Direct Appeal Third District, Salt Lake The Honorable Heather
Brereton No. 140905252
L. Zagar, Robin Winchester, Kristen L. Ross, Radnor, PA, J.
Ryan Mitchell, Steven J. Joffee, Salt Lake City, for
A. Christiansen, Alan S. Mouritsen, Salt Lake City, Douglas
A. Rappaport, Lucy C. Malcolm, James Tysse, New York, NY, for
Justice Durham authored the opinion of the Court in which
Chief Justice Durrant, Associate Chief Justice Lee, Justice
Himonas, and Presiding Judge Orme joined.
recused himself, Justice Pearce does not participate herein;
Court of Appeals Presiding Judge Gregory Orme sat.
DURHAM, JUSTICE .
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.
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.
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. 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. The recipient
does not need to pay an exercise price.
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
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.
The Plan states only that the exercise price must be at least
100 percent of the "Fair Market
Value" 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.
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
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.
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.
DUTIES OWED BY CORPORATE OFFICERS AND DIRECTORS
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) 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.
As the emphasized portions show, this statute requires that a
cause of action brought by a corporation or
shareholder 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).
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
Standards of Conduct Under Utah Code ...