STANLEY J. PRESTON (4119)
MICHAEL R. CARLSTON (0577)
MARALYN M. REGER (8468)
SNOW, CHRISTENSEN & MARTINEAU
Attorneys for Plaintiffs
RALPH J. YARRO III, an individual,
DARCY G. MOTT, an individual, and
BRENT D. CHRISTENSEN, an individual,
Civil No. 050400205
Honorable Anthony W. Schofield, Div. 8
BRENT D. CHRISTENSEN, being first duly sworn, upon oath, deposes and says:
1. I am over twenty-one years of age and have personal knowledge of the facts stated below.
2. Prior to joining The Canopy Group, Inc., ("Canopy") in 2001, I was in private law practice and had represented Canopy as outside legal counsel on certain matters. I agreed to employment with Canopy in part on assurances that my compensation would include the opportunity to participate in the Canopy 2000 Recapitalization Plan and Canopy Stock Option Plan.
3. I have served as Canopy's Vice President, Corporate Counsel and Assistant Secretary since 2001.
4. Under the Canopy 2000 Recapitalization Plan and the Canopy Stock Option Plan, I have been granted options on both Class A Voting Common Stock and Class B Non-Voting Common Stock. I have exercised all of my Class A Voting Common Stock options, to the extents they have vested.
5. I was not the architect or primary drafter of the Canopy 2000 Recapitalization Plan or the Canopy Stock Option Plan. However, at Canopy's request I and other members of our law firm did participate in their preparation. In addition, all of the documents associated with the Canopy 2000 Recapitalization Plan and Canopy Stock Option Plan were reviewed and revised by Mr. and Mrs. Noordas' personal attorneys and tax advisors.
6. On December 17, 2004, I was asked to meet some men in a conference room at Canopy. When I went to the room, David Watkiss, an attorney from Ballard Spahr Andrews and Ingersoll, LLP, handed me a copy of a purported resolution of Canopy's Board and certain other documentation at which time he advised me that I was being terminated for cause. I then asked on what grounds I was being terminated for cause. I received no response. At that time, I was also advised that if I did not sign the proposed settlement agreement that I would be named in a lawsuit the following Monday and they proceeded to hand me a copy of the draft complaint. Shortly thereafter, I was escorted from Canopy's building.
SUBSCRIBED AND SWORN TO before me this 28th day of January, 2005.
6. Defendant Brent D. Christensen ("Christensen") is an individual residing in Salt Lake County, Utah. Hired by Canopy on January 16, 2001, Christensen served most recently as Canopy's Vice President-Legal, Corporate Counsel and Assistant Secretary until his termination for cause on December 17, 2004. Prior to his employment with Canopy, Christensen served as Canopy's outside legal counsel. . . .
19. On September 30, 1998, without Board review or approval, Yarro implemented an Incentive Bonus Plan Agreement for Canopy "to reward certain key employees of [Canopy]," including Yarro (the "Incentive Plan"). On information and belief, Christensen drafted or participated in drafting the Incentive Plan, and Yarro executed it in his individual capacity and purportedly on behalf of Canopy.
20. The Incentive Plan contains the following significant provisions:
(a) "The Plan shall be administered by the Board." (Incentive Plan, ¶ 3.)
(b) Bonuses for eligible employees are determined "at such time as any of the Included Companies [set forth on Exhibit B, which is subject to amendment by the Board at any time] is sold or the investment of [Canopy] in any of the Included Companies is exchanged for cash and/or readily tradable marketable securities (the 'Triggering Event")." (Id. ¶ 5.)
(c) "The total amount to be paid as a bonus . . . upon each Triggering Event shall be five percent (5%) of the total amount of sales proceeds on the sale or exchange of the Included Company, less the total amount of investment plus debt that NFT and/or any affiliate of NFT has in the Included Company." (Id.)
(d) The bonus amount is to be allocated among employees "based on the Board's determination of the Employee's involvement, effort and contribution to the success of the lncluded Company for which the sale or exchange has occurred," with an initial recommendation to be made by Canopy's President, subject to review, approval and modification by Canopy's Board of Directors. (Id. ¶ 6.) . . .
26. Commencing in 2000, Defendants advised the Noordas to adopt an equity compensation plan that would provide employees an opportunity to acquire an equity interest in Canopy as a purported incentive to remain in Canopy's service. To do so, Defendants advised, required a significant modification of Canopy's capitalization structure.
27. Based on Defendants' advice, on November 3, 2000, the Noordas voted the Trust's shares in favor of Canopy's adoption of Amended and Restated Articles of Incorporation authorizing Canopy to issue up to 25,000,000 shares of common stock, with 25,000 shares of such stock designated as Class A Common Stock and 24,975,000 shares designated as Class B Common Stock (the "Amended Articles"). In connection with Defendants' recapitalization scheme, the Trust's 10,000,000 shares of stock -- Canopy's only outstanding shares at the time -- were converted into 10,000 shares of Class A Common Stock and 9,990,000 Shares of Class B Common Stock.
28. On information and belief, Christensen, in his capacity as legal counsel to Canopy, prepared documentation necessary to effectuate the recapitalization, including all necessary consent resolutions, the Articles of Restatement of the Articles of Incorporation of The Canopy Group, and the Amended Articles. At the time, the Noordas' trust and confidence in Defendants led them to believe the recapitalization plan was in Canopy's and the Trust's best interests.
29. Pursuant to Canopy's Amended Articles:
(a) Class A shares have one vote on each matter to be voted on by Canopy's shareholders. (Amended Articles at 1.)
(b) Upon liquidation, dissolution or winding up of Canopy, whether voluntary or involuntary, "the holders of Class A Common Stock shall be entitled to equal distributions of the net assets of the Corporation . . . (Id. at 2.)
(c) The relative rights, privileges and limitations of the Class A shares and Class B shares "shall be in all respects identical, share for share, except that the voting power for the election of directors and other matters coming to a vote before the shareholders of the corporation, shall be vested exclusively" in the holders of the Class A shares until the earlier of October 31, 2020 or the occurrence of a "Liquidation Event," defined to include "any liquidation, dissolution or winding up of the Corporation." (Id.)
30. On November 7, 2000, immediately after the recapitalization and based on Defendants' advice, Canopy adopted an equity compensation plan entitled The Canopy Group, Inc. 2000 Stock Option Plan (the "Equity Plan"). Under the Equity Plan, employees became eligible to receive "twenty year non-qualified stock options to purchases shares of [Canopy's] Class A Voting Common Stock and Class B Nonvoting Common Stock."
31. Christensen, in his capacity as legal counsel to Canopy, prepared and filed documentation relating to the Equity Plan and, along with Yarro and Mott, advised the Noordas that its adoption was in Canopy's best interests. At the time, the Noordas' trust and confidence in Defendants, particularly led them to believe the Equity Plan was in Canopy's best interests.
32. The Equity Plan provides for excessive compensation and, on its face, is unfair to Canopy and the Trust. The most egregious aspects of the plan and the options issued under it are as follows:
(a) Despite the plan's purported purpose to provide employees with an incentive to remain in service, it allows for options that vest immediately. (Equity Plan, Art. 2(I)(B).)
(b) It provides for the issuance of options that do not terminate until October 31, 2020. (Id.)
(c) It provides for issuance of options with discounted exercise prices, i.e., exercise prices "less than the Fair Market Value per share on the Option grant date . . . . (Id. at Art. 2(I)(a)(i).)
(d) It provides for issuance of Class A options with a tax protection payment clause that requires Canopy to pay a cash bonus to the Optionee (as that term is defined in the Equity Plan) "in approximately the amount of the state and federal income taxes payable with respect to the ordinary taxable compensation income deemed received as a result of the exercise of such option plus the receipt of the tax protection payment itself." (Id. at Art. 2(II)(A).)
(e) Terminated employees are permitted an excessive period of time to exercise their options. For example, if an Optionee ceases to remain in "Service" (broadly defined to include service to Canopy or any subsidiary "in the capacity of an Employee, a non-employee member of the board of directors or a consultant") for any reason other than cause, disability or death, the Optionee shall have "a period beginning on the date of cessation of Service and ending on the later of (1) the date that is three (3) months following the date of such cessation of Service, or (2) the last day of the next February following the date of such cessation of Service, during which [he or she] may exercise each outstanding vested Option held by such Optionee." (Id. at Art. 2(I)(C)(i).) Even if an Optionee is terminated for cause, such Optionee has one month following the date of cessation of Service services to exercise each outstanding vested option held by Optionee. (Id.)
(f) Until Class B shares are registered and a public market exists for them, "each Class B option shall include the right to elect a 'Cashless Exercise' with respect to Options whose termination date is accelerated by reason of the Optionee's cessation of Service for any reason other than for Cause." A Cashless Exercise may only be made in the month of February of each year. An Optionee who elects a Cashless Exercise pays the options exercise price and all applicable withholding taxes by receiving a reduced number of shares. (Id. at Art. 2(I)(H).)
Each option includes a limited resale right under which an Optionee may elect to sell to Canopy any shares of common stock purchased by the exercise of the option or any previously exercised option. This resale right can be exercised at any time during the month of February through the year 2020, but terminates upon the Optionee's termination for cause, and terminates the February following termination for any reason other than cause. The resale right for each calendar year may be exercised "with respect to a number of shares equal to 5% of the sum of (1) the total number of shares of Common Stock that the Optionee has previously purchased by the exercise of Options; and (2) the total number of shares of Common Stock then subject to outstanding options held by the Optionee; provided, however, that the Optionee may also exercise the Resale Right with respect to any shares of Common Stock for which the Optionee had, but did not exercise, a Resale Right in a prior calendar year." (Id. at Art. 2(II)(B).) . . .
37. Christensen, in his capacity as legal counsel to Canopy, participated in drafting the Shareholder Agreement and, along with Yarro and Mott, advised that its adoption was in Canopy's and the Trust's best interests. At the time, the Noordas' trust and confidence in Defendants, particularly Yarro, led them to believe the Shareholder Agreement was in Canopy's and the Trust's best interests.
38. Pursuant to a Stock Purchase Agreement executed by Yarro personally and on purportedly on behalf of Canopy on November 17, 2000, Yarro exercised his Class A stock options and acquired 10,000 shares of Class A voting stock, an amount equivalent to that held by the Trust. . . .
41. On Yarro's advice, Canopy hired Christensen as its Vice President-Legal, Corporate Counsel, and Assistant Secretary and Treasurer on or about January 16, 2001.
42. At the time of Christensen's employment, Yarro and Christensen executed stock option agreements pursuant to which Christensen purportedly acquired fully-vested twenty-year options to purchase 150 Class A voting shares and 149,850 Class B shares at $10.00 per share. The $10.00 strike price was approximately $9.00 below Canopy's then net value per share of approximately $19.00, making the transaction worth approximately $1.35 million to Christensen. At the same time, Christensen acquired twenty-year options to purchase 300 Class A voting shares and 299,700 Class B shares at $18.00 per share, vesting 25% per year starting in 2002. Yarro also executed stock option agreements purporting to grant options on Class A and B shares to Canopy employee Darla Newbold, all as summarized below: Employee Number & Class - Exercise Price - Vesting
Brent Christensen - 150 Class A - $10.00 -- 100%
" - 149,850 Class B - $10.00 -- 100%
"- 300 Class A - $18.00 -- 25% starting 1/16/02
" - 299,700 Class B - $18.00 -- 25% starting 1/16/02 . . . .
The foregoing equity compensation was excessive, unfair to Canopy, and constituted waste of corporate assets. . . .
43. On or about February 28, 2002, without Board review or approval, Defendants caused Canopy to distribute 10% of the proceeds of a Triggering Event relating to the Portfolio Company Altiris, ("Altiris") to twelve Canopy employees, even though the Incentive Plan, by its own terms provides for a bonus pool equal of 5%. The bonus pool totaled approximately $1.15 million. Yarro alone received $503,317, Mott received approximately 152,000 and Christensen received $135,128.
44. On April 19, 2002, on the advice of Defendants, Canopy repriced the exercise price of all outstanding options with an exercise price of $18.00 or higher to $13.00, at a time when Canopy's net value per share was approximately $14.13. . . .
49. On or about November 21, 2002, on Defendants' advice, 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."
50. On or about December 2, 2002, without Board review or approval. Defendants caused Canopy to distribute 10% of the proceeds of another Triggering Event relating to Altiris to thirteen Canopy employees, even though the Incentive Plan, by its own terms, provided for a bonus pool of 5%. The bonus pool totaled approximately $1.03 million. Yarro alone received $516,844, Mott received $134,379, Christensen received $132,312.
51. On or about April 4, 2003, without Board review or approval, Defendants caused Canopy to distribute 10% of the proceeds of yet another Triggering Event relating to to Altiris to thirteen Canopy employees, even though the Incentive Plan, by its own terms, provided for a bonus pool of 5%. The bonus pool totaled approximately $317,246. Yarro alone received approximately $151,834, Mott received $41,242, and Christensen received $40,607.
52. On or about June 3, 2003, without Board review or approval, Defendants caused Canopy to distribute 10% of the proceeds of another Triggering Event relating to Altiris to thirteen Canopy employees, even though the Incentive Plan, by its own terms, provided for a bonus pool of 5%. This time the bonus pool totaled approximately $2.4 million. Yarro alone received approximately $1.08 million, Mott received $301,004, and Christensen received $296,373.
53. On or about August 20, 2003, without Board review or approval, Defendants caused Canopy to distribute 10% of the proceeds of another Triggering Event relating to Altiris, even though the Incentive Plan, by its own terms, provided for a bonus pool of 5%. This time the bonus pool totaled approximately $3.37 million. Yarro alone received approximately $1.58 million, Mott received $472,082, and Christensen received $446,792. . . .
56. From 2001 to the present, Christensen acquired $607,941 in compensation from Canopy by exercising options to acquire Class B shares and reselling those shares to Canopy pursuant to the resale provisions in Article 2, Section II, of the Equity Plan. . . .
61. Between 2001 and 2004, Christensen took a total of at least $1,759,370 in excessive cash compensation pursuant to the Incentive Plan and the exercise of resale rights acquired pursuant to the Equity Plan. Such amount does not include the value of options and stock improperly acquired by Christensen pursuant to the Equity Plan. Nor does it include amounts received by Christensen from Canopy as base compensation and bonuses, which totaled approximately $165,000 to $173,000 per year, or compensation received by Christensen directly from Portfolio Companies.