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holding that a CEO may be liable for inducing breach if the plaintiffs can establish that his actions "were not motivated by, and for, his corporate responsibilities, but were instead principally executed to further his personal investments"
Summary of this case from Masterson-Carr v. Anesthesia Servs., P.A.Opinion
C.A. No. 01C-08-291 WCC
Submitted: December 26, 2001
Decided: March 28, 2002
On Defendant Thomas Gossage's Motion to Dismiss. Denied.
Richard G. Elliott, Jr., Esquire; Jennifer C. Bebko, Esquire; Richards, Layton Finger, Wilmington, Delaware, Attorneys for Plaintiffs.
Kathleen Furey McDonough, Esquire; Jennifer Gimler Brady, Esquire; Potter, Anderson Corroon, Wilmington, Delaware, Attorneys for Defendant Thomas Gossage.
ORDER
On this 28th day of March, 2002, upon consideration of Thomas Gossage's motion to dismiss, it appears to the Court that:
1. Hercules Incorporated ("Hercules") acquired BetzDearborn, a water treatment chemical company on October 15, 1998 for $3.2 billion. Shortly after the BetzDearborn — Hercules merger ("the merger"), Hercules initiated a formal process to integrate BetzDearborn into Hercules and produce substantial "synergies," which were intended to result in cost savings and revenue enhancement. The synergies were measured in the areas of "headcount reductions, supply chain improvements, revenue improvements, facility cost reductions, financial tax improvements and other areas." In late 1998, immediately after the merger, Hercules formulated a detailed plan, in which the "synergies" were to be achieved through the efforts of six departments; each department was compelled to achieve specific tasks and targets. Approximately 130 Hercules employees (Mr. Smith and the putative class participants "Plaintiffs") worked within these six departments and were thus eligible participants in this plan. From the savings plan's inception, Hercules management informed Plaintiffs that they would be compensated for their extra efforts, depending on the success in achieving the target synergies. The time that Plaintiffs devoted to the plan was above and beyond their usual work hours, which included their weekends and nights to promote the plan.
Plaintiffs' Complaint at 4.
Id. at 5.
2. By August, 1998, Hercules publicly targeted $100 million of savings from synergies; this target was increased to $150 million in April, 1999, just eight months later. Plaintiffs began working on the plan prior to the merger and continued throughout the calendar year 2000. During this time, an executive and senior management committee developed the Integration Synergies Incentive Compensation Plan ("ISICP") to award Plaintiffs extra compensation who were instrumental in achieving the synergies. The ISICP was finalized in November, 1999, and operated retroactively to cover from October 15, 1998, the date of the merger, to the end of 2000.
3. Thomas Gossage ("Gossage"), a former Chief Executive Officer ("CEO") of Hercules was re-hired in October, 2000 for the same position with the intent to correct and improve Hercules' deteriorating financial condition. When Gossage was hired, the ISICP had been active for almost two years. Gossage was compensated by Hercules for accepting the CEO position in the form of one million Hercules stock options, 128,003 shares of Hercules restricted stock, and $1 salary, to retain his benefits. Gossage received no other monetary compensation.
4. According to Plaintiffs, the original ISICP promised awards to ISICP participants depending upon the total synergy goal achieved, and was to be validated through an audit by Price Waterhouse Cooper ("PWC"), Hercules' auditors for its books and records. In 1999, Plaintiffs allegedly received personalized letters that set forth their individual target levels, and their corresponding target award, which again depended upon the total synergy goal achieved under the ISICP Plan. The individual letters explained that the higher the synergies, the higher the employee's award compensation. Plaintiffs also alleged that in the same year, Hercules shareholders had been informed that the selected departments were on target to achieve the final synergies around $165,000,000, and that the department team leaders were informed that the synergies had reached $255,731,000, which was above the highest target level of $150,000,000. In early 2000 before Gossage was hired, Hercules had apparently informed each of the six departments that they were on target to meet, or possibly exceed, the highest target level.
5. In late 2000, after Gossage was hired, he allegedly instructed PWC to perform an "analysis," which Plaintiffs allege was inconsistent with the original ISICP terms. In March, 2001, Gossage notified Plaintiffs by individual letters that the achieved synergies were slightly below the required minimum levels to generate any bonus under the ISICP terms. According to Plaintiffs, their actual payout was significantly lower than the minimum synergy levels. Furthermore, Hercules did not consider their individual performances, which was originally part of the ISICP.
6. Plaintiffs claim that Gossage intentionally gave PWC incorrect instructions and explanations for the ISICP, and instructed PWC to do the analysis instead of the "audit," which was required in the ISICP. They further allege that Gossage took "other affirmative and intentional actions to cause Hercules to breach the terms of the Plan" Plaintiffs claim that Gossage was able to virtually eliminate the bonus pool, by performing the analysis, which resulted in Plaintiffs' damages. In essence, they claim that Gossage tortiously interfered in their business relationship with Hercules; he caused Hercules to breach the original terms of the ISICP, which saved the company vast amounts of money. The enormous savings Hercules assumed inflated the company's stock, and since Gossage's exclusive form of compensation related directly to the state of Hercules' stock, Plaintiffs allege that he interfered with the ISICP in order to directly benefit from the improved pricing of the stock.
Plaintiff's Complaint at 13.
7. Gossage claims that at all times, he was acting as a Hercules CEO and that every action he took was taken to improve Hercules' financial condition, which is precisely why the company hired him in October, 2000. As such, Gossage contends he cannot be held personally liable for any of his actions, which may have caused Plaintiffs to lose their expected bonuses. Gossage firmly contends that he was never acting in any capacity other than as a Hercules CEO, and that in Delaware, a corporate officer cannot be personally liable for tortiously interfering with his company's contract.
Gossage Motion at 3 (citing International Association of Heat Frost Insulators Asbestos Workers Local Union 42 v. Absolute Envtl. Serv., Inc., 814 F. Supp. 392, 400-401 (D.Del 1993)).
8. When deciding a motion to dismiss for failure to state a claim upon which relief can be granted, the Court must accept all well-pleaded allegations as true. The test, which determines whether the facts alleged are sufficient to withstand a motion to dismiss is a broad one, and thus, a plaintiff may recover under any reasonably conceivable set of circumstances susceptible of proof under the complaint. The Court must now review Gossage's motion to dismiss, with these principles in mind.
Spence v. Funk, Del. Supr., 396 A.2d 967 (1978).
396 A.2d at 968(citing Klein v. Sunbeam Corp., 47 A.2d 526 (Del.Supr. 1952).
Because Gossage has filed a motion to dismiss, the Court will not consider the other additional documents submitted by the parties. The Court will only consider the allegations made in the complaint, the motion, and Plaintiffs' response.
9. Delaware courts have previously adopted the Restatement (Second) of Torts to analyze intentional interference with contract relations. Section 766 states
See Grand Ventures, Inc. v. Paoli's Restaurant, Inc. No. 95C-030013, 1996 Del. Super. LEXIS 3 (Del.Super. Jan. 4, 1996); Bobson v. Gulfstream Marketing Ltd., No. 89C-NO11, 1992 WL 68913 (Del.Super. Mar. 27, 1992); Irwin Leighton v. W.M. Anderson Co., 532 A.2d 983 (Del.Ch. 1987); Bowl-Mor Company Inc. v. Brunswick Corporation, 297 A.2d 61 (Del.Ch. 1972).
One who intentionally and improperly interferes with the performance of a contract . . . between another and a third person by inducing or otherwise causing the third person not to perform the contract, is subject to liability to the other for the pecuniary loss resulting to the other from the failure of the third person to perform the contract.
RESTATEMENT (SECOND) OF TORTS § 766 (1977).
According to the clear language of the rule, liability may only be imposed if there is an interference, which was both intentional and improper. However, similar to the case of Grand Ventures v. Paoli's Restaurant, Inc., the Court's inquiry in the instant action is not necessarily whether Gossage improperly interfered with the ISICP, but whether his interference and conduct was privileged. The Restatement identifies particular privileges, which allow one to interfere with a contract, when they otherwise would be forbidden to do so. "If one's conduct falls into a specific privilege, then a court can find, as a matter of law, that the interference was privileged." Delaware courts have previously adopted these privileges, one of which is captured in section 770 of the Restatement (Second) of Torts.
Grand Ventures Inc., 1996 Del. Super. LEXIS 3.
Grand Ventures Inc., 1996 Del. Super. LEXIS 3 at *10.
See Grand Ventures Inc., 1996 Del. Super LEXIS 3, at *10. See also Bobson v. Gulfstream Marketing, Ltd., No. 89C-NO11, 1992 WL 68913 (Del.Super. Mar. 27, 1992) (examining the Restatement (Second) of Torts at length and the privileges that fall under tortious interference with contractual rights.); Bowl-Mor Company Inc. v. Brunswick Corporation, 297 A.2d 61 (Del.Ch. 1972) (adopting the Restatement (Second) of Torts § 766 (1939)).
"[o]ne who, charged with the responsibility for the welfare of a third person, intentionally causes that person not to perform a contract or enter into a prospective contractual relation with another, does not interfere improperly with the other's relation if the actor (a) does not employ wrongful means and (b) acts to protect the welfare of the third person.
RESTATEMENT (SECOND) TORTS § 770 (1977).
It appears that section 770 is applicable to Gossage, and therefore, Plaintiffs may not be able to hold him personally liable, even if he intentionally interfered in the original ISICP contract. Gossage was hired by Hercules as a CEO and charged with the responsibility of improving the company's financial condition. According to section 770, an intentional interference executed by Gossage may not be improper, so long as he did not employ wrongful means, and he was acting to protect the welfare of Hercules. The comments to section 770 state that the section is "frequently applicable to those who stand in a fiduciary relation toward another, as in the case of agents acting for the protection of their principals, trustees for their beneficiaries or corporate officers acting for the benefit of the corporations." As noted in Local Union 42 v. Absolute Environmental Services, "[t]he rule in § 770 is consistent with Delaware's venerable business judgment rule which creates a presumption that officers and directors are immune from personal liability when making business decisions in their fiduciary capacity." The Local Union 42 court also stated that § 770
RESTATEMENT (SECOND) OF TORTS § 770 cmt.b (1977).
814 F. Supp. 392, 400-401 (D.Del. 1993).
Id. (citing Aronson v. Lewis, 473 A.2d 805, 812-13 (Del. 1984).
is consonant with the economic efficiency view of contract law that a party to a contract has the option of either honoring the contract or breaching it and paying money damages. Breaches of contract can be economically efficient and part of the function of the marketplace.
Local Union 42, 1996 Del. Super. LEXIS 3, at *12.
As such, the Court finds that Plaintiffs cannot hold Gossage personally liable for his actions taken in his capacity as a Hercules CEO, so long as the decisions he made, were business judgments relating to the operation of the company.
However, Gossage is not immunized from all liability simply because he holds the position of CEO. If Plaintiffs can establish that his actions were not motivated by, and for, his corporate responsibilities, but were instead principally executed to further his personal investments, Gossage may be held liable for causing the breach. Although it appears from the face of the complaint that Gossage acted within the permissible scope of a CEO, the Court can not make this determination at this early stage of the litigation, particularly under the legal standard for considering a motion to dismiss. The Court believes Plaintiffs face nearly an insurmountable burden in regard to this issue but will not cut off the development of the case through discovery at this juncture of the litigation. After some reasonable discovery on the issue, the Court would anticipate a motion for summary judgment being brought by Plaintiffs.
10. In light of the above, the Court cannot at this stage dismiss Plaintiffs' claims against Gossage until the record is more fully developed, and as such, his motion to dismiss Count V of Plaintiffs' complaint is hereby denied.
IT IS SO ORDERED.