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Sherry v. Chioini

United States District Court, E.D. Michigan, Southern Division

October 25, 2016

ROBERT L. CHIOINI et al., Defendants.



         This is a shareholder derivative action under Michigan law. Plaintiff Donald E. Sherry (“Sherry”) is a shareholder of nominal Defendant Rockwell Medical, Inc. (“Rockwell”). Sherry alleges that Rockwell's Board of Directors (the “Board”) and certain corporate officers improperly enriched themselves by granting and/or accepting (1) so-called “spring loaded” stock options and/or (2) a greater number of stock options than permitted under the company's compensation plan.

         Prior to filing this action, Sherry sent a letter to the Board identifying this alleged wrongdoing and demanding that Rockwell investigate it and take appropriate action (the “Demand Letter”). In response, Rockwell asked the Oakland County Circuit Court (the “OCCC”) to appoint attorney S. Thomas Wienner (“Wienner”) as a disinterested person to investigate Sherry's allegations and to determine whether Rockwell should pursue claims based upon the allegations. After the OCCC appointed Wienner, he conducted an investigation and determined that it would not be in Rockwell's best interest to pursue claims arising out of Sherry's allegations.

         The Defendants now move for dismissal of Sherry's claims. They seek that relief under a Michigan statute that, under certain circumstances, requires a court to dismiss derivative claims that a court-appointed disinterested person has determined should not be pursued. (See ECF #15.) For the reasons explained below, the Court DISMISSES the claims that were the subject of Wienner's determination (Counts I, III, and IV of the Complaint).

         In a separate claim that was neither raised in the Demand Letter nor investigated by Wienner (Count II of the Complaint), Sherry alleges that the Board issued a misleading proxy statement to Rockwell's shareholders in 2014. The Defendants have moved to dismiss this claim on the ground that, among other things, Sherry lacks standing to assert it. For the reasons explained below, the Court concludes that it cannot rule on the motion to dismiss Count II until it receives and reviews supplemental briefs with respect to that claim.



         Rockwell is a publicly-traded medical device and biopharmaceutical company. (See Wienner Report at 4, ECF #15-10 at 5, Pg. ID 435.) For most of its history, “the great majority of [Rockwell's] revenues have been derived from the manufacture and sale of concentrate solutions used during hemodialysis.” (Id. at 6, ECF #15-10 at 7, Pg. ID 437.)

         Rockwell's President and CEO is Defendant Robert Chioini (“Chioini”). (See Id. at 4, ECF #15-10 at 5, Pg. ID 435.) Chioini also serves as Chairman of the Board. (See id.) The Board includes three outside directors: Defendants Patrick Bagley (“Bagley”), Ronald Boyd (“Boyd”), and Kenneth Holt (“Holt”). (See Id. at 4-5, ECF #15-10 at 5-6, Pg. ID 435-36.) Bagley, Boyd, and Holt comprise the Board's “Compensation Committee.” (See id.) The remaining Defendants in this action - Thomas Klema (“Klema”), Ajay Gupta (“Gupta”), and Raymond Pratt (“Pratt”) - are Rockwell corporate officers. (See Compl., ECF #1 at ¶¶ 16-19, Pg. ID 6.)

         In 2007, Rockwell's shareholders approved, and the Board adopted, a “Long Term Incentive Plan” (the “Plan”). (See Wienner Report at 7, ECF #15-10 at 8, Pg. ID 438.) The Plan authorizes the Board's Compensation Committee “to grant various equity awards [i.e., stock options] to themselves, any other non-employee directors, executive officers, other employees, and consultants of [Rockwell].” (Compl., ECF #1 at ¶21, Pg. ID 7.) The Plan further provides that “the exercise price of stock options [granted under the Plan] be set at no less than Rockwell's ‘Fair Market Value' on the date of the grant.” (Id. at ¶36, Pg. ID 12.) The Plan defines “Fair Market Value” as “the closing price of [Rockwell's] Common Stock on the [NASDAQ] Stock Exchange for the Grant Date.” (Id.)

         On April 4, 2014, the Board filed a Schedule 14A Proxy Statement with the United States Securities and Exchange Commission in which the Board “solicited shareholder approval of amendments to the Plan” (the “2014 Proxy Statement”). (Id. at ¶5, Pg. ID 4.) In the 2014 Proxy Statement, the Board sought to increase the number of stock options that the Compensation Committee could grant in a single fiscal year. (See id.) Rockwell's shareholders approved the amendment on May 22, 2014. (See Id. at ¶68, Pg. ID 23.)


         The fall of 2014 was an important and busy time for Rockwell. For years, “Rockwell [had been] attempting to transition from being a medical supplier of dialysis concentrate products to being a specialty pharmaceutical company with higher margins.” (Wienner Report at 5, ECF #15-10 at 6, Pg. ID 436.) Rockwell's “primary effort” in this transformation had been “the development of a drug called Triferic, which is used to replace iron and maintain hemoglobin during hemodialysis treatments.” (Id.) In the fall of 2014, the Food and Drug Administration (the “FDA”) was nearing a decision on whether to approve Triferic, and it had scheduled a public session to review the drug on November 6, 2014. (See Id. at 6-7, ECF #15-10 at 7-8, Pg. ID 437-38).

         In this same time frame, Rockwell was also negotiating a transaction with Baxter Healthcare Corporation (“Baxter”). (See Compl. at ¶4, Pg. ID 3.) The proposed transaction called for Baxter to “serve as the exclusive distributor of Rockwell's hemodialysis concentrate and ancillary products in the United States and selected foreign countries.” (Id.) Chioini, “in his capacity as [P]resident of [Rockwell]” was the person negotiating with Baxter on Rockwell's behalf. (Wienner Dep. at 116, ECF #32-1 at 31, Pg. ID 826.)

         On October 1, 2014, the Board met to address the Baxter transaction. (See id.) The Board voted to “authorize[]” the Baxter transaction and to give Chioini the “authority” to complete his negotiations and close on the transaction. (Id.)

         At the conclusion of the full Board meeting, the Compensation Committee met. (See Wienner Report at 9, ECF #15-10 at 10, Pg. ID 440.) During that meeting, the Compensation Committee granted an aggregate of 825, 000 stock options (the “Option Awards”) as follows: 500, 000 options to Chioini, 120, 000 options to Klema, 50, 000 options each to Gupta and Pratt, and 35, 000 options to each member of the committee. (See Id. at 9-10, ECF #15-10 at 10-11, Pg. ID 440- 41.) The “exercise price of the [Option Awards] was $8.88 per share, which, consistent with [the Plan], was the closing price on the NASDAQ exchange [of Rockwell's stock] on October 1, 2014.” (Id. at 10, ECF #15-10 at 11, Pg. ID 441.) The Option Awards were set “to vest in three equal, annual installments beginning in October 2015.” (Id.)

         Chioini completed his negotiations with Baxter on October 1 and 2, and the two companies issued a joint press release announcing the transaction on October 3. (See Compl. at ¶29, Pg. ID 9.) The press release explained that Baxter would become “the exclusive distributor of Rockwell's hemodialysis concentrate and ancillary products in the U.S. and selected foreign countries” in exchange for a $20 million cash payment to Rockwell and a $15 million purchase of Rockwell's stock. (Id.)

         The day Rockwell announced the Baxter transaction, Rockwell's stock closed at $10.63 per share, or nearly 20-percent higher than the $8.88 per share closing price two days earlier. (See Id. at ¶¶ 31-32, Pg. ID 11.) The increase in Rockwell's share price was short lived. On October 8, 2014, less than a week later, Rockwell's share price retreated to $8.89. (See Wienner Report at 6, ECF #15-10 at 7, Pg. ID 437.)


         Sherry has owned shares of Rockwell's public stock since October 2011. (See Compl. at ¶10, Pg. ID 5.) On January 8, 2015, Sherry and a second Rockwell shareholder sent the Demand Letter to the Board. (See Demand Ltr., ECF #15-10 at 21-26, Pg. ID 451-56.) In the Demand Letter, Sherry claimed that the granting of the Option Awards was improper for two reasons. First, Sherry argued that the Compensation Committee had improperly timed their granting of the Option Awards in order to “take advantage of the expected stock gains that would occur after the announcement of the deal with Baxter.” (Id. at 25, Pg. ID 456.) He complained that:

[t]he Compensation Committee granted [the Option Awards] just prior to the release of material information that caused Rockwell's stock price to rise, and made these grants with the intent of circumventing the shareholder-approved restriction requiring that the exercise price [of any option award] be no less than the fair market value of [Rockwell's] common stock on the date of the grant. This practice - known as ‘spring loading' - constitutes a violation of the terms and objectives of the Plan and is a breach of fiduciary duty.

(Id. at 23, Pg. ID 453). Sherry contended that the timing of the Option Awards was suspicious because the Compensation Committee normally issued option awards in January and/or June, not October. (See id.)

         Second, Sherry argued that the Compensation Committee granted Chioini more options in one fiscal year than he was entitled to receive under the Plan:

Section 7.3 of the Plan, as most recently approved by shareholders in May 2014, provides that during any fiscal year no individual employee may be granted awards of stock options covering more than 500, 000 shares or awards of restricted stock covering more than 200, 000 shares. ….
On January 13, 2014, Chioini was granted 250, 000 stock options and 100, 000 shares of restricted stock under the Plan. Then, on October 1, 2014, Chioini was granted 500, 000 stock options and 200, 000 shares of restricted stock under the Plan. …. Accordingly, during the 2014 fiscal year, Chioini was granted a total of 750, 000 stock options and 300, 000 shares of restricted stock under the Plan, exceeding the [l]imits by 250, 000 stock options and 100, 000 shares of restricted stock.

(Id. at 25-26, Pg. ID 456-67.)

         Sherry concluded the Demand Letter by insisting that the Board “rescind” the Option Awards, “seek any further appropriate relief … for damages sustained as a result of the misconduct described [in the Demand Letter], ” “[i]nvestigate whether there [were] additional violations of the Plan, ” and “[a]dopt and implement adequate internal controls and systems … designed to prohibit and prevent a recurrence of [violations of] the Plan [].” (Id. at 26, Pg. ID 457).


         Rockwell shared the Demand Letter with its outside counsel, the Dykema Gossett law firm (“Dykema”). After consulting with Dykema, Rockwell decided to seek court appointment of a disinterested person to investigate the claims made in the Demand Letter and to determine whether the company should pursue those claims.

         Section 495 of the Michigan Business Corporations Act authorized Rockwell to seek such an appointment. See M.C.L. § 450.1495 (“Section 495”). In relevant part, Section 495 provides that when a corporation receives a shareholder demand letter, it may file a motion asking a court to appoint a “panel of [one] or more disinterested persons” to investigate the claims asserted in the demand letter and to determine whether “the maintenance of [a] derivative proceeding is … in the best interests of the corporation.” M.C.L. § 450.1495(2)(c). If a court later finds that the disinterested person has made “a determination in good faith after conducting a reasonable investigation upon which its conclusions are based that the maintenance of [a] derivative proceeding is not in the best interest of the corporation, ” then the court “shall dismiss” any “derivative proceeding” asserting the claims raised in the demand letter. M.C.L. § 450.1495(1). The statute assigns to a plaintiff-shareholder the “burden of proving” that that the court-appointed disinterested person's investigation was not reasonable and/or that his determination was not made in good faith. Id.

         Rockwell concluded that Wienner would be an appropriate “disinterested person” to conduct a Section 495 investigation into the claims asserted in the Demand Letter. Wienner is a graduate of Harvard College and the University of Michigan Law School. (See ECF #1 at 59, Pg. ID 59.) He has practiced law as a commercial litigator in the Detroit area for nearly 40 years. (See id.) He began his career with the Dykema law firm in 1978. (See id.) He became a partner, and later hiring partner, at Dykema, before forming the Feeney, Keller, Wienner & Bush law firm in 1992. (See id.) In 2003, he formed another law firm (Wienner & Gould, P.C.) with attorney Seth Gould (“Gould”). (See id.) Wienner has represented both plaintiffs and defendants in securities actions, and he was named a “2015 Best Lawyer” by the magazine U.S. News. (See id.)

         In early February 2015, Dykema contacted Wienner on Rockwell's behalf and asked him if he would be interested in serving as the court-appointed disinterested person. (See Wienner Dep. at 12-13, ECF #32-1 at 5, Pg. ID 800.) After Dykema explained the general nature of the claims in the Demand Letter, Wienner agreed to serve as a disinterested person under Section 495. (See id.)

         Rockwell thereafter filed a petition in the OCCC formally seeking Wienner's appointment (the “Petition”). (See ECF #1 at 44-60, Pg. ID 44-60.) Rockwell captioned the Petition “In re Appointment of Disinterested Person as to Rockwell Medical, Inc.” (Id.) The Petition did not identify any party other than Rockwell, nor did it indicate that it had been served on any other party. (See id.)

         The Petition was assigned to Circuit Court Judge Wendy Potts (“Judge Potts”), one of two judges on OCCC's Business Court division. (See id.) Judge Potts has served as an OCCC Judge since 1997, was chief judge of that court from 2004-2009, and has been a member of the Business Court since 2013. See Honorable Wendy Potts Biography, available at /circuit/Pages/judges/potts-wendy-pro.aspx.

         In the Petition, Rockwell explained that it had recently received the Demand Letter, and it “request[ed] that the [c]ourt appoint S. Thomas Wienner to investigate” the claims made in the letter. (ECF #1 at 45, Pg. ID 45.) The Petition outlined Wienner's qualifications and noted that “no claim is asserted against him in the demand letter.” (Id. at 45-46, Pg. ID 45-46.) Rockwell attached three exhibits to the Petition: (1) the Demand Letter (see Id. at 50-55, Pg. ID 50-55), (2) an affidavit from Wienner in which he averred that that Rockwell was not a client of his (or his law firm) and that he had “no interest in Rockwell or the transactions put at issue” in the Demand Letter (id. at 57, Pg. ID 57), and (3) biographical information about Wienner (see Id. at 59, Pg. ID 59). Wienner's attached biography disclosed that had previously worked at Dykema (the same firm that represented Rockwell in the Petition), rose to partner at that firm, helped form the Feeney Kellet firm, and finally started his own firm. (See id.) Three weeks later, on March 6, 2015, Judge Potts entered a written order appointing Wienner “as a disinterested person pursuant to M.C.L. 540.1495(2)(c).” (Id. at 61, Pg. ID 61.)


         Wienner commenced his investigation shortly after his appointment. Wienner spent “in the neighborhood of 40 [to] 50 hours” investigating the claims in the Demand Letter. (Wienner Dep. at 14, ECF #32-1 at 6, Pg. ID 801.) Among other things, Wienner:

. Read and “[c]arefully considered” the claims made in the Demand Letter, the reasoning and support for those claims, and the case law cited in the Demand Letter. (Id. at 52-53, 126, ECF #32-1 at 15, 34, Pg. ID 810, 829);
. Conducted legal research into the nature of the legal claims raised in the Demand Letter, and reviewed additional research that Gould conducted. (See Id. at 15-17, 51, ECF #32-1 at 6, 15, Pg. ID 801, 810); . Reviewed “many analyses” of Rockwell's stock price both before and after the announcement of the Baxter transaction. (Id. at 118, ECF #32-1 at 32, Pg. ID 827);
. Reviewed documents related to the Baxter transaction and to the Compensation Committee's decision to grant the Option Awards, including the Plan, the 2014 Proxy Statement, e-mails, and minutes of meetings of the Board and the Compensation Committee. (See Id. at 44-49, ECF #32-1 at 13-14, Pg. ID 808-09);
. Interviewed everyone at Rockwell who participated in (1) the negotiation of the Baxter transaction and the decision to approve that transaction and (2) the granting of the Option Awards. He interviewed Chioini and Klema (Rockwell's Vice President and Chief Financial Officer) in person, and he interviewed the three outside directors and members of the Compensation Committee - Bagley, Boyd, and Holt - by phone. (See Id. at 49, ECF #32-1 at 14, Pg. ID 809); and
. Asked each of the individuals he interviewed for documents and/or e-mails related to the issues raised in the ...

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