The United States District Court for the Southern District of Ohio recently refused to grant the defendants’ motion to dismiss litigation resulting from Cincinnati Bell’s failed say-on-pay vote required by the Dodd-Frank Act. 

Business Judgment Rule

The court noted that Ohio courts follow the “business judgment rule.”  Directors face liability only if it is shown by clear and convincing evidence that actions were undertaken with a “deliberate attempt to cause injury to the corporation” or “reckless disregard for the best interest of the corporation.”

The court also noted however that, in its view, the “business judgment rule imposes a burden of proof, not a burden of pleading.” Explaining further, the court stated the business judgment rule would require the plaintiff to present evidence at trial to rebut the presumption the rule imposes.  However, according to the court, the plaintiff is not required to plead operative facts in their complaint that would rebut the presumption.

Here, the court found the plaintiff’s allegations raised a plausible claim that the multi-million dollar bonuses approved by the directors during a time of declining financial performance violated Cincinnati Bell’s pay-for-performance compensation policy and therefore constituted an abuse of discretion or bad faith.  The court continued that the defendants may offer the affirmative defense of the business judgment rule at trial.

Pre-suit Demand

The court also found pre-suit demand was not futile because the plaintiff pled specific facts to give reason to doubt that the directors would make an unbiased decision about whether to sue themselves.  The directors, the court noted, were the very same people who voted to approve the pay hikes and bonuses.  It seemed critical to the court that the directors not only approved the transactions, but that they also recommended to the shareholders that the shareholders approve the compensation.

Unjust Enrichment

The plaintiff also claimed three defendants were unjustly enriched as a result of the executive compensation.  According to the plaintiff, the unjust enrichment flowed from the Cincinnati Bell board’s breach of fiduciary duty.  The court rejected the argument that the defendants could not have been unjustly enriched merely because they rendered services.  The court found that the plaintiff sufficiently pled facts of beach of fiduciary duty. It is “axiomatic” that plaintiff has also sufficiently pled a case for unjust enrichment according to the court.

Beazer Litigation

In the court docket, the defendants also submitted information regarding the Beazer say-on-pay litigation pending in the Superior Court of Fulton County Georgia. In that case the defendants noted that the court had granted the defendants’ motion to dismiss, but no formal order had yet been signed.  A proposed order by the Beazer defendants, found in the Cincinnati Bell docket, indicates the judge’s decision may have been based on:

• Failure to properly allege excuse from the pre-suit demand requirement
• Failure to state a claim.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.