Here's Canopy's Motion to Remove Ralph J. Yarro III As Director [PDF] and the supporting Memorandum [PDF], which we commented on earlier, as text, thanks to fudisbad and Loïc. The salient paragraph is number 8, where they acknowledge that Raymond Noorda is, in fact, apparently suffering from Alzheimer's disease: "8. Mr. Noorda, formerly the president of Novell, Inc., has long been regarded as one of Utah's preeminent businessmen. Mr. Noorda was born on June 19, 1924, and is currently 80 years old. As a consequence of age and associated health issues, including the apparent onset of Alzheimer's disease, Mr. Noorda has not participated in the day-to-day management of Canopy's affairs since at least 1998." So that is now admitted. What isn't clear is the degree of impairment so far or what his capacity was on December 17, 2004, or back in 1998-2001, when the events that star in this motion took place. Paragraph 65 is pertinent to the subpoenaes and validate my interpretation of what they are after: "65. Following Defendants' terminations, one valued Canopy employee has died and five others have terminated their own employment. Despite Defendants' inflammatory and baseless accusations, those employees who have terminated their own employment have done so voluntarily or, on information and belief, under Defendants' influence. For instance, Defendants allege that "key and valuable Canopy employees have terminated, or are considering terminating, their employment with Canopy." (Complaint in Yarro Action, ¶ 114.) Defendants would not know this absent having contacted these employees. Should discovery reveal, as suspected, that Yarro has interfered with Canopy's employee relationships, such conduct would be in violation of his ongoing fiduciary duty of loyalty to Canopy as a director and provide an additional basis for his removal. (Mustard Aff. at 21-22.)" See, you have to be very, very careful what you say to lawyers. They pick up on the tiniest detail and will use it against you. It's their job. The other significant issue raised in these very serious charges is that Canopy and the Noordas accuse Yarro of implementing, back in 1998, around the time that Mr. Noorda was no longer involved in day to day affairs, an Incentive Bonus plan, "without Board review or approval" so as to "reward certain key employees" such as Yarro.
They believe it was Christensen who "drafted or
participated in drafting" the plan, and Yarro "executed it in his individual capacity and
purportedly on behalf of Canopy."
Then, when Caldera, then a Portfolio Company, settled the antitrust lawsuit against Microsoft, they say, in paragraph 20, Yarro, again without Board review or approval, distributed the settlement proceeds to six employees, including himself, his take being, they say, $6.75 million of the total amount of $7.6 million. Then, again in 2000, and again, they say, without Board review or approval, they distributed double the percentage of the proceeds of a Triggering Event (defined in the Incentive Bonus Plan), with a couple more millions going to Yarro. In both the Altiris deal and the Traxess sale, Yarro is alleged to have been the only one to sign the Bonus Distribution documents, and they attach the documents as evidence. It's the phrase "without Board review or approval" that Yarro will have to counter, if he wishes to keep that money. He'll have to try to find some corporate documents to validate his actions, and with something like this, there would normally be some writing to verify that the Board did review and approve. Corporations don't just do major things without the Board and/or the shareholders getting to decide whether or not to do it. And all that activity is supposed to be memorialized as a writing. When corporations act like they are one and the same as the individual who benefitted from a transaction, things start to get serious. We saw in the Stock Option Agreement that Yarro, who they again accuse of acting on his own and without review and approval by the Board, gave himself a fully-vested 20-year option to purchase 10,000 Class A voting shares and 9,990,000 Class B shares, so as to receive options allowing him to acquire 40% of the company's Class A and Class B shares. In this document, we find out how much that transaction was worth. He granted himself options at $5 per share when the strike price was $19.27, for a total transaction value of $143 million. Nice work if you can get it, as they say. Or should I say, Nice work if you can get away with it? There is another whole category of allegations, namely that Yarro more or less took advantage of the Noordas, getting them to sign things based on his recommendation and their trust. For example, here's the terse description of the Shareholder Agreement in paragraph 33: "At the time, the Noordas' trust and confidence in
Defendants, particularly Yarro, led them to believe the Shareholder Agreement was in Canopy's
and the Trust's best interests, which it is not." All three defendants are accused of advising the Noordas to sign things that were not in their or Canopy's best interest. It a serious allegation to lay at the feet of Mr. Christensen, because he is a lawyer. There are rules for lawyers. Those allegations of improper and undue influence will be harder to prove, because how do you establish if Mr. Noorda was incapacitated back then or not? Yes, the agreements seem ridiculous on their face, but if all of the Board members signed off, it's a harder issue. If the signatures are valid, absent some evidence otherwise, then the question is, how do you prove that Mr. and Mrs. Noorda were fooled, as opposed to intending to give their business away, in the face of all reason? If the latter, next you have to demonstrate that it was unequivocably not in Canopy's interest, which, frankly, doesn't seem all that impossible to do, from my reading. As the motion argues, "an interested director bears the burden of proving that his or her
compensation is entirely fair to the corporation." And they state: "Because Yarro has dominated and controlled Canopy's Board since at least 1998, he
cannot escape having to prove that the manner in which he improperly enriched himself and
others was entirely fair to Canopy. A shareholder is a 'controlling shareholder' if a majority of
the board does not exercise independent business judgment and follows the will of that
shareholder." In short, they are accusing him of making out like a bandit, and now he has the burden of showing that it was in the best interests of the company that he did so. True, he didn't have a controlling share, but he so dominated the Noordas, they allege, that he was a "controlling shareholder". If the Noordas weren't given all the facts, or were given misinformation, their "ratification" of corporation actions are suspect. If, on the other hand, the Noordas acted on purpose to give away the store, then the Noordas are technically in a position where Canopy should go after *them*. Alternatively, if the diagnosis of Alzheimer's was, say, prior to 1998 and there was some level of incapacity, why didn't anyone replace Mr. Noorda on the Board? They had a fiduciary duty to do so, both Yarro and Mrs. Noorda, and the lawyer had a duty to so advise them, I'd think, if he wasn't able to function. Of course, that isn't established yet. Paragraph 28(e) says that the employees have a grace period of three months from termination to exercise any options outstanding if they are terminated or leave without cause; if terminated for cause, they only get one month, all of which the motion calls "excessive" amounts of time. 28(f) explains the Cashless Exercise, whereby an employee who leaves or ceases to work for Canopy for any reason but cause could pay " the options exercise price and all applicable withholding taxes by receiving a reduced number of shares." Once a year, employees could ask Canopy to buy their shares back. The motion mocks the purported purpose of the plan. If it was to retain the services of the employees, why give them options that vest immediately? I must say, the benefits of working at Canopy were so lavishly liberal, it must have been a horrible work environment if they had to go to such lengths to retain the services of their secretaries, paralegals, etc. Yes, I'm joking. Near the end of the document, they point out that even though the three defendants were terminated for cause on December 17th, the simple fact is that they were at-will employees, so Canopy didn't even need a reason to terminate them. Being an at-will employee means you can't argue that it was unfair that you were terminated. It doesn't matter. The only issue for an at-will employee like Yarro would be whether the two board members had capacity to act. I can't help but puzzle over why he didn't think to contract with Canopy/the Noordas and get an iron-clad employment contract, while he was at it, composing documents right and left. It has cost him now. Canopy and the Noordas seek, among other things: (1) an order removing Yarro as a director of Canopy pursuant to Utah Code Ann. § 16-10a-809; (2) a judgment declaring that Defendants' stock option agreements are null and void, that all stock and
cash compensation acquired by Defendants pursuant to the Equity Plan must be returned to Canopy, and that all options acquired by Defendants pursuant to the Equity Plan are terminated and rescinded; (3) a judgment declaring that all cash, stock, options and other property acquired by Defendants in violation of their fiduciary duty of loyalty to Canopy is being held by them in constructive trust for Canopy and that Defendants are under an equitable duty to return and convey such property to Canopy; (4) a judgment declaring that Defendants' purported rights under the Shareholder Agreement are void, terminated, and rescinded; and (5) a judgment awarding actual, special, consequential, and punitive damages as appropriate. I wonder if they are taking steps to remove Mr. Yarro from Angel Partners now? With the Noordas so elderly, that seems like an urgent task from the perspective of Mr. Mustard, who defends his role and leadership in this motion. As for the employees who expressed that Canopy couldn't make it without them, the motion says Mr. Mustard has hired replacements at a compensation level "commensurate with their experience and skills, in contrast to the wasteful compensation levels set by prior management." The statutory basis for one cause of action in the complaint is Utah Code Ann. Section 16-10a-809(1): "In their Fourth Cause of Action, Canopy and the Trust seek an order removing Yarro as a director of Canopy. Under the Utah Revised Business Corporation Act, the "district court of the county in this state where a corporation's principal office . . . is located may remove a director in a proceeding commenced" by the corporation or a shareholder holding at least 10 percent of the outstanding shares of any class if the court determines that "(a) the director engaged in fraudulent or dishonest conduct or gross abuse of authority or discretion with respect to the corporation; and (b) removal is in the best interest of the corporation." Utah Code Aim. § 16- 10a-809(1)." You can find the statute here. Note that there is a hearing requested, for March 8, so we will get to hear the whole story, live and in all its gruesome details. This is another of the paper documents that Frank Sorenson personally picked up for us and scanned. Thank you, Frank, so much. When there is nothing left of SCO but an old blues song, we'll have to throw a party for Frank, to thank him and all the other heros of this saga for the steady, reliable, nonstop efforts, not only, in Frank's case, in writing technical papers and doing research and providing me with technical advice behind the scenes, but being willing to do the lowlier tasks too, like picking up documents from the courts and scanning them in for hours. We'll have a virtual party, at least. How many people can you fit on one chat session anyhow?
: )
*************************************
David B. Watkiss, Esq. (#3401)
Anthony C. Kaye, Esq. (#8611)
James W. Stewart, Esq. (#3959)
Boyd L. Rogers, Esq. (#10095)
Craig H. Howe, Esq. (#7552)
BALLARD SPAHR ANDREWS & INGERSOLL, LLP
[address, phone, fax]
Attorneys for Plaintiffs, The Canopy Group, Inc. and
Raymond J. Noorda and Lewena Noorda,
as Trustees of the Noorda Family Trust
IN THE FOURTH JUDICIAL DISTRICT COURT
UTAH COUNTY, STATE OF UTAH
THE CANOPY GROUP, INC., a Utah
corporation, and RAYMOND J. NOORDA
and LEWENA NOORDA, as Trustees of the
NOORDA FAMILY TRUST,
Plaintiffs,
vs.
RALPH J. YARRO III, an individual,
DARCY G. MOTT, an individual, and
BRENT D. CHRISTENSEN, an individual,
Defendants.
MOTION TO REMOVE RALPH J.
YARRO III AS DIRECTOR
Civil No. 050400245
Honorable Anthony W. Schofield
HEARING REQUESTED
Pursuant to Utah Code Ann. § 16-10a-809, Plaintiffs, The Canopy Group, Inc.
("Canopy"), and Raymond J. Noorda and Lewena Noorda, as Trustees of the Noorda Family
Trust (the "Noordas"), through their counsel, hereby move for an order removing Ralph J. Yarro
1
III as a director of Canopy. This Motion is supported by the accompanying Memorandum in
Support of Motion to Remove Ralph J. Yarro III as Director and the Affidavit of William
Mustard, dated January 30, 2005, which was filed on or about January 31, 2005, in the related
action, Ralph J. Yarro III et al. v. Val Noorda Kreidel et al., Fourth Judicial District Court, Utah
County, State of Utah, Civil No. 050400205 (the "Yarro Action"). For the reasons set forth in
the supporting Memorandum, Canopy and the Noordas respectfully request that the Court enter
an order granting this Motion and removing Yarro as a director of Canopy.
Concurrently with the filing of this Motion, Plaintiffs are filing a Motion requesting the
Court to consolidate this action with the Yarro Action. Pursuant to Rule 42 of the Utah Rules of
Civil Procedure, the Motion to Consolidate has been filed in the earlier-filed Yarro Action. An
evidentiary hearing has been set in the Yarro Action commencing on March 8, 2005, to consider
the Motion for Preliminary Injunction filed by Ralph J. Yarro, Darcy G. Mott, and Brent D.
Christensen in that case. Canopy and the Noordas respectfully request that the Court set this
Motion for an evidentiary hearing to be held concurrently with the evidentiary hearing presently
scheduled for March 8-11, 2005, in the Yarro Action.
DATED this 14th day of February 2005.
___[signature]___
David B. Watkiss, Esq.
Anthony C. Kaye, Esq.
James W. Stewart, Esq.
Boyd L. Rogers, Esq.
Craig H. Howe, Esq.
BALLARD SPAHR ANDREWS & INGERSOLL, LLP
Attorneys for Plaintiffs
2
CERTIFICATE OF SERVICE
I hereby certify that a true and correct of copy of the foregoing MOTION TO
REMOVE RALPH J. YARRO III AS DIRECTOR was served on the following this 14th day
of February 2005, in the manner set forth below:
Via Hand Delivery:
Stanley J. Preston, Esq.
Michael R. Carlston, Esq.
Maralyn M. Reger, Esq.
Bryan M. Scott, Esq.
SNOW CHRISTENSEN AND MARTINEAU
[address]
Attorneys for Plaintiffs
Via First Class Mail, Postage Prepaid:
Jeffrey S. Facter, Esq.
SHEARMAN & STERLING LLP
[address]
Blake D. Miller, Esq.
MILLER & GUYMON, P.C.
[address]
Blaine J. Benard, Esq.
Eric G. Maxfield, Esq.
HOLME ROBERTS & OWEN, LLP
[address]
__[signature]____
**************************
David B. Watkiss, Esq. (#3401)
Anthony C. Kaye, Esq. (#8611)
James W. Stewart, Esq. (#3959)
Boyd L. Rogers, Esq. (#10095)
Craig H. Howe, Esq. (#7552)
BALLARD SPAHR ANDREWS & INGERSOLL, LLP
[address, phone, fax]
Attorneys for Plaintiffs, The Canopy Group, Inc. and
Raymond J. Noorda and Lewena Noorda,
as Trustees of the Noorda Family Trust
IN THE FOURTH JUDICIAL DISTRICT COURT
UTAH COUNTY, STATE OF UTAH
THE CANOPY GROUP, INC., a Utah
corporation, and RAYMOND J. NOORDA and LEWENA NOORDA, as Trustees
NOORDA FAMILY TRUST, Plaintiffs, vs. RALPH J. YARRO III, an individual,
DARCY G. MOTT, an individual, and
BRENT D. CHRISTENSEN, an individual,
Defendants.
MEMORANDUM IN SUPPORT OF
of the MOTION TO REMOVE RALPH J. YARRO III AS DIRECTOR
Civil No. 050400245
Honorable Anthony W. Schofield
TABLE OF CONTENTS
Page
INTRODUCTION . . . . . . . . . . . . . iv
STATEMENT OF FACTS . . . . . . . . . . . . . . . . . . . . . . v
A. Background . . . . . . . . . . . . . . . . . . . . . . v
B. The Incentive Compensation Plan . . . . . . . . . . . . . . . . . . . . viii
C. Early Incentive Plan Payments . . . . . . . . . . . . . . . . . . . . . . ix
D. The Recapitalization & Equity Compensation Plans . . . . . . . . . . . . x
E. The Shareholder Agreement . . . . . . . . . . . . . . . . . . . . . . xvi
F. Subsequent Distributions of Incentive and Equity Compensation . . . . xviii
G. Compensation From Exercise of Resale Rights . . . . . . . . . . . . . . . . xxii
H. Summary of Excessive Cash Compensation Taken By Plaintiffs . . . . xxiii
ARGUMENT . . . . . . . . . . . . . . . . . . . . . . 1
1. THIS COURT SHOULD REMOVE YARRO AS A DIRECTOR OF
CANOPY BECAUSE HE HAS ENGAGED IN FRAUDULENT OR
DISHONEST CONDUCT AND HAS GROSSLY ABUSED HIS
AUTHORITY AND DISCRETION AS A DIRECTOR . . . . . . . . . . . . . . . . . . . . . 1
A. This Court Has Statutory Authority Under Utah Code Ann. § 16-10a-809 to
Remove Yarro As a Director . . . . . . . . . . . . . . . . . . 1
B. Yarro's Self-Dealing and Wasteful Compensation Plans Must be Reviewed
Under an "Entire Fairness" Standard . . . . . . . . . . . . . . . . . . . . . . 1
C. Yarro's Improper and Dishonest Conduct Requires His Removal From
Canopy's Board . . . . . . . . . . . . . . . . . . . . . . 6
II. YARRO'S REMOVAL IS IN THE BEST INTEREST OF CANOPY . . . . . . . . . . . . . 8
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . 9
i
TABLE OF AUTHORITIES
FEDERAL CASES
In re Mi-Lor Corp .,
348 F.3d 294 (1st Cir. 2003) . . . . . . . 10
Resolution Trust Co. v. Dean ,
854 F. Supp. 626 (D. Ariz. 1994). . . . . . . 4, 16
STATE CASES
Aronson v. Lewis ,
473 A.2d 805 (Del. 1984) . . . . . . . 6
C & Y Corp. v. General Biometrics, Inc .,
896 P.2d 47 (Utah Ct. App. 1995) . . . . . . . 2
Kahn v. Tremont Corp .,
694 A.2d 422 (Del. 1997) . . . . . . . 8, 10
Lewis v. Vogelstein ,
699 A.2d 327 (Del. Ch. 1997) . . . . . . . 10
In Re Maxxam Inc .,
659 A.2d 760 (Del. Ch. 1995) . . . . . . . 8
Merritt v. Colonial Foods, Inc .,
505 A.2d 757 (Del. Ch. 1986) . . . . . . . 8
Odyssey Partners, L.P. v. Fleming Companies, Inc .,
735 A.2d 386 (Del. Ch. 1999) . . . . . . . 6
Solomon, TRV v. Armstrong ,
747 A.2d 1098 (Del. Ch. 1999) . . . . . . . 8
Stroud v. Grace ,
606 A.2d 75 (Del. 1992) . . . . . . . 10
Telxon Corp. v. Meyerson ,
802 A.2d 257 (Del. 2002) . . . . . . . 4, 6
ii
In re Walt Disney Company Derivative Litigation ,
825 A.2d 275 (Del. Ch. 2003) . . . . . . . 4, 6
STATUTES
Utah Code Ann. § 16-10a-809 . . . . . . . 2
iii
Plaintiffs, The Canopy Group, Inc. ("Canopy"), and Raymond J. Noorda and Lewena
Noorda, as Trustees of the Noorda Family Trust (the "Noordas"), through their counsel,
respectfully submit this Memorandum in support of their Motion, pursuant to Utah Code Ann. §
16-10a-809, for an order removing Ralph J. Yarro III ("Yarro") from Canopy's Board of
Directors.
INTRODUCTION
By this Motion, Canopy and the Noordas seek Yarro's removal from Canopy's Board of
Directors for fraudulent and dishonest conduct and gross abuse of authority and discretion.
Through a series of self-dealing and wasteful transactions, Yarro, aided and abetted by
defendants Darcy G. Mott and Brent D. Christensen, wrongfully enriched himself and others at
the expense of Canopy and the Noorda Family Trust, its majority shareholder. Although the
precise amount of damages suffered by virtue of Yarro 's conduct is not yet known, the evidence
will show at least $20 million has been misappropriated. The evidence will also show Yarro
improperly acquired an option pursuant to which he may allegedly acquire forty percent of the
company's non-voting shares. As a consequence of his conduct, Yarro's employment as
Canopy's President and Chief Executive Officer was terminated for cause on December 17,
2004.
Pursuant to its statutory authority under the Utah Revised Business Corporation Act,
Utah Code Ann. § 16-10a-809, this Court should now enter an order removing Yarro from
Canopy's board. Because Yarro's wrongful actions have cost Canopy millions of dollars, most
of which he received, his removal as a director is in the company's best interest.
iv
STATEMENT OF FACTS
A. Background
1. Canopy (formerly known as NFT Ventures, Inc.) is a closely-held corporation
organized under the laws of the State of Utah and has its principal place of business in Lindon,
Utah.
2. The Noordas, who are husband and wife, are residents of Utah County, Utah. The
Noordas settled the Noorda Family Trust pursuant to a Declaration of Trust dated October 8,
1980, as subsequently amended (the "Trust"), and hold a majority of Canopy's shares. The
Noordas serve as two of the three members of Canopy's Board of Directors.
3. The Trust's principal beneficiaries are Angel Partners, Inc., and The Worth of a
Soul, both of which are Utah non-profit corporations. Angel Partners, Inc., is a supporting
organization for the Church of Jesus Christ of Latter-day Saints. Since December 2000, the
Trust has specified that upon the death of both of the Noordas, all of the Trust's stock in Canopy
shall be distributed to Angel Partners, Inc. The Worth of a Soul, which is to receive the
remainder of the Trust's assets, is a private non-operating foundation whose purpose is to
provide grants to charitable organizations.
4. Yarro is an individual residing in Utah County, Utah, and is the third member of
Canopy's Board of Directors. Yarro served as Canopy's President and Chief Executive Officer
from 1998 until his termination for cause on December 17, 2004. Yarro's employment with
Canopy was at-will. (See Bylaws of NFT Ventures, Inc. ("Bylaws"), Section 6.03, a copy of
v
which is attached to the Affidavit of William Mustard dated January 30, 2005 ("Mustard Aff."),
as Exhibit B, filed in the Yarro Action, as defined hereafter.)
5. On behalf of the Trust, Mr. Noorda founded Canopy in 1992 to foster and
promote a strong local economy, support emerging technology companies located predominantly
in Utah, and establish a source of funding for the Noordas' charitable endeavors.
6. Over time, the Trust has invested approximately $160 million in Canopy, and
with that investment, Canopy has acquired interests in several emerging technology companies
(the "Portfolio Companies").
7. Canopy's profitability since 1999 is a result of Canopy's liquidation of
investments in certain Portfolio Companies (discussed more fully below) and a settled antitrust
lawsuit brought by the Portfolio Company Caldera, Inc. ("Caldera") against Microsoft
Corporation. Canopy's investments in these companies and its prosecution of the Caldera
lawsuit were driven by the investment decisions of Mr. Noorda, and absent these investment
decisions, Canopy would have incurred net losses in each year as far back as 1999. In addition, a
significant portion of Canopy's current value resides in its investment in Helius, Inc., another
investment decision behind which Mr. Noorda was the driving force.
8. Mr. Noorda, formerly the president of Novell, Inc., has long been regarded as one
of Utah's preeminent businessmen. Mr. Noorda was born on June 19, 1924, and is currently 80
years old. As a consequence of age and associated health issues, including the apparent onset of
Alzheimer's disease, Mr. Noorda has not participated in the day-to-day management of Canopy's
affairs since at least 1998.
vi 9. Mrs. Noorda was born on December 26, 1923 and is currently 81 years old.
Although Mrs. Noorda has been a member of Canopy's Board of Directors since Canopy's
formation, prior to 1998, Mrs. Noorda relied in great part on Mr. Noorda's business experience
and judgment in most matters relating to Canopy's management.
10. Canopy hired Yarro on or about April 14, 1995. After being trained by Mr.
Noorda, Yarro became Canopy's President, Chief Executive Officer, and a member of its Board
of Directors in 1998.
11. As the Noordas aged, Yarro assumed primary responsibility for managing
Canopy's affairs, both in his capacity as an officer and a director, and the Noordas increasingly
relied on and deferred to Yarro's counsel and advice in all matters relating to Canopy.
12. By 1998, if not earlier, Yarro dominated and controlled the Noordas in their
capacity as officers and directors of Canopy, through the force of his own will and the close
personal relationships he had established with them. The Noordas considered Yarro to be a
close, personal friend, believed his business judgment to be reliable and trustworthy, and relied
on his counsel and advice -- often presented to them at their own home -- with respect to the
management of Canopy's affairs.
13. Based on their trust and confidence in Yarro and their belief that Yarro would act
in Canopy's best interests, the Noordas delegated to Yarro full responsibility for the management
of Canopy's affairs.
14. As set forth more fully below, Yarro, aided and abetted by co-defendants, Brent
D. Christensen ("Christensen") and Darcy G. Mott ("Mott") (collectively, "Defendants"), took
vii
advantage of the Noordas' trust and confidence by implementing excessive and unfair incentive
and equity compensation packages for themselves and Canopy's other employees and by ceding
undue control of Canopy to its employees. Through these actions, Defendants breached their
duties to Canopy and its shareholders.
B. The Incentive Compensation Plan.
15. On September 30, 1998, without Board review or approval, Yarro implemented
an Incentive Bonus Plan Agreement for Canopy "to reward certain key employees of [Canopy],"
including Yarro (the "Incentive Plan"). On information and belief, Christensen drafted or
participated in drafting the Incentive Plan, and Yarro executed it in his individual capacity and
purportedly on behalf of Canopy. (A copy of the Incentive Plan is attached to the Mustard Aff.
as Exhibit G.)
16. The Incentive Plan contains the following significant provisions:
(a) "The Plan shall be administered by the Board." (Incentive Plan, ¶ 3.)
(b) Bonuses for eligible employees are determined "at such time as any of the
Included Companies [set forth on Exhibit B, which is subject to amendment by the Board
at any time] is sold or the investment of [Canopy] in any of the Included Companies is
exchanged for cash and/or readily tradable marketable securities (the "Triggering
Event")." (Id. ¶ 5.)
(c) "The total amount to be paid as a bonus . . . upon each Triggering Event
shall be five percent (5%) of the total amount of sales proceeds on the sale or exchange of
viii
the Included Company, less the total amount of investment plus debt that NFT and/or any
affiliate of NFT has in the Included Company." (Id.)
(d) The bonus amount is to be allocated among employees "based on the
Board's determination of the Employee's involvement, effort and contribution to the
success of the Included Company for which the sale or exchange has occurred," with an
initial recommendation to be made by Canopy's President, subject to review, approval
and modification by Canopy's Board of Directors. (Id. ¶ 6.)
C. Early Incentive Plan Payments.
17. On Yarro's advice, Canopy hired Mott as its Vice President-Finance, Chief
Financial Officer, and Treasurer on May 3, 1999.
18. In August 1999, without Board review or approval, Yarro and Mott caused
Canopy to distribute 5% of the net proceeds of a Triggering Event relating to the Portfolio
Company Vinca, Inc. ("Vinca") to five Canopy employees, including Yarro and Mott. The
bonus pool from the Vinca sale totaled approximately $2.1 million. Yarro alone received
approximately $1.47 million of the bonus amount, and Mott, whom Canopy had hired only a few
months earlier, received approximately $42,000.00.
19. In 1999 or early 2000, Caldera, then a Portfolio Company, settled a significant
antitrust lawsuit it had filed against Microsoft Corporation.
20. On or about February 25, 2000, without Board review or approval, Yarro and
Mott caused Canopy to distribute a portion of the Caldera settlement proceeds to six Canopy
employees, including Yarro and Mott, even though the Caldera settlement was not a Triggering
ix
Event as that term is defined in the Incentive Plan. The bonus pool from the Caldera settlement
totaled approximately $7.6 million, and Yarro caused himself to be paid approximately $6.75
million of that amount. Mott received approximately $227,000.00.
21. On or about February 25, 2000, without Board review or approval, Yarro and
Mott caused Canopy to distribute 10% of the proceeds of a Triggering Event relating to the
Portfolio Company KeyLabs, even though the Incentive Plan by its own terms provides for a
bonus pool of 5%. The bonus pool from the KeyLabs transaction totaled approximately $3.4
million. Yarro alone received approximately $2.9 million, and Mott received $205,320.
D. The Recapitalization & Equity Compensation Plans.
22. Commencing in 2000, Defendants advised the Noordas to adopt an equity
compensation plan that would provide employees an opportunity to acquire an equity interest in
Canopy as a purported incentive to remain in Canopy's service. To do so, Defendants advised,
required a significant modification of Canopy's capitalization structure.
23. Based on Defendants' advice, on November 3, 2000, the Noordas voted the
Trust's shares in favor of Canopy's adoption of Amended and Restated Articles of Incorporation
authorizing Canopy to issue up to 25,000,000 shares of common stock, with 25,000 shares of
such stock designated as Class A Common Stock and 24,975,000 shares designated as Class B
Common Stock (the "Amended Articles"). In connection with Defendants' recapitalization
scheme, the Trust's 10,000,000 shares of stock -- Canopy's only outstanding shares at the time --
were converted into 10,000 shares of Class A Common Stock and 9,990,000 Shares of Class B
Common Stock.
x
24. On information and belief, Christensen, in his capacity as legal counsel to
Canopy, prepared documentation necessary to effectuate the recapitalization, including all
necessary consent resolutions, the Articles of Restatement of the Articles of Incorporation of The
Canopy Group, Inc., and the Amended Articles. At the time, the Noordas' trust and confidence
in Defendants led them to believe the recapitalization plan was in Canopy's and the Trust's best
interests.
25. Pursuant to Canopy's Amended Articles:
(a) Class A shares have one vote on each matter to be voted on by Canopy's
shareholders. (Amended Articles at 1.)
(b) Upon liquidation, dissolution, or winding up of Canopy, whether
voluntary or involuntary, "the holders of Class A Common Stock shall be entitled to
equal distributions of the net assets of the Corporation." (Id. at 2.)
(c) The relative rights, privileges and limitations of the Class A shares and
Class B shares "shall be in all respects identical, share for share, except that the voting
power for the election of directors and other matters coming to a vote before the
shareholders of the corporation, shall be vested exclusively" in the holders of the Class A
shares until the earlier of October 31, 2020 or the occurrence of a "Liquidation Event,"
defined to include "any liquidation, dissolution or winding up of the Corporation." (Id.)
26. On November 7, 2000, immediately after the recapitalization, and based on
Defendants' advice, Canopy adopted an equity compensation plan entitled The Canopy Group,
Inc. 2000 Stock Option Plan (the "Equity Plan"). Under the Equity Plan, employees became
xi
eligible to receive "twenty year non-qualified stock options to purchases shares of [Canopy's]
Class A Voting Common Stock and Class B Nonvoting Common Stock." (A copy of the Equity
Plan is attached to the Mustard Aff. as Exhibit H.)
27. Christensen, in his capacity as legal counsel to Canopy, prepared and filed
documentation relating to the Equity Plan and, along with Yarro and Mott, advised the Noordas
that its adoption was in Canopy's best interests. At the time, the Noordas' trust and confidence
in Defendants, particularly Yarro, led them to believe the Equity Plan was in Canopy's best
interests.
28. The Equity Plan provides for excessive compensation and, on its face, is unfair to
Canopy and the Trust. The most egregious aspects of the plan and the options issued under it are
as follows:
(a) Despite the plan's purported purpose to provide employees with an
incentive to remain in service, it allows for options that vest immediately. (Equity Plan,
Art. 2 (I)(B).)
(b) It provides for the issuance of options that do not terminate until October
31, 2020. (Id.)
(c) It provides for issuance of options with discounted exercise prices, i.e.,
exercise prices "less than the Fair Market Value per share on the Option grant date." (Id.
at Art. 2(I)(a)(i).)
(d) It provides for issuance of Class A options with a tax protection payment
clause that requires Canopy to pay a cash bonus to the Optionee (as that term is defined
xii
in the Equity Plan) "in approximately the amount of the state and federal income taxes
payable with respect to the ordinary taxable compensation income deemed received as a
result of the exercise of such option plus the receipt of the tax protection payment itself"
(Id. at Art. 2(II)(A).)
(e) Terminated employees are permitted an excessive period of time to
exercise their options. For example, if an Optionee ceases to remain in "Service"
(broadly defined to include service to Canopy or any subsidiary "in the capacity of an
Employee, a non-employee member of the board of directors or a consultant") for any
reason other than cause, disability or death, the Optionee shall have "a period beginning
on the date of cessation of Service and ending on the later of (1) the date that is three (3)
months following the date of such cessation of Service, or (2) the last day of the next
February following the date of such cessation of Service, during which [he or she] may
exercise each outstanding vested Option held by such Optionee." (Id. at Art. 2(I)(C)(i).)
Even if an Optionee is terminated for cause, such Optionee has one month following the
date of cessation of Service services to exercise each outstanding vested option held by
such Optionee. (Id.)
(f) Until Class B shares are registered and a public market exists for them,
"each Class B option shall include the right to elect a 'Cashless Exercise' with respect to
Options whose termination date is accelerated by reason of the Optionee's cessation of
Service for any reason other than for Cause." A Cashless Exercise may only be made in
the month of February of each year. An Optionee who elects a Cashless Exercise pays
xiii
the options exercise price and all applicable withholding taxes by receiving a reduced
number of shares. (Id. at Art. 2(I)(H).)
(g) Each option includes a limited resale right under which an Optionee may
elect to sell to Canopy any shares of common stock purchased by the exercise of the
option or any previously exercised option. This resale right can be exercised at any time
during the month of February through the year 2020, but terminates upon the Optionee's
termination for cause, and terminates the February following termination for any reason
other than cause. The resale right for each calendar year may be exercised "with respect
to a number of shares equal to 5% of the sum of (1) the total number of shares of
Common Stock that the Optionee has previously purchased by the exercise of Options;
and (2) the total number of shares of Common Stock then subject to outstanding options
held by the Optionee; provided, however, that the Optionee may also exercise the Resale
Right with respect to any shares of Common Stock for which the Optionee had, but did
not exercise, a Resale Right in a prior calendar year." (Id. at Art. 2(II)(B).)
29. On November 7, 2000, the same day Canopy adopted the Equity Plan, Yarro
executed a Stock Option Agreement, personally and purportedly on behalf of Canopy, granting
himself a fully-vested twenty-year option to purchase 10,000 Class A voting shares at $5.00 per
share. Yarro also executed a second Stock Option Agreement, personally and purportedly on
behalf of Canopy, granting himself a fully-vested twenty-year option to purchase 9,990,000
Class B shares at $5.00 per share. At the time, the $5.00 strike price of Yarro's options was
$14.27 below Canopy's then net value per share of $19.27. In other words, Yarro caused himself
xiv
to receive options allowing him to immediately acquire 40% of Canopy's authorized Class A and
B shares at a fraction of their value. At the time, the transaction was worth approximately $143
million to Yarro. (Copies of the foregoing Stock Option Agreements are attached to the Mustard
Aff. as Exhibits H and I.)
30. Yarro also executed stock option agreements purportedly granting Mott fully
vested options to acquire 500 Class A shares and 499,500 Class B shares at $7.00 per share,
worth, at the time, approximately $6.14 million to Mott.
31. In addition to wrongfully enriching himself and Mott, Yarro also executed stock
option agreements purporting to grant options on Class A and B shares to various other Canopy
employees at strike prices ranging from $5.00 to $19.00 per share, each of which were excessive
and constituted waste of corporate assets. Moreover, the grant to Yarro, Mott, and Canopy's
other employees of options allowing them to acquire in excess of 10,000 Class A voting shares,
as detailed below, enabled Yarro, Mott, and Canopy's employees to acquire a majority of
Canopy's Class A voting shares:
Employee Number & Class Exercise Price Vesting
Ralph Yarro 10,000 Class A $5.00 100%
9,990,000 Class B$5.00 100%
Darcy Mott 500 Class A $7.00 100%
49,500 Class B $7.00 100%
Barbara Jackson25 Class A $5.00 100%
24,975 Class B $5.00 100%
Joyce Wiley 300 Class A $5.00 100%
299,700 Class B $5.00 100%
xv
Rob Penrose 150 Class A $5.00 100%
149,850 B $5.00 100%
Boyd Worthington120 Class A $19.00 25% starting 2/8/01
119,880 Class B $19.00 25% starting 2/8/01
Jan Newman 150 Class A $19.00 25% starting 2/8/01
149,850 Class B $19.00 25% starting 2/8/01
Dan Baker 110 Class A $19.00 25% starting 2/8/01
109,890 Class B $19.00 25% starting 2/8/01
Frankie Gibson 35 Class A $19.00 25% starting 2/8/01
34,965 Class B $19.00 25% starting 2/8/01
E. The Shareholder Agreement.
32. On or about November 8, 2000, on the advice of Defendants, the Trust, Yam),
and Canopy entered into a Shareholder Agreement (the "Shareholder Agreement," a copy of
which is attached to the Mustard Aff. as Exhibit J) pursuant to which the parties, including all
future Canopy shareholders, purportedly agreed as follows:
(a) That for so long as they are willing and able to serve as directors, the
Noordas and Yarro shall be elected directors of Canopy. (Shareholder Agreement
§ 1(a).)
(b) That consent of all of the shareholders holding Class A stock is required
for the following matters:
(i) A "Liquidation Event," as defined in the Amended Articles.
xvi
(ii) Amendment, modification or restatement of the Amended Articles,
or entry into any voting or management agreement inconsistent with the
Shareholder Agreement.
(iii) Entry into any transaction with any shareholder or any person or
entity that is an affiliate of or has a significant relationship with a shareholder,
other than on an arms' length basis.
(iv) An increase or decrease in the size of the Board of Directors or any
other action that "adversely affects the rights of any of the Shareholders set forth
in this Agreement." (Id. at § 2(b).)
(c) That directors may not be removed except as provided in Utah Code Ann.
§ 16-10a-809, as amended. (Id. at § 3.)
(d) That "any person who serves as a director of [Canopy] will be obligated as
a fiduciary to [Canopy] and its shareholders, as is more specifically provided by Utah
Code Section § 16-10a-840(1)." (Id. at § 4.)
(e) That the Shareholder Agreement shall terminate upon agreement of the
shareholders or the last to die of the Noordas. (Id. at § 7.)
33. Christensen, in his capacity as legal counsel to Canopy, participated in drafting
the Shareholder Agreement and, along with Yarro and Mott, advised that its adoption was in
Canopy's and the Trust's best interests. At the time, the Noordas' trust and confidence in
Defendants, particularly Yarro, led them to believe the Shareholder Agreement was in Canopy's
and the Trust's best interests, which it is not.
xvii
34. Pursuant to a Stock Purchase Agreement executed by Yarro personally and
purportedly on behalf of Canopy on November 17, 2000, Yarro exercised his Class A stock
options and acquired 10,000 shares of Class A voting stock, an amount equivalent to that held by
the Trust.
F. Subsequent Distributions of Incentive and Equity Compensation.
35. On or around December 1, 2000, Yarro executed stock option agreements
granting options on Class A and B shares to Gerald Garbe with a strike price of $18, as follows:
Employee -- Number & Class -- Exercise Price --
Vesting
Gerald Garbe 52 Class A $18.00 25% starting 12/01/01
51,948 Class B $18.00 25% starting 12/01/01
36. In December 2000, without Board review or approval, Yarro caused Canopy to
distribute 5% of Canopy's gain on the value of a merger involving the Portfolio Company Utah
Health Informatics, or approximately $23,749, to ten Canopy employees, including himself and
Mott. Yarro alone received $10,687 of the bonus amount, and Mott received $5,225.
37. On Yarro's advice, Canopy hired Christensen as its Vice President-Legal,
Corporate Counsel, and Assistant Secretary and Treasurer on or about January 16, 2001.
38. At the time of Christensen's employment, Yarro and Christensen executed stock
option agreements pursuant to which Christensen purportedly acquired fully-vested twenty-year
options to purchase 150 Class A voting shares and 149,850 Class B shares at $10.00 per share.
The $10.00 strike price was approximately $9.00 below Canopy's then net value per share of
approximately $19.00, making the transaction worth approximately $1.35 million to Christensen.
At the same time, Christensen acquired twenty-year options to purchase 300 Class A voting
xviii
shares and 299,700 Class B shares at $18.00 per share, vesting 25% per year starting in 2002.
Yarro also executed stock option agreements purporting to grant options on Class A and B shares
to Canopy employee Darla Newbold, all as summarized below:
Employee -- Number & Class -- Exercise Price -- Vesting
Brent Christensen 150 Class A $10.00 100%
-- 149,850 Class B $10.00 100%
-- 300 Class A $18.00 25% starting 1/16/02
-- 299,700 Class B $18.00 25% starting 1/16/02
Darla Newbold 45 Class A $18.00 25% starting 1/16/02
-- 44,955 Class B $18.00 25% starting 1/16/02
The foregoing equity compensation was excessive, unfair to Canopy, and constituted waste of
corporate assets.
39. On or about February 28, 2002, without Board review or approval, Plaintiffs
caused Canopy to distribute 10% of the proceeds of a Triggering Event relating to the Portfolio
Company Altiris, Inc. ("Altiris") to twelve Canopy employees, even though the Incentive Plan,
by its own terms, provides for a bonus pool equal of 5%. The bonus pool totaled approximately
$1.15 million. Yarro alone received $503,317, Mott received approximately $152,000, and
Christensen received $135,128. (See Altiris Bonus Distribution, signed only by Yarro on
February 28, 2002, a copy of which is attached to the Mustard Aff. as Exhibit K.)
40. On April 19, 2002, on the advice of Defendants, Canopy re-priced the exercise
price of all outstanding options with an exercise price of $18.00 or higher to $13.00, at a time
when Canopy's net value per share was approximately $14.13.
xix
41. At approximately the same time, Yarro executed stock option agreements
purporting to grant options on Class A and B shares to Canopy employee Allan Smart with a
strike price of $13.00, as follows:
Employee -- Number & Class -- Exercise Price -- Vesting
Allan Smart 90 Class A Shares $13.00 25% starting 1/3/03
-- 89,910 Class B $13.00 25% starting 1/3/03
42. On November 21, 2002, on Defendants' advice, Canopy repriced the exercise
price of all outstanding options with an exercise of $8.00 or higher to $8.00, at a time when
Canopy's net value per share was approximately $12.00.
43. At approximately the same time, Yarro executed stock option agreements
purporting to grant options on Class A and B shares to Canopy employee Mark Cusick with a
strike price of $8.00, as follows:
Employee -- Number & Class -- Exercise Price -- Vesting
Mark Cusick -- 150 Class A -- $8.00 -- 25% starting 7/1/02
-- 149,850 Class B -- $8.00 -- 25% starting 7/1/02
44. On or about August 26, 2002, without Board review or approval, Defendants
caused Canopy to distribute 10% of the proceeds of a Triggering Event relating to the Portfolio
Company Traxxes to fourteen Canopy employees, even though the Incentive Plan, by its own
terms, provided for a bonus pool of 5%. The bonus pool totaled $708,242. Yarro alone received
$283,296, Mott received $100,216, and Christensen received $100,216. (See Traxess Bonus
Distribution, signed by Yarro on August 26, 2002, a copy of which is attached to the Mustard
Aff. as Exhibit L.)
xx
45. On or about November 21, 2002, on Defendants' advice, Canopy adopted a
resolution stating that "the officers and directors of the Corporation shall be entitled to
indemnification to the maximum extent allowed by Utah law."
46. On or about December 2, 2002, without Board review or approval, Defendants
caused Canopy to distribute 10% of the proceeds of another Triggering Event relating to Altiris
to thirteen Canopy employees, even though the Incentive Plan, by its own terms, provided for a
bonus pool of 5%. The bonus pool totaled approximately $1.03 million. Yarro alone received
$516,844, Mott received $134,379, and Christensen received $132,312. (See Altirus Bonus
Distribution signed only by Yarro on December 2, 2002, a copy of which is attached to the
Mustard Aff. as Exhibit M.)
47. On or about April 4, 2003, without Board review or approval, Defendants caused
Canopy to distribute 10% of the proceeds of yet another Triggering Event relating to Altiris to
thirteen Canopy employees, even though the Incentive Plan, by its own terms, provided for a
bonus pool of 5%. The bonus pool totaled approximately $317,246. Yarro alone received
approximately $151,834, Mott received $41,242, and Christensen received $40,607. (See Altiris
Bonus Distribution signed only by Yarro on April 7, 2002, a copy of which is attached to the
Mustard Aff. as Exhibit N.)
48. On or about June 3, 2003, without Board review or approval, Defendants caused
Canopy to distribute 10% of the proceeds of another Triggering Event relating to Altiris to
thirteen Canopy employees, even though the Incentive Plan, by its own terms, provided for a
bonus pool of 5%. This time the bonus pool totaled approximately $2.4 million. Yarro alone
xxi
received approximately $1.08 million, Mott received $301,004, and Christensen received
$296,373. (See Altiris Bonus Distribution signed only by Yarro on June 3, 2003, a copy of
which is attached to the Mustard Aff. as Exhibit O.)
49. On or about August 20, 2003, without Board review or approval, Defendants
caused Canopy to distribute 10% of the proceeds of another Triggering Event relating to Altiris,
even though the Incentive Plan, by its own terms, provided for a bonus pool of 5%. This time
the bonus pool totaled approximately $3.37 million. Yarro alone received approximately $1.58
million, Mott received $472,082, and Christensen received $446,792. (See Altiris Bonus
Distribution signed by Yarro on August 20, 2003, a copy of which is attached to the Mustard
Aff. as Exhibit P.)
G. Compensation From Exercise of Resale Rights.
50. Between 2000 and the present, Yarro acquired $4,236,670 in compensation from
Canopy by exercising options to acquire Class B shares and reselling those shares to Canopy
pursuant to the resale provisions in Article 2, Section II, of the Equity Plan.
51. From 2000 to the present, Mott acquired $881,733 in compensation from Canopy
by exercising options to acquire Class B shares and reselling those shares to Canopy pursuant to
the resale provisions in Article 2, Section II, of the Equity Plan.
52. From 2001 to the present, Christensen acquired $607,941 in compensation from
Canopy by exercising options to acquire Class B shares and reselling those shares to Canopy
pursuant to the resale provisions in Article 2, Section II, of the Equity Plan.
xxii
53. From 2000 to the present, employees other than Defendants acquired a total of
$1,655,712 in compensation from Canopy by exercising options to acquire Class B shares and
reselling those shares to Canopy pursuant to the resale provisions in Article 2, Section II, of the
Equity Plan.
54. By allowing Canopy's employees to exercise resale rights under the Equity Plan,
Defendants wasted corporate assets.
H. Summary of Excessive Cash Compensation Taken By Plaintiffs.
55. Between 1999 and 2004, Yarro took a total of at least $19,535,602 in excessive
cash compensation pursuant to the Incentive Plan and exercises of resale rights acquired pursuant
to the Equity Plan. This amount does not include the value of options and stock improperly
acquired by Yarro pursuant to the Equity Plan. Nor does it include amounts received by Yarro
from Canopy as base compensation and annual bonuses, which totaled approximately $275,000 to $300,000 per year, or compensation received by Yarro directly from Portfolio Companies.
56. Between 1999 and 2004, Mott took a total of at least $2,557,727 in excessive cash
compensation pursuant to the Incentive Plan and exercises of resale rights acquired pursuant to
the Equity Plan. This amount does not include the value of options and stock improperly
acquired by Mott pursuant to the Equity Plan. Nor does it include amounts received by Mott
from Canopy as base compensation and annual bonuses, which totaled approximately $115,000
to $1S0,000 per year, or compensation received by Mott directly from Portfolio Companies.
57. Between 2001 and 2004, Christensen took a total of at least $1,759,370 in
excessive cash compensation pursuant to the Incentive Plan and the exercise of resale rights
xxiii
acquired pursuant to the Equity Plan. Such amount does not include the value of options and
stock improperly acquired by Christensen pursuant to the Equity Plan. Nor does it include
amounts received by Christensen from Canopy as base compensation and annual bonuses, which
totaled approximately $165,000 to $173,000 per year, or compensation received by Christensen
directly from Portfolio Companies.
58. Plaintiffs estimate the value of their purported options exceeds $100 million.
(Complaint in Yarro Action (as defined hereafter), ¶ 66.)
59. Under Defendants' control, Canopy has never distributed a dividend to the Trust.
60. Mrs. Noorda has never been paid for her services as an officer and director of
Canopy.
61. Mr. Noorda has received only nominal compensation for his services as an officer
and director, ranging from $40,000 per year in 2000 to $60,000 per year in 2001, 2002, and
2003.
62. In consequence of the foregoing conduct, the Noordas noticed a meeting of
Canopy's board of directors for December 17, 2004. At that meeting, which was duly held as
noticed, with the Noordas attending telephonically as permitted by the Bylaws, the Noordas
proposed and voted in favor of 3 separate corporate resolutions terminating Defendants'
employment with Canopy for cause. Since Defendants were at-will employees of Canopy, their
employment was equally susceptible to termination without cause. (Copies of the Notice and
Minutes of the December 17, 2004 board meeting are attached to the Mustard Aff. as Exhibits D
and E)
xxiv
63. At the same meeting, the Noordas proposed and voted in favor of a corporate
resolution retaining William Mustard as Canopy's Chief Executive Officer. Mustard is a
seasoned and highly experienced business and financial executive who is well qualified to lead
Canopy. (Mustard Aff. at 6-9 (A copy of Mustard's resume is attached as Exhibit A to the
Mustard Aff.).)
64. Since his retention, Mustard has managed Canopy's day-to-day affairs exercising
his own independent business judgment. Mustard was not hired by Val Noorda Kreidel
("Kreidel"), the Noordas' daughter, or Terry Peterson ("Peterson"), their financial advisor, has
no prior relationship with these individuals, and is not part of any conspiracy to operate Canopy
for their benefit. To the contrary, Mustard is operating Canopy for the benefit of its
shareholders, including the Trust. (Mustard Aff. at 20.)
65. Following Defendants' terminations, one valued Canopy employee has died and
five others have terminated their own employment. Despite Defendants' inflammatory and
baseless accusations, those employees who have terminated their own employment have done so
voluntarily or, on information and belief, under Defendants' influence. For instance, Defendants
allege that "key and valuable Canopy employees have terminated, or are considering terminating,
their employment with Canopy." (Complaint in Yarro Action, ¶ 114.) Defendants would not
know this absent having contacted these employees. Should discovery reveal, as suspected, that
Yarro has interfered with Canopy's employee relationships, such conduct would be in violation
of his ongoing fiduciary duty of loyalty to Canopy as a director and provide an additional basis
for his removal. (Mustard Aff. at 21-22.)
xxv
66. In any event, under Mustard's control, Canopy, a small holding company with
minimal staffing needs, is in the process of retaining replacement employees at compensation
levels commensurate with their experience and skills, in contrast to the wasteful compensation
levels set by prior management. (Mustard Aff. at 24.)
67. On Friday, January 21, 2005, Defendants filed an action against Canopy, the
Noordas, Val Noorda Kreidel, and Terry Peterson, whom Defendants erroneously and without
basis allege are part of a conspiracy to appropriate Canopy's assets for their own benefit. That
action is captioned Ralph J. Yarro, III v. Val Noorda Kreidel et al., Fourth Judicial District
Court, Utah County, State of Utah, Case No. 050400205 (the "Yarro Action"). In point of fact, it
is Angel Partner's, Inc., a non-profit organization, that stands to acquire the Trust's interest in
Canopy upon the Noordas' death.
68. The following Tuesday, on January 25, 2005, Canopy and the Noordas instituted
this action, contending that Defendants' conduct described above constitutes, among other
things, (1) breach of the fiduciary duty of loyalty owed by Defendants to Canopy and the Trust;
(2) conversion; (3) breach of the Incentive Plan and the covenant of good faith and fair dealing
implied therein; (4) breach of Defendants' purported option agreements and the covenant of
good faith and fair dealing implied therein; and (5) breach of the Shareholder Agreement and the
covenant of good faith and fair dealing implied therein.
69. By their Complaint, Canopy and the Noordas seek, among other things: (1) an
order removing Yarro as a director of Canopy pursuant to Utah Code Ann. § 16-10a-809; (2) a
judgment declaring that Defendants' stock option agreements are null and void, that all stock and
xxvi
cash compensation acquired by Defendants pursuant to the Equity Plan must be returned to
Canopy, and that all options acquired by Defendants pursuant to the Equity Plan are terminated
and rescinded; (3) a judgment declaring that all cash, stock, options and other property acquired
by Defendants in violation of their fiduciary duty of loyalty to Canopy is being held by them in
constructive trust for Canopy and that Defendants are under an equitable duty to return and
convey such property to Canopy; (4) a judgment declaring that Defendants' purported rights
under the Shareholder Agreement are void, terminated, and rescinded; and (5) a judgment
awarding actual, special, consequential, and punitive damages as appropriate.
70. Concurrently with the filing of this Motion, Canopy, the Noordas, and Mustard
are filing a Motion requesting the Court to consolidate this action with the Yarro Action. In
addition, Canopy and the Noordas request that the Court hear the evidence and arguments on this
Motion at the hearing set to begin on March 8, 2005, on the Motion for Preliminary Injunction
filed by Yarro, Mott, and Christensen in the Yarro Action.
xxvii
ARGUMENT
I. THIS COURT SHOULD REMOVE YARRO AS A DIRECTOR OF CANOPY
BECAUSE HE HAS ENGAGED IN FRAUDULENT OR DISHONEST CONDUCT
AND HAS GROSSLY ABUSED HIS AUTHORITY AND DISCRETION AS A
DIRECTOR.
A. This Court Has Statutory Authority Under Utah Code Ann. § 16-10a-809(1)
to Remove Yarro As a Director.
In their Fourth Cause of Action, Canopy and the Trust seek an order removing Yarro as a
director of Canopy. Under the Utah Revised Business Corporation Act, the "district court of the
county in this state where a corporation's principal office . . . is located may remove a director in
a proceeding commenced" by the corporation or a shareholder holding at least 10 percent of the
outstanding shares of any class if the court determines that "(a) the director engaged in
fraudulent or dishonest conduct or gross abuse of authority or discretion with respect to the
corporation; and (b) removal is in the best interest of the corporation." Utah Code Aim. § 16-
10a-809(1). In addition, the Court may "bar the director from reelection for a period prescribed
by the Court." Id. § 16-10a-809(2). The purpose of section 16-10a-809 is "to permit the prompt
and efficient elimination of dishonest directors." Rev. Model Bus. Corp. Act. § 8.09 official cmt.
Thus, the Court has the statutory authority in this action, which has been brought by Canopy and
the Noordas, to promptly enter an order removing Yarro as a director.
B. Yarro's Self-Dealing and Wasteful Compensation Plans Must Be Reviewed
Under an "Entire Fairness" Standard.
Corporate directors have a fiduciary duty of loyalty to act, at all times, in the best
interests of the corporation and its shareholders, unhampered by any personal pecuniary gain.
C & Y Corp. v. General Biometrics, Inc., 896 P.2d 47, 54-55 (Utah Ct. App. 1995). With respect
to director compensation, an interested director bears the burden of proving that his or her
1
compensation is entirely fair to the corporation. Telxon Corp. v. Meyerson, 802 A.2d 257, 265
(Del. 2002); see also Resolution Trust Co. v. Dean, 854 F. Supp. 626, 645 (D. Ariz. 1994)
("Allegations of excessive executive compensation implicate a director's duty of loyalty to the
corporation."). The reasonableness of a director's compensation involves "consideration of the
services rendered, time devoted to the company, difficulties involved, responsibilities assumed,
corporate earnings, and other relevant facts and circumstances." Dean, 854 F. Supp. at 645. In
Telxon Corp., the Delaware Supreme Court recognized as follows:
Like any other interested transaction, directorial self-compensation
decisions lie outside the business judgment rule's presumptive
protection, so that, where properly challenged, the receipt of self-
determined benefits is subject to an affirmative showing that the
compensation arrangements are fair to the corporation.
802 A.2d at 265. Telxon was a derivative action brought by shareholders of a corporation who
alleged that the directors of the corporation had breached their duty of loyalty by granting
themselves excessive compensation. Id. at 258-65. Specifically, the directors were paid some
$90,000 per year as salaries, and were also paid separate amounts for attending board meetings
and for "consultation fees." Id. The trial court dismissed the shareholders' "compensation
claims," reasoning that no facts had been produced showing the compensation was excessive.
Id. at 265. The Delaware Supreme Court reversed the dismissal, holding that the trial court had
improperly imposed the burden on the shareholders to prove the compensation was
unreasonable.Id. Thus, the Telxon court recognized that in a situation involving directorial self-compensation, the interested directors have the burden of demonstrating the fairness of their
compensation. Id.; see also In re Walt Disney Company Derivative Litigation, 825 A.2d 275,
291 (Del. Ch. 2003) (holding that allegation that president acquired compensation package with
2
"enormous financial benefits" through negotiations with the chief executive officer that were not
arms-length states claim for breach of the fiduciary duty of loyalty; self compensation decisions
must affirmatively be shown to be fair to the corporation).
1
Because Yarro has dominated and controlled Canopy's Board since at least 1998, he
cannot escape having to prove that the manner in which he improperly enriched himself and
others was entirely fair to Canopy. A shareholder is a "controlling shareholder" if a majority of
the board does not exercise independent business judgment and follows the will of that
shareholder. Telxon, 802 A.2d at 264; Odyssey Partners, L.P. v. Fleming Companies, Inc., 735
A.2d 386, 407 (Del. Ch. 1999); Aronson v. Lewis, 473 A.2d 805, 815 (Del. 1984). Here, the
evidence will show Yarro dominated Canopy's Board through the force of his own will and the
close, personal relationships he had established with the Noordas, both of whom believed him to
be reliable and trustworthy. See, e.g., Telxon, 802 A.2d at 265 (control present where it was
"clear that the other [d]irectors respected [the controlling shareholder's] business acumen and
often relied on his counsel"). That Yarro does not own a majority of Canopy's shares is
irrelevant. Control is present where a shareholder has "exercise[ed] actual control" over the
3
company's business affairs, as is readily apparent here. In Re Maxxam Inc., 659 A.2d 760, 771
(Del. Ch. 1995).
"[I]n a challenged transaction involving self-dealing by a controlling shareholder, the
substantive legal standard is that of entire fairness, with the burden of persuasion resting upon
the defendants."Kahn v. Tremont Corp., 694 A.2d 422, 428 (Del. 1997). Stated another way:
[W]henever a controlling shareholder sets out to exercise his
power to set the terms of such a [self-dealing] transaction and
compel its effectuation, he assumes a new and significant
responsibility: the burden of establishing to an independent body,
whether a court in litigation, an independent committee of the
board . . . , or disinterested ratifying shareholders on full and
complete information that the transaction is fully fair.
Merritt v. Colonial Foods, Inc., 505 A.2d 757, 764 (Del. Ch. 1986). Thus, if a controlling
shareholder is present and effectuates a self-dealing transaction, he unquestionably assumes the
burden of demonstrating the fairness of that transaction.
Moreover, the presence of a controlling stockholder negates the effect of shareholder
ratification, which is the basic premise of Yarro's defense. See, e.g., Solomon, TRV v.
Armstrong, 747 A.2d 1098, 1117 n.59 (Del. Ch. 1999) (a seemingly valid stockholder vote may
be invalidated by demonstrating that shareholders were wrongfully led to vote in favor of the
transaction for some reason other than its merits). Any transaction between a corporation and a
controlling shareholder is subject to total fairness review. The only effect of an effective
shareholder ratification is to shift the burden from the controlling shareholder to the plaintiffs to
demonstrate the unfairness of the disputed transaction. Id. at 1116-17; see also Kahn v. Tremont
Corp., 694 A.2d 422, 428 (Del. 1997) ("Regardless of where the burden lies, when a controlling
shareholder stands on both sides of a transaction the conduct of the parties will be viewed under
4
the more exacting standard of entire fairness as opposed to the more deferential business
judgment standard."). However, no burden-shifting occurs if it is shown the ratifications in
question were not made by independent directors based on their independent business judgment.
Id. Thus, even where shareholders are alleged to have ratified self-dealing transactions, if the
presence of a controlling shareholder has clouded the judgment of those shareholders, the burden
will remain on the controlling shareholder to demonstrate the entire fairness of the transaction.
Yarro's suggestion that his conduct has been properly ratified will be proven erroneous
for an additional, significant reason. In a close corporation, self-dealing transactions can be
ratified only by "fully informed shareholder owners" of the corporation. In re Mi-Lor Corp.,
348 F.3d 294, 304-05 (1st Cir. 2003) (emphasis added). In other words, the Noordas could not
have ratified that which they did not know or fully understand. Lewis v. Vogelstein, 699 A.2d
327, 335 (Del. Ch. 1997) (ratification can be "defective because of incomplete information or
coercion").
The standard for proving adequate disclosure is complete candor in disclosing the facts
that a reasonable shareholder or director would consider important in making an informed
decision to ratify the transaction at issue. Stroud v. Grace, 606 A.2d 75, 85 (Del. 1992). Yarro
bears the burden of proof on this issue as well, and, having failed to make adequate disclosures
concerning Canopy's Incentive and Equity Plans, he cannot possibly meet it. See In re Walt
Disney Derivative Litigation, 731 A.2d 342, 369 (Del. Ch. 1998) (stating that "[t]o obtain this
[c]ourt's deference to shareholder ratification, directors and majority shareholders alike must
show this [c]ourt that the shareholders possessed all information germane to the transaction at the
time they ratified it").
5
C. Yarro's Improper and Dishonest Conduct Requires
His Removal From Canopy's Board.
The evidence will show that Yarro has breached his duty of loyalty to Canopy by
engaging in numerous gross abuses of his authority as a director. In particular, Yarro wrongfully
implemented compensation packages that were not only "unfair" to Canopy, but were patently
excessive under any objective standard.
First, without the full review or approval of Canopy's Board, Yarro implemented a self-
serving and wasteful Incentive Plan, pursuant to which he alone received payments totaling
$15,298,932. (Statement of Facts, ¶¶ 15-16.) Many of these payments did not fall within the
terms of the Incentive Plan. For example, Yarro's receipt of $6.75 million in Caldera settlement
proceeds did not result from a Triggering Event, and numerous other payments derived from
bonus pools totaling 10% of the proceeds of Triggering Events, even though by its own terms,
the Incentive Plan provides for bonus pools of only 5%. (Id. ¶¶ 20-21.)
The evidence will further show that in November 2000, based predominantly on Yarro's
advice, the Noordas permitted Canopy to adopt the Equity Plan, which, on its face, is excessively
rich and unfair to Canopy and the Trust. Although the Equity Plan's purported purpose is to
provide employees with an incentive to remain in service, it permitted issuance of immediately
vesting options at extremely discounted exercises prices. Options issued under the Equity Plan
do not terminate until October 31, 2020, allowing purported Optionees up to 20 years to realize
deferrred gains. Each Class A option includes a tax-protection payment clause purportedly
requiring Canopy to pay cash bonuses to optionees sufficient to cover all taxes payable on
income received as a result of the option's exercise and the tax protection payment itself (Id. ¶¶
28(a)-(d).)
6
Terminated employees are permitted an excessive period of time to exercise their options
- at least three months and up to a year in certain circumstances - and even if an employee is
terminated for cause, he or she has one month following the date of cessation of Service (broadly
defined to include service in connection with a Portfolio Company) to exercise his or her options.
Class B options purportedly include the right to elect a cashless exercise with respect to options
whose termination date is accelerated by reason of the optionee's cessation of Service for any
reason other than cause. An employee who purports to elect a Cashless Exercise pays the
exercise price and all applicable withholding taxes by receiving a reduced number of shares. (Id.
¶ ¶ 28(e)-(f.)
Finally, each option includes a purported resale right that may be exercised at any time
during the month of February through the year 2020, but terminates upon the Optionee's
termination for cause, and terminates the February following termination for any reason other
than cause. The resale right for each calendar year may be exercised "with respect to a number
of shares equal to 5% of the sum of (1) the total number of shares of Common Stock that the
Optionee has previously purchased by the exercise of Options; and (2) the total number of shares
of Common Stock then subject to outstanding options held by the Optionee; provided, however,
that the Optionee may also exercise the Resale Right with respect to any shares of Common
Stock for which the Optionee had, but did not exercise, a Resale Right in a prior calendar year."
(Id., ¶ 28(g); Equity Plan at Art. 2(II)(B).)
Following the implementation of the Equity Plan, Yarro executed stock option
agreements that purported to grant options on Class A and B shares to himself, Mott,
Christensen, and other Canopy employees at grossly undervalued prices. Yarro caused himself
7
to receive options purportedly allowing him to immediately acquire 40% of Canopy's authorized
Class A and B shares at $5.00 per share. At the time, Canopy's net value per share was $19.27,
thus making the transaction worth approximately $143 million to Yarro. (Id., ¶ 29.)
In sum, between 1999 and 2004, Yarro took a total of at least $19,535,602 pursuant to the
Incentive Plan and exercises of resale rights purportedly acquired pursuant to the Equity Plan.
This amount does not include the value of options and stock improperly acquired by Yarro,
generous amounts paid to Yarro as base compensation and annual bonuses, or compensation
received by Yarro directly from Portfolio Companies. Nor does it included any of the excessive
and wasteful compensation paid to Canopy's other officers employees. (Id. ¶ 55.)
Yarro's compensation grossly exceeded the value received by Canopy in exchange. See
Dean, 854 F. Supp. at 645. In contrast, Mrs. Noorda has never been paid for her services as an
officer or director. Mr. Noorda has received nominal compensation for his services as an officer
and director, ranging from $40,000 per year in 2000 to $60,000 per year in 2001, 2002, and
2003. (Statement of Facts, ¶ 56.) Because the evidence will establish that Yarro has engaged in
fraudulent and dishonest conduct and has grossly abused his authority and discretion with respect
to compensation packages received by himself and others at Canopy, he should be removed as a
director.
II. YARRO'S REMOVAL IS IN THE BEST INTEREST OF CANOPY.
As set forth above, Yarro has grossly abused his authority as a director, granting himself
and other employees excessive compensation packages that have not been in the best interest of
Canopy. Permitting Yarro to continue to serve as a director places him in a position to further
dissipate Canopy's assets. Removing Yarro as a director will benefit the financial health of the
8
company by helping to restore rationality and fairness to compensation levels and other financial
aspects of the corporation. Thus, Yarro's removal is in Canopy's best interest.
CONCLUSION
Based on the foregoing reasons, Canopy and the Noordas respectfully request that the
Court enter an order granting this Motion and removing Yarro as a director of Canopy.
DATED this 14th day of February 2005.
___[signature]___
David B. Watkiss, Esq.
Anthony C. Kaye, Esq.
James W. Stewart, Esq.
Boyd L. Rogers, Esq.
Craig H. Howe, Esq.
BALLARD SPAHR ANDREWS & INGERSOLL, LLP
Attorneys for Plaintiffs
1 Corporate "waste" also gives rise to a breach of duty of loyalty claim. A director
breaches the duty of loyalty by intentionally or negligently facilitating the waste or
mismanagement of corporate funds or property. American Law Institute, Principles of Corporate
Governance: Analysis and Recommendations, § 1.42 (2003). A transaction constitutes waste if it
involves an expenditure of corporate funds or a disposition of corporate assets for which no
consideration is received and for which there is no rational business purpose. If consideration is
received, a transaction constitutes waste if the consideration is so inadequate in value that no
person of ordinary sound business judgment would deem it worth that which the corporation has
paid. Id.
9
CERTIFICATE OF SERVICE
I hereby certify that a true and correct of copy of the foregoing MEMORANDUM IN
SUPPORT OF MOTION TO REMOVE RALPH J. YARRO III AS DIRECTOR was
served on the following this 14th day of February 2005, in the manner set forth below:
Via Hand Delivery:
Stanley J. Preston, Esq.
Michael R. Carlston, Esq.
Maralyn M. Reger, Esq.
Bryan M. Scott, Esq.
SNOW CHRISTENSEN AND MARTINEAU
[address]
Via First-Class Mail, Postage Prepaid:
Jeffrey S. Facter, Esq.
SHEARMAN & STERLING LLP
[address]
Blake D. Miller, Esq.
MILLER & GUYMON, P.C.
[address]
Blaine J. Benard, Esq.
Eric G. Maxfield, Esq.
HOLME ROBERTS & OWEN, LLP
[address]
___[signature]____
10
|