Here's the Canopy Group/Ray and Lewena Noorda as Trustees of the Noorda Family Trust's complaint against Ralph Yarro, Darcy G. Mott and Brent D. Christensen. It's both stunning and sad at the same time.
What the Noordas and Canopy are accusing them of doing is, in plain English, gaining their trust and confidence and then taking advantage of it, writing up self-dealing corporate equity plans and shareholder agreements and bonus plans, and then handing themselves more than the plans and agreements even allowed. They are accused of taking advantage of some decent folks who got old and had a lot of money. It was a honey pot that no one was watching closely, except for the three defendants, who are accused of dipping into it over and over and over.
I wish to stress that this is a complaint, not a decision by a court, so nothing is proven at this point. For perspective, think back to when SCO filed their complaint against IBM. A lot of people thought it was true or partly true. Nothing is true until it is proven in a court of law. The facts in the complaint should not be regarded as true until proved, since the plaintiffs generally have the burden of proof, the defendants have not answered with their version of the facts and any counterclaims, and the court has not yet received any evidence.
But at the same time, the allegations of the complaint are what the plaintiffs are alleging that they will prove, so the complaint tells the story line of the situation from the plaintiffs' point of view. The story told by this complaint is fascinating and compelling. So I'll try to summarize it, but please keep in mind that this is all I'm doing or can do. I'm just paraphrasing and explaining their allegations.
What stands out the most, however, to me, are two things: (1) that they are accused of taking a big bite out of the money won from the lawsuit Caldera, Inc. successfully launched against Microsoft, the DR DOS settlement. If you, like me, always wondered where that money went, outside of the portion Novell was allotted, now we begin to find out; and (2) is more complex. Let's take it a step at a time. It's an ugly story alleging unjust enrichment and playing around with corporate books to make it happen.
What they are specifically accused of, in the umbrella language of paragraph 18 is this:
As set forth more fully below, Yarro, aided and abetted by Christensen and Mott, took 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.
First, the Noordas are the trustees of The Noorda Family Trust. In turn, the Trust is the majority shareholder of Canopy Group. So Noordas control the majority of the shares in the closely held company. There are three members on the Board of Directors, the two Noordas and Ralph Yarro. The Trust was set up in 1980. Yarro also served as President and CEO of Canopy from 1998 to December 17, 2004. He was first hired in 1995. Ray Noorda, according to the complaint, hasn't participated in day-to-day management of Canopy since at least 1998. Yarro used to go by their home, it says, to discuss things with them, and they trusted him.
There are two principal beneficiaries of the Noorda Trust, Angel Partners, Inc. and The Worth of a Soul, both Utah non-profits. Angel Partners, the complaint tells us, "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." Worth of a Soul, which is set up just to give to charities, gets the rest of the considerable assets. The Noordas are in their 80s. If you were working for Canopy, would you be worried about the longevity of your job? What might happen on their death?
The thing about closely held corporations is, there isn't a lot of oversight, not the way there is with a large corporation with open shareholder meetings, for example. So the role of CFO and inhouse lawyer is a significant one. That's who you would normally rely on to let you know if something was going wrong. Darcy Mott was hired by Canopy in 1999 and served as VP-Finance, CFO and Treasurer. Brent D. Christensen was hired in 2001 and served "most recently as Canopy's VP President-Legal, Corporate Counsel and Assistant Secretary."
What distinguishes a closely held corporation from a regular one is that it's usually a small group, often family members or close friends. Actually, most corporations that are not large, publicly held corporations used to be of that variety. They could have been partnerships, but chose a corporate form for certain benefits that flow from that structure. Nowadays, most would probably set themselves up as LLCs instead. For one thing there is less oversight. Canopy Group didn't choose to become an LLC, so certain state laws regarding corporations apply. Here's an explanation from an old texbook of mine:
"A significant characteristic of the close corporation is that the shareholders actively participate in the management of the business. Thus, unlike a large, publicly-held corporation, there is a mixture of management and ownership in the close corporation and this unique relationship between the shareholders usually results in a guarded interest in maintaining ownership control through internal shareholder agreements and restrictions on the transfer of equity securities."
That means that if, for example, two or three friends set up a corporation, they have an interest in making sure that none of them can sell or will their interest to an outsider that the others don't want to be in business with. If you followed the Craig's List story, you saw what happens if you don't make such arrangements. So, normally, it's prudent to set up a shareholders' agreement that spells out what happens if one of you goes bankrupt or dies or goes bonkers.
Most states treat both kinds of corporations the same, and that is one really annoying thing about them, because if you are a husband and wife and you incorporate, you still have to have annual meetings and write it all down in the corporate records. If you fail to do that, if someone sues you, and the judge sees you acted like humans instead of a corporation, you can lose your corporate status and the benefits that come from it, like limited liability.
I used to do incorporations, setting up the corporate kit and writing up shareholder agreements, and the thing about laws regarding corporations is, certain things can't be done unless the correct officers sign off on it. Nothing that matters can be done without voting to do it and recording it and having at least two officers sign the corporate document. Important things must be approved by the Board of Directors. The main corporate officers are the President, one or more Vice Presidents, the Treasurer, and the Secretary. Unless there is only one person in the corporation, you can't have one person holding all the functions, and if there are only two people in the corporation, the same person can't be President and Secretary, because that's too much power in one person. The Secretary isn't like yours, who types up stuff. It's the person who signs most of the corporate documents and is one officer who signs the shares. So if the President and the Secretary go bad together, they can sign off on plenty.
Yarro was both President and a Director and Mott was Treasurer (as in has authority to sign the checks) and Christensen was Assistant Secretary. The complaint doesn't say what Noordas' positions were, but we know they were officers as well as on the Board, because the complaint says they were not compensated lavishly, Mrs. Noorda not at all. So just to imagine for a moment, let's imagine he is Secretary. If he isn't around, the Assistant Secretary signs corporate documents, normally. So you have in such a picture the three you need to do anything you please, if it is set up that shareholders' voting quorum is such that their votes are enough to prevail. I'm not saying that is what happened, but I'm just explaining how it works in the state I worked in then, and I'm imagining how it could be, so as to explain the complaint.
Corporations are not supposed to be serving any individual's personal agenda, only the interests of the corporation, so there are checks and balances in place by law. One reason for that is that you get certain tax treatment as a corporation and you have certain immunities from lawsuits you don't get as an individual. Folks can normally only sue you and tap into the corporate assets, as opposed to your personal home or car or bank account. The benefits come with oversight, however. Part of that oversight is the requirement that certain officers must sign off on any important corporate move. The Articles of Incorporation normally spell out who runs the thing, usually the Board of Directors, and who gets to vote and how many votes win, and also it accurately describes the equity shares, who has how many of what kind or class, and what par value is. That value is also in the shareholders' agreement, and normally there is a method to decide every year or so how to figure out the value of the shares. Normally, you can't sell for less than par value. And you can't just hand out shares. There has to be something given in return, money, property or services.
You have to have common stock, but there can be a number of other classes, too, like nonvoting stock, or shares with special rights, and in the Articles, it normally also spells out whether and how the Board can set up other classes of stock, and whether the shareholders need to vote to approve this or that.
I am sure by now you have seen that there is lots of room for self-dealing, if there were no statutory oversight, and that's why states have such laws. But the thing is, unless someone inside the corporation complains, who would know what is going on? There is no one else to say, What *are* you doing? Unless someone sues you, and then all your corporate documents and how you set yourself up become public, or the IRS takes an interest in you, things can go bad for years before anyone sees what is happening, other than the insiders. And in this case, the complaint tells us, as the Noordas aged, Mr. Noorda didn't stay involved in the day-to-day business of Canopy Group and the complaint indicates that Mrs. Noorda wasn't the businessperson he was, so if she was around, it would have been easier to pull a fast one without her realizing it. When you read the corporate lingo of the documents in this complaint, a normal human wouldn't know what it was saying and would naturally rely on the inhouse lawyer's explanation. When you stop and think that there are only three members on the Board, it sets the stage for what they are now accusing Yarro of doing.
And what they are accusing him of doing is arranging the corporation in such a way that he got unjustly enriched. He and the other two defendants. There was a lot of money invested by the Trust into Canopy. It was set up in 1992, and over time, the Trust invested, they say, $160 million. Canopy has been profitable since 1999, according to the complaint, "a result of Canopy's liquidation of investments in certain Portfolio Companies . . . and a settled antitrust lawsuit brought by the Portfolio Company Caldera, Inc. . . . 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."
How else did they unjustly enrich themselves according to the complaint? In 1998, without Board review or approval, Yarro, it says, implemented an Incentive Bonus Plan Agreement to reward certain employees, such as himself. They believe Christensen drafted the plan or participated in drafting it. Yarro signed it "in his individual capacity and purportedly on behalf of Canopy." Remember that 1998 is the year Noorda stopped being involved in day-to-day management. What triggered a bonus according to the Bonus Plan? Any time a company on a list attached as an exhibit, presumably the portfolio companies, "is sold or the investment of [Canopy] in any of the Included Companies is exchanged for cash and/or readily tradable marketable securities."
The bonus was to be 5% of the total sales proceeds on the sale or exchange, less total amount of investment and debt, and the bonus was allocated "based on the Board's determination of the Employee's involvement, effort and contributon to the success of the Included Company", based on recommendation by the President (Yarro) and subject to review by the Board. So he is accused of setting up a plan, signing it alone on behalf of the corporation, which gave him whatever he allocated to himself, subject to review by essentially himself, with the others advising the Noordas that it was a good idea.
Then there is the "Early Incentive Plan Payments" accusation. In 1999, just after Mott was hired, Yarro and Mott, without Board approval, it says, had Canopy distribute 5% of the net proceeds of a Triggering Event, $2.1 million, related to the Canopy company, Vinca. Five employees are accused of pocketing the money, including Yarro, who they say got $1.47 million, and Mott, who was just hired, but nonetheless was deemed worthy of $42,000.
On the Microsoft settlement money, settled in 1999 or early 2000, it says, Yarro and Mott did a similar distribution. Yarro and Mott again were among the employees so blessed, although the settlement wasn't a Triggering Event under the definition of the Bonus Plan. This time, Yarro took $6.75 out of $7.6 million, the complaint alleges. Then in 2000, there was another Triggering Event related to KeyLabs. This time, instead of 5%, it says the pool was 10%, or $3.4 million, of which Yarro got $2.9 million and Mott $205,320. Other triggering events involved Utah Health Informatics, Traxxes, and Altiris, several times. Lots of other employees benefited from these events, in addition to the usuals.
There's more, which you can read for yourselves, about the equity compensation plan and the recapitalization scheme. This required amending the Articles of Incorporation, so Noordas had to agree to this. Did they not read the fine print? It said that upon liquidation, dissolution or winding up of Canopy, "the holders of Class A Common Stock shall be entitled to equal distributions of the net assets of the Corporation." No doubt Angel Partners and Worth of a Soul will be interested in this clause.
Next, in 2000, they set up a stock option plan. Again, the Noordas were persuaded it was in Canopy's interests to do it, based on Yarro and the other two, who advised them to do it. The complaint says that the plan "provides for excessive compensation and, on its face, is unfair to Canopy and the Trust." It was supposedly set up to provide employees with an incentive to stay with the company, but it allowed for options that vested immediately. Hmm.
That's just for starters. It also allowed for issuance of options below the fair market value, for options that don't terminate until 2020, and with a tax protection payment clause which required Canopy to pay a cash bonus to cover the optionee's taxes on all the bounty he got from the exercise of the options.
If you were terminated except for cause, disability or death, you retained your options for several months and could still exercise them, and you aren't considered terminated as long as you remain in "service" to Canopy or any subsidiary as employee or on the board or even as a consultant, so I guess Yarro, being still on the board of SCO, assuming it is a subsidiary company, would mean he is still in service to Canopy under this plan, or would be if he hadn't been terminated for cause. That might explain the motivation to bring a lawsuit alleging unfair or improper termination, although I am just guessing there. There could be many other motives, including thinking that it was unfair. But the point is, there is a lot at stake here.
The day the equity plan was adopted, the complaint says, Yarro executed a Stock Option Agreement giving himself a fully-vested 20-year option to purchase 10,000 Class A voting shares at $5 and another one giving himself a 20-year option to buy 9,990,000 Class B shares at $5 per share. The net value per share at the time was $19.27. Nice work, if you can get it.
"In other words," the complaint says, "Yarro caused himself 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 $14.27 million to Yarro." Mott, it says, was given similar options worth $6.14 million. Some other employees got some options too. How they must be feeling now. I think it is vital to point out that although other employees are listed as receiving options, they are not accused of any impropriety in this complaint. If you as an employee receive a bonus from your boss, you probably assume it's been approved, so at this point they are accused of absolutely nothing.
Then there is the Shareholder Agreement, which specified that "for so long as they are willing and able to serve as directors, the Noordas and Yarro shall be elected directors of Canopy." I have never seen a clause like that. Maybe others have. But that is a bit like an "election" in Stalinist Russia. If a client asked for a clause like that, the first thing I'd do is research the consequences, if any, of such an election.
Well, you get the idea. The summary of "excessive cash compensation taken by defendants" is found in paragraph 59. It's $19,535,602 for Yarro alone, and that's not counting the equity plan or incentive plan monies or any of the triggering events bonuses or base salary, which was around $300,000 annually. The Trust never was paid a dividend, and Mrs. Noorda got no salary and Ray got between $40,000 - $60,000.
In 2002, 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." I guess you can imagine how useful that can be. And I'm only up to page 18 of the 30 pages in the complaint, but I hope I have explained enough that you catch the drift. There are 11 causes of action:
1. Breach of Fiduciary Duty of Loyalty (all three for
implementing excessive and unfair incentive and equity compensation packages for themselves and Canopy's other employees and ceding undue control of Canopy to its employees)
2. Aiding and Abetting Breach of Fiduciary Duty - (Mott and Christensen)
3. Breach of Fiduciary Duty (Christensen, as Canopy's attorney had duty of undivided loyalty)
4. Removal of Yarro as Director Pursuant to Utah Code Ann. Section 16-10a-809 -
(Yarro -- "fraudulent or dishonest conduct or gross abuse of authority or discretion with respect to the corporation")
5. Constructive Trust -
(acquired title to or possession of Canopy's property, including case, stock, and options, with actual and/or constructive knowledge that such acquisition constituted a breach of their fiduciary duties to Canopy -- unjustly enriched and have duty to convey it back to Canopy)
6. Conversion - (asking for punitive damages)
7. Breach of Contract - (Incentive Plan -
Paid themselves incentive bonuses derived from 1) the Caldera lawsuit proceeds and 2) bonus pools totaling more than 5% of any Triggering Event, as that term is defined in the Incentive Plan; ask for damages in an amount to be proven at trial)
8. Breach of Covenant of Good Faith and Fair Dealing - (Incentive Plan --
if valid and enforceable contract, breached by implementing excessive and unfair incentive compensation payments and equity compensation packages for themselves and Canopy's other employees, ceding undue control of Canopy to its employees, and otherwise breaching their fiduciary duty of loyalty to Canopy)
9. Breach of Covenant of Good Faith and Fair Dealing - (Option Agreements --
to the extent valid and enforceable, implemented excessive and unfair incentive and equity compensation packages for themselves and Canopy's other employees, ceding undue control of Canopy to its employees -- material breaches of their obligations under the option agreements -- ask for termination and rescission of the Defendants' option agreements and an award of damages in an amount to be proven at trial)
10. Breach of Contract - (Shareholder Agreement --
to extent valid and enforceable, breached by implementing excessive and unfair incentive and equity compensation packages for themselves and Canopy's other employees, ceding undue control of Canopy to its employees and otherwise breaching their fiduciary duty of loyalty to Plaintiffs; ask to avoid, terminate and rescind their purported rights under the shareholder agreement and an award of damages at an amount to be determined at trial)
11. Breach of Covenant of Good Faith and Fair Dealing - (Shareholder Agreement --
to extent valid and enforceable, breached by implementing excessive and unfair incentive and equity compensation packages for themselves and Canopy's other employees, ceding undue control of Canopy to its employees, and otherwise breaching their fiduciary duty of loyalty- material breaches; ask to avoid, terminate and rescind their purported rights and to an award of damages in amount to be determined at trial)
The Noordas Family Trust and Canopy Group would like their money back. They'd like damages, actual, special and consequential, and punitive damages for one cause of action, and they'd like Yarro removed as a director. They also want legal fees and costs. They ask for a judgment declaring the stock option agreements are null and void, that all stock and cash compensation acquired by them by means of the Equity Plan be returned to Canopy, and that all options acquired are terminated and rescinded;
judgment that all cash, stock, options and other property is being held in constructive trust for Canopy and that they are under an equitable duty to return and convey such property to Canopy;
order declaring all defendants' purported rights under the Shareholder Agreement are void, terminated and rescinded. In short, they wish it never happened and they'd like to be made whole.
Again, I can't stress enough how important it is to wait to get a complete picture, after the counterclaims, if any, and affirmative defenses are in and evidence is presented. At this point, we've heard one side. It does, however, make a girl wonder about the motivation for the SCO lawsuit. I can't help but notice how much money Yarro is alleged to have pocketed from the Microsoft settlement. I make no allegations, naturally, but how can one not at least notice? As for the rest, there is the puzzlement I feel over how Ray Noorda could let this happen without noticing, and I expect that issue to be raised in some way. The complaint says he wasn't around day-to-day, but by being a trustee still, they are more or less stating that Ray Noorda is still competent. For that matter, if he is competent, he had a fiduciary duty to do his job as a Director, just as Yarro did, so I'm not clear how he could just not be involved and not hire someone to be the Director for him, if he felt he couldn't do the job. Maybe he felt enough trust in Yarro that he thought he was getting accurate and reliable information from him and the others and that it was sufficient to do his job from afar. If the Noordas viewed him kind of like a son, I am sure any parent can imagine how things could reach an extreme point before a parent would believe bad of their child.
No matter how you look at it, though, it's a really sad story, and my heart is touched to think of the Noordas, if the allegations end up being proved true, suffering what they must view as a betrayal by someone they thought was a trustworthy friend. They must have trusted Yarro deeply to give him so much control with so little oversight. On the other hand, my mom, who is old now, thinks the cleaning woman stole her glasses, if you know what I mean. So, let's wait and see what happens, without leaping to firm conclusions just yet. It's natural, given the feelings about the SCO case, to assume negative things are true, but our entire legal system is built on the idea that a man has the opportunity to present evidence to prove his innocence, if he can.
It will be fascinating to watch this unfold, unless it settles rapidly, which is what I kind of expect. Nobody wants something like this aired in public, and frankly, I found it a little painful to even explain it.