New York Supreme Court Allows Excessive Compensation Action to Proceed Against Regeneron Pharmaceuticals, Inc., Its Board and Executives

6/29/2017 - The Supreme Court of New York has found that an institutional investor's allegations against Regeneron’s board of directors for paying directors and officers grossly excessive compensation can go forward.  Specifically, Justice Saliann Scarpulla denied a motion to dismiss a stockholder derivative action against the board of directors, chief executive officer (“CEO”) and chief scientific officer (“CSO”) of Regeneron Pharmaceuticals, Inc., a New York corporation.

On December 30, 2015, BR&B and its co-counsel brought a stockholder derivative action on behalf of the Cement Masons Local 780 Pension Fund, an institutional stockholder of Regeneron, against the CEO, CSO, and all members of the board of directors of Regeneron alleging breach of fiduciary duty and unjust enrichment for the extraordinary compensation these executives and directors awarded themselves from the company’s 2014 Long-Term Incentive Plan ("2014 Plan").  The complaint alleged that in 2014: (i) the non-employee directors were the highest-compensated directors in the United States – receiving $2 million each; (ii) these same non-employee directors were paid approximately four and a half times as much compensation as their peers; (iii) the Chairman of the Board was the highest compensated part-time employee in the United States, making more than $20.5 million; (iv) director and CEO Schleifer was the highest-paid CEO compared to his peer group, receiving at least twice the compensation of his peers -- $41.9 million; (v) director and CSO Yancopoulos was the highest-paid second in command in his peer group, receiving at least four times the compensation provided to his peers – $35.5 million; and (vi) defendants effectively controlled the stockholder vote on the 2014 Plan as a result of a voting rights agreement made with the company’s largest stockholder only months before the vote and were therefore able to force adoption of the plan despite opposition from independent proxy advisors ISS and Glass Lewis and despite disinterested shareholders voting against the plan at a rate of two to one. The complaint asked the Court to void the 2014 Plan, to require a vote from disinterested stockholders on a new plan, to set meaningful limits on director compensation, and to order disgorgement of defendants’ compensation under the 2014 Plan.  The defendants moved to dismiss the claims, arguing that the complaint‘s allegations were insufficient to allow the case to proceed.  The Court heard arguments on the motion to dismiss in August 2016.

On June 29, 2017, the Court rejected the defendants arguments about the 2014 Plan and the compensation awarded to defendants under the Plan, making several important rulings.  The Court held that:

  1. pre-suit demand on the board, ordinarily required in a derivative suit,  was excused because, among other things, five of the ten members of the board comprised the compensation committee that awarded compensation under the 2014 Plan, thereby making any demand futile;
  2. the Cement Mason Local 780 Pension Fund was not required to allege that the defendants' conduct amounted to fraud, because the Defendants were, under the 2014 Plan, engaging in a self-interested transaction – a ruling that followed Delaware precedent;
  3. the stockholders vote had not acted as ratification of the defendants’ compensation because defendants controlled the stockholder vote on the 2014 Plan, and ratification requires a disinterested stockholder vote; 
  4. the complaint adequately pleaded a claim for breach of fiduciary duty since it “sufficiently details how the Defendants reaped tremendous personal gain through the 2014 Plan,” and how the shareholder vote approving the plan was not disinterested; and
  5. the complaint also adequately pleaded a claim for unjust enrichment because “Cement Masons allege that Defendants ‘have been unjustly enriched by abusing their ability to set their own compensation as Regeneron directors and paying themselves excessive compensation’ at the expense of Regeneron.” 

The court's decision (available here) allows BR&B to proceed with the prosecution of this important excessive compensation case. 

If you have any questions about the June 29, 2017 decision in the Regeneron case or about the litigation in general, please contact BR&B attorneys A. Arnold Gershon at agershon@barrack.com or Michael A. Toomey at mtoomey@barrack.com.