for any action taken, or any failure to take any action, as an officer or director, as the case may be, unless:
(a) the director or officer has breached or failed to perform the duties of the office in compliance with this section; and
(b) the breach or failure to perform constitutes gross negligence, willful misconduct, or intentional infliction of harm on the corporation or the shareholders.

(Emphases added).

         ¶11 As the emphasized portions show, this statute requires that a cause of action brought by a corporation or shareholder[6] against a director or officer, for the official acts of the director or officer, must be for a breach of Utah Code section 16-10-840(4). See Bagley v. Bagley, 2016 UT 48, ¶ 10, 387 P.3d 1000 (holding that we interpret statutes to determine the intent of the legislature by looking first to the plain language); see also Utah Code § 16-10a-842(1) (providing for director liability if a director "votes for or assents to a distribution" that violates the URBCA "or the articles of incorporation, " but only if "the director's duties were not performed in compliance with Section 16-10a-840"). Otherwise, if it is not a breach of subsection (4), the "director or officer is not liable to the corporation [or] its shareholders, " absent some other statutory authorization. Utah Code § 16-10a-840(4) (emphasis added).

         ¶12 Subsection (4) mandates that a corporation or shareholder prove two things before a director or officer can be held liable: (1) that the director or officer breached a duty enumerated in Utah Code section 16-10a-840(1); and (2) that the director or officer breached the duty with a mental state listed in Utah Code section 16-10a-840(4)(b). According to the plain language in subsection (4), both a breach of a standard of conduct in subsection (1) and a mental state listed in subsection (4)(b) are required to hold a director or officer liable. We will first discuss the standards of conduct that corporate directors and officers owe under the URBCA and then the mental states required to establish liability.

         A. Standards of Conduct Under Utah Code ...

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