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George Assad, Derivatively On Behalf of Pico Holdings, Inc. v. John R. Hart; Ronald Langley; Robert G. Deuster; Richard D. Ruppert

January 6, 2012

GEORGE ASSAD, DERIVATIVELY ON BEHALF OF PICO HOLDINGS, INC. PLAINTIFF,
v.
JOHN R. HART; RONALD LANGLEY; ROBERT G. DEUSTER; RICHARD D. RUPPERT; JULIE H. SULLIVAN; KRISTINA M. LESLIE; CARLOS C. CAMPBELL; KENNETH J. SLEPICKA; DOES 1-12, INCLUSIVE, DEFENDANTS,
AND
PICO HOLDINGS, INC., NOMINAL PARTY.



The opinion of the court was delivered by: Hayes, Judge:

ORDER

The matters before the Court are the Motion to Dismiss filed by Defendants John R. Hart, Ronald Langley, Ronald G. Deuster, Richard D. Ruppert, Julie H. Sullivan, Kristina M. Leslie, Carlos C. Campbell, and Kenneth J. Slepicka (ECF No. 6) and the Motion to Remand to State Court filed by Plaintiff George Assad, suing derivatively on behalf of PICO Holding, Inc. (ECF No. 7).

I. Background

On August 26, 2011, Plaintiff Assad initiated this shareholder derivative action by filing a Complaint in the Superior Court of the State of California for the County of San Diego, where it was assigned case number 37-2011-00096962-CU-BT-CTL. (ECF No. 1-4 at 7). On September 30, 2011, Defendants filed a Notice of Removal, removing the case to this Court. (ECF No. 1). Defendants assert that the Court has original jurisdiction over the case pursuant to 28 U.S.C. § 1331 because allegations regarding the negative say on pay vote in the Complaint raises "a substantial and novel federal question." Id. at 4.

On October 7, 2011, Defendants filed a Motion to Dismiss. (ECF No. 6). Plaintiff filed an Opposition. (ECF No. 14). Defendants filed a Reply. (ECF No. 16).

On October 13, 2011, Plaintiff filed a Motion to Remand to State Court. (ECF No. 7). Defendants filed an Opposition. (ECF No. 15). Plaintiff filed a Reply. (ECF No. 17).

II. Allegations of the Complaint

Plaintiff George Assad is a shareholder of PICO Holdings, Inc. ("PICO"). (ECF No. 1-1 at ¶ 18). PICO is a California corporation located in La Jolla, CA. Id. at ¶ 19. PICO "engages in water resource and water storage, real estate insurance, and agribusiness businesses." Id. at ¶ 36. Defendants Hart, Langley, Deuster, Ruppert, Sullivan, Leslie, Campbell, and Slepicka serve on the board of directors for PICO. Id. at ¶¶ 20-27.

PICO maintains a "pay-for-performance" policy that "rewards executive[s] for achieving a superior return ...." Id. at ¶ 5. On April 2, 2011, PICO filed a proxy statement in which the board "represented that the intent of its compensation policy was to align shareholder and executive interests." Id. In 2010, PICO's stock performance "lagged the Dow by nearly 14%" and the amount of free cash flow per share decreased. Id. at ¶ 7. "In direct violation of their publicly stated pay for performance policy," the board increased executive salaries from $2.4 million in 2009 to nearly $14.3 million in 2010. Id. "This was pay for under performance, in direct violation of the board's purported pay for performance policy and its own public statements ...." Id. "The directors on the board breached their fiduciary duties by materially increasing 2010 executive compensation in the wake of substantial diminution in shareholder value after claiming to adhere to a strict pay-for-performance policy, which purportedly hinged upon delivering 'superior return' to shareholders ...." Id. at ¶ 54.

On May 13, 2011, sixty-one percent of shareholders "rejected the Board's senior officer compensation recommendation" in a "say on pay" vote conducted pursuant to the provisions of Dodd-Frank Wall Street Reform Act. Id. at ¶¶ 10, 12. "The inference that the board breached its fiduciary duties is supported by the fact that: (a) a majority of the company's stockholders voted that 2010 executive compensation was not in their best interests; and (b) the board has yet to respond to the majority will of its stockholders ...." Id. at ¶¶ 12, 54.

Plaintiff asserts four claims against Defendants as follows: (1) breach of fiduciary duty in connection with the issuance of false and misleading statements; (2) breach of fiduciary duty in connection with the board's compensation practices; (3) breach of the fiduciary duty in connection with the failure to respond to the negative say on pay vote; and (4) unjust enrichment.

Plaintiff's first claim for breach of fiduciary duty in connection with the issuance of false and misleading statements alleges that Defendants "breached their fiduciary duties of loyalty, good faith, candor and independence owed to PICO and its shareholders, and failed to disclose material information and/or made material misrepresentations... regarding PICO's 2010 executive compensation scheme." Id. at ¶ 75. Defendants "conceal[ed] the fact that the company was overpaying its directors, officers and employees via compensation plans premised on an illusory 'pay for performance' executive compensation scheme ...." Id. at ¶ 79.

Plaintiff's second claim for breach of fiduciary duty in connection with the board's compensation practices alleges that Defendants "breached their fiduciary duties ... by failing to adhere to the Company's purported pay-for-performance policy." Id. at ¶ 85. The policy was to "'reward executive[s] for achieving a superior return' for stockholders and to align shareholder and executive interests[;]" however, the board increased executive compensation as the company's stock value decreased. Id.

Plaintiff's third claim for breach of the fiduciary duty in connection with the failure to respond to the negative say on pay vote alleges that Defendants breached their fiduciary duties "by failing to amend or alter 2010 executive compensation (or even issue a response) in connection with the negative say on pay vote." Id. at ΒΆ 92. "[D]espite having their executive compensation program rejected by 61% of ...


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