Chancery Tosses Suit Over Swift Founder's Borrowing

Kirkland represents Chamberlain, the world’s largest manufacturer of residential and commercial garage door openers, in a Northern District of Illinois lawsuit alleging, among other things, that the TTI defendants and a former Chamberlain executive misappropriated trade secrets in violation of the federal Defend Trade Secrets Act and Computer Fraud and Abuse Act, violated the Illinois Trade Secrets Act, and breached contracts.  Chamberlain alleges that the former executive misappropriated trade secrets in the form of technology, business strategies, and financials and took them to TTI, who used Chamberlain’s trade secrets to make its first ever residential garage door opener in direct competition with Chamberlain. The case is ongoing.

A Delaware Chancery judge on Wednesday threw out derivative claims alleging Swift Transportation Co.’s board failed to control founder and retired CEO Jerry Moyes' practice of borrowing against his stake in the company, ruling that “at bottom” the suing shareholder simply disagrees with the directors’ business judgment.

Ruling from the bench during a hearing in Wilmington, Vice Chancellor J. Travis Laster said that contrary to suing shareholder Shiva Stein’s allegations, Swift’s directors neither failed to oversee Moyes’ activities, nor did they fail to respond to his actions.

In fact, the board not only reprimanded Moyes, who is also Swift’s controlling stockholder, and had him forfeit some pay and a bonus, but eventually negotiated his exit as CEO through retirement, Vice Chancellor Laster said.

“That is a big response,” the vice chancellor said. “Given all that, I can’t conclude the board acted recklessly or in bad faith.”

The issue stems from a derivative complaint Stein lodged in February connected to allegations that Moyes had been taking margin loans against his roughly 40 percent stake, in excess of company policy, to prop up his other endeavors such as charter airline Swift Air and interests in several Phoenix-area major league sports teams.

The borrowing practice threatened to depress Swift’s stock price, spreading harm out among all of the company’s shareholders, Stein had alleged.

The case came to Vice Chancellor Laster in an unusual posture for a derivative lawsuit because the suing shareholder had made a demand on the board and was alleging the directors hadn’t adequately responded.

Stein contended that not only were the sanctions levied against Moyes “meaningless,” but he was actually rewarded with a sweetheart retirement deal that included an “excessive” compensation package and an agreement to be a nonemployee consultant through 2019 at $200,000 per month.

The response was so inadequate that it amounted to bad faith on the part of the board, the suing shareholder alleges.

The board also continued to acquiesce to Moyes’ requests to alter the policy and the borrowing continued, suing shareholder’s attorney Stephen B. Brauerman of Bayard PA told the vice chancellor.

“This is not a board making an effort to address the situation,” Brauerman said, adding that doing just “something” is not an adequate response. “Their something is a two-month salary and bonus sanction, and then gave him a three-year consulting agreement, which I’m sure he’ll do nothing.”

Matthew Solum of Kirkland & Ellis LLP, attorney for Swift’s directors, countered that the retirement package was connected to the years of service Moyes had with the company he founded in the 1960s and grew into one of the largest trucking firms in the nation.

The suing shareholder is essentially disputing how the board exercised its business judgment and weighed the concerns over the matter, and wants to step in and take over how the directors were handling the situation, Solum argued.

Vice Chancellor Laster said that dealing with a CEO who is also the controller of a company is a “delicate situation” for a board that must take into account dynamics and the effect it would have on the overall company. He agreed that the suing shareholder was just challenging the business judgment of the board.

After the hearing, suing shareholder’s attorney Gustavo F. Bruckner of Pomerantz LLP said his side was “very disappointed” with the decision.

“We respect the decision and we realize demand refusal cases are tough, but we thought this was a case with an extreme set of facts,” Bruckner said.

Attorneys for the Swift directors declined to comment.

Swift went public in the 1990s before briefly going private in 2007, launching another initial public offering to go public again in 2010.

The company's terminal network has grown to more than 40 terminals in Mexico and the United States, and it has a presence in every Canadian province, according to Swift's website.

Stein is represented by Stephen B. Brauerman and Sara E. Bussiere of Bayard PA and Gustavo F. Bruckner and Darya Kapulina-Filina of Pomerantz LLP.

The Swift defendants are represented by Michael J. Barrie of Benesch Friedlander Coplan & Aronoff LLP and Matthew Solum of Kirkland & Ellis LLP.

The case is Stein v. Moyes et al., case number 2017-0101, in the Delaware Court of Chancery.

REPRINTED WITH PERMISSION FROM THE JULY 19, 2017 EDITION OF LAW360 © 2017 PORTFOLIO MEDIA INC. ALL RIGHTS RESERVED. FURTHER DUPLICATION WITHOUT PERMISSION IS PROHIBITED. WWW.LAW360.COM