The opinion of the court was delivered by: Denise Cote, District Judge
This action arises from a dispute concerning a corporation's payment of a so-called "finder's fee" to its lead outside director for his role in facilitating a merger. In July 2001, L. Dennis Kozlowski ("Kozlowski"), the Chief Executive Officer of plaintiff Tyco International, Ltd. ("Tyco"), paid Tyco's director, defendant Frank E. Walsh, Jr. ("Walsh"), a $20 million fee in connection with Tyco's acquisition of CIT Group, Inc. ("CIT"). Tyco's board first became aware of the payment to Walsh in January of 2002. Tyco eventually brought suit against Walsh, alleging that he breached his fiduciary duty to the board by failing to disclose the payment. Shortly thereafter, Walsh pleaded guilty to a violation of New York's Martin Act and returned the $20 million to Tyco.
Tyco now seeks recovery of interest on the $20 million payment to Walsh and consequential and punitive damages. A bench trial was held October 12-13, 2010. This Opinion presents the Court's findings of fact and concludes that although Walsh breached his fiduciary duty to Tyco by failing to timely disclose the $20 million payment, Tyco's board implicitly ratified the payment through its public actions and statements in the period immediately following disclosure of the payment to the board.
On June 17, 2002, Tyco filed this action against Walsh, asserting claims for restitution, breach of fiduciary duty, conversion, unjust enrichment, constructive trust, and inducing breach of fiduciary duty. This case returned to this Court for trial in 2010, following the completion of proceedings before the Multi-District Litigation court.
The bench trial was conducted, without objection, in accordance with this Court's customary practices for the conduct of non-jury proceedings. On September 17, 2010, the parties submitted a Joint Pretrial Order and proposed findings of fact and conclusions of law. The parties also served affidavits containing the direct testimony of their witnesses and copies of all the exhibits and deposition testimony that they intended to offer as evidence in their case in chief at trial.
Tyco presented affidavits constituting the direct testimony of David Boies ("Boies"), a lawyer at the firm Boies Schiller & Flexner LLP ("Boies Schiller") which served as outside counsel to Tyco; Elizabeth Edwards ("Edwards"), a lawyer at the firm McGuireWoods LLP which represented Tyco in the Franklin litigation; and John Jenkins ("Jenkins"), the Vice President, Corporate Secretary, and International Counsel of Tyco.
Walsh presented affidavits constituting the direct testimony of Andrew Martin ("Martin"), a partner in the Bermuda law firm of Mello Jones & Martin; and Walsh himself.
Excerpts from the depositions of some of the testifying witnesses, as well as the following individuals, were offered and received into evidence at trial. The parties offered excerpts from the depositions of the following former Tyco directors: Michael Ashcroft ("Ashcroft"); Joshua Berman ("Berman"); Richard Bodman ("Bodman"); John Fort ("Fort"); Stephen Foss ("Foss"); Wendy Lane ("Lane"); James Pasman ("Pasman"); W. Peter Slusser ("Slusser"); Mark Swartz ("Swartz"), Tyco's former Chief Financial Officer; Kozlowski, the former President and Chief Executive Officer of Tyco and Chairman of the Board; and Joseph Welch ("Welch"). The parties also offered the depositions of former Tyco Chief Counsel Mark Belnick ("Belnick") and Tyco in-house counsel Fatemah SadeghiNejad ("Sadeghi-Nejad"), as well as the deposition of Meredith Cross ("Cross"), outside counsel to Tyco at the firm Wilmer Cutler Pickering Hale and Dorr LLP ("Wilmer Cutler"). The parties also offered the depositions of the following Tyco employees: Jackson Blackstock ("Blackstock"), a former analyst; Mark Foley ("Foley"), senior vice president of finance; Maryanne Kane ("Kane"), former Chief Communications Officer; Kevin MacKay ("MacKay"), a vice president and assistant controller; Kathy Manning ("Manning"), former senior vice president of investor relations; Jeffrey Mattfolk ("Mattfolk"), senior vice president of business development; Bradley McGee ("McGee"), a manager of business analysis; Patricia Prue ("Prue"), a senior vice president of human resources; and Michael Robinson ("Robinson"), a treasurer. The parties offered the testimony of CIT employees Albert Gamper, Jr. ("Gamper"), the former Chief Executive; and William Taylor ("Taylor"), a former controller. The parties also offered the testimony of the following auditors at PricewaterhouseCoopers: Kevin Burney ("Burney"), Dustin Minton ("Minton"), and Christa Dewire ("Dewire").
On October 4, this Court denied Tyco's motions in limine to exclude the testimony of Martin, an expert in Bermuda law, and to exclude evidence of Walsh's reliance on counsel. The Court granted in part Tyco's motion to exclude testimony related to compensation received by other Tyco directors. Also on October 4, the Court denied Walsh's motion to preclude evidence of damages associated with an investigation conducted by Boies Schiller and the Franklin litigation.
The Court also ruled on October 10 that Tyco would not be entitled to punitive damages. The adoption of Bermuda law, for the reasons described below, precludes any award of punitive damages. Following the Court's ruling, Tyco withdrew Jenkins' affidavit, as it related solely to the issue of punitive damages.
The following constitutes the Court's findings of fact and conclusions of law in this case. While many of the findings of fact appear in the next section of this Opinion, additional findings appear later in the Opinion as well.
Plaintiff Tyco is a corporation engaged in manufacturing and services. It had been a New Hampshire corporation until 1997, when it became a Bermuda corporation through a reverse merger with another corporation. In its Form 10-K filed on December 28, 2001, Tyco listed the location of its principal executive office as Bermuda. Defendant Walsh, a former investment banker, served on Tyco's board of directors from 1992 to 2002. Walsh was appointed Lead Director in January 2001. The appointment of Lead Director conferred the responsibility for helping to coordinate the agenda of board meetings, the nomination of new directors, and the board's review of the performance of the Chairman. Walsh also served on Tyco's Compensation Committee from 1997 to 2000 and its Corporate Governance and Nominating Committee in 2001.
Walsh Introduces Tyco and CIT
In late 2000, Walsh became aware that Tyco was interested in acquiring a financial services company and suggested that Tyco consider acquiring CIT. After Tyco expressed interest in CIT, Walsh arranged for a meeting between Kozlowski and Gamper, whom Walsh knew. The meeting took place at the Park Avenue Club in Florham Park, New Jersey. After the initial meeting between Kozlowski and Gamper, Kozlowski thanked Walsh for his assistance and mentioned that Walsh could receive a finder's fee for his services if the transaction were successfully consummated. The two men agreed to discuss the matter further in the event Tyco succeeded in acquiring CIT.
In 2001, two provisions of Tyco's Bye-Laws addressed the performance of special duties undertaken by directors for the benefit of Tyco. In the section of the Bye-Laws addressed to "Directors' interests," the Bye-Laws provided that "Any Director may act by himself or his firm in a professional capacity for the Company, and he or his firm shall be entitled to remuneration for professional services as if he were not a Director, provided that nothing herein contained shall authorise a Director or his firm to act as Auditor to the Company." (Emphasis supplied.) Later, in a section entitled "Remuneration of Directors," the Bye-Laws provided that The Directors may grant special remuneration to any Director who, being called upon, shall perform any special or extra services for or at the request of the Company. Such special remuneration may be made payable to such Director in addition to or in substitution for his ordinary remuneration (if any) as a Director, and may be made payable by a lump sum or by way of a salary, or commission on the dividends or profits of the Company or of any other company in which the Company is interested or other participation in any such profits or otherwise, or by any or all or partly by one and partly by another or other of those modes. (Emphasis supplied.)
Tyco's Bye-Laws also required directors to disclose conflicts of interest to the board:
A Director who to his knowledge is in any way, whether directly or indirectly, interested in a contract or arrangement or proposed contract or arrangement with the Company shall declare the nature of his interest at the meeting of the Directors at which the question of entering into the contract or arrangement is first taken into consideration, if he knows his interest then exists, or in any other case at the first meeting of the Directors after he knows that he is or has become so interested. A general notice to the Directors given by a Director to the effect that he is a member of a specified company or firm and is to be regarded as interested in any contract or arrangement which may after the date of the notice be made with such company or firm shall be sufficient declaration of interest under this Bye-Law in relation to any contract or arrangement so made; provided that no such notice shall be effective unless either it is given at a meeting of the Directors or the Director giving the same takes reasonable steps to secure that it is brought up and read at the next meeting of the Directors after it is given. (Emphasis supplied.)
Tyco's board voted on the acquisition of CIT during its March 12, 2001 meeting in Bermuda. After Kozlowski explained the terms of the proposed merger, the board unanimously ratified the transaction. Walsh was not present at the meeting.*fn1
Kozlowski did not inform the board that any compensation was owed or would be paid to Walsh.
In the Agreement and Plan of Merger for the $9.5 billion acquisition of CIT, dated March 12, 2001, Tyco represented that, with the exception of its investment bankers Lehman Brothers and Goldman, Sachs & Co., "there is no investment banker, broker, finder or other intermediary that has been retained by or is authorized to act on behalf of [Tyco] who might be entitled to any fee or commission from [Tyco] . . . in connection with the transactions contemplated by this Agreement." The Agreement was incorporated by reference and attached to the registration statement on Form S-4 that Tyco filed with the Securities and Exchange Commission ("SEC") on March 29, 2001. Walsh signed the registration statement in his capacity as a director of Tyco.
Walsh Requests and Receives $20 Million
After the closing of the CIT transaction in early June 2001, Walsh and Kozlowski again discussed Walsh receiving a fee for introducing CIT and Tyco. As they were negotiating a fee of $20 million, Kozlowski told Walsh that he hoped to avoid making any payment to Walsh over $15 million, since a payment of that size would have to be disclosed publicly. Ultimately, on July 18, Walsh submitted an invoice for $10 million for "investment banking services" rendered in connection with the CIT acquisition. The cover letter attaching the invoice was addressed to Swartz in Florida, although the invoice itself was addressed to Tyco's New York office and it was faxed to Swartz at a New York telephone number. The invoice was paid out of the Pittsburgh, Pennsylvania bank account of Tyco Acquisition Corp., a Tyco subsidiary based in Boca Raton, Florida. In a letter of July 25, addressed to Swartz in Florida although again faxed to a New York number, Walsh thanked Tyco for agreeing to contribute $10 million to a charity selected by him, and designated the Community Foundation of New Jersey ("Community Foundation") as the charity. Walsh advised the Community Foundation on its investment and distribution of the $10 million it received from Tyco. Tyco recorded the entire $20 million payment on its books as a cost related to the acquisition of CIT. It also received a receipt from the Community Foundation for use in claiming the $10 million donation as a charitable contribution.
During the negotiation of the fee in July, Kozlowski had asked Walsh not to discuss the fee with anyone other than Swartz and Kozlowski. Walsh had not mentioned his expectation of a fee during the board's discussion of the CIT transaction and he did not advise his fellow directors about it at the board meeting he attended in October. Nonetheless, at the end of the year, on December 21, 2001, Walsh filled out a Directors' and Officers' Questionnaire ("D&O Questionnaire") in connection with the preparation of proxy materials for a shareholders meeting. In the questionnaire, Walsh disclosed his receipt of the $20 million fee, stating:
In connection with the acquisition of CIT Corporation, Tyco paid me a fee of $10 million for Investment Banking Services rendered. At my request, Tyco contributed $10 million to The Community Foundation of New Jersey, a public charity, and I was given the authority to recommend to the Foundation how the funds would be disbursed to appropriate charitable causes.
Walsh forwarded the questionnaire to Swartz and advised members of Tyco's legal department that he had done so. Tyco's Form 10-K for the fiscal year ending September 30, 2001, filed with the SEC on December 28, did not disclose the $20 million payment.
January 16, 2002 Board Discussion of Tyco Payment to Walsh
Walsh's decision to disclose the $20 million payment on his D&O Questionnaire began a chain reaction of disclosures within the company that culminated in the disclosure of the payment to Tyco's board and then to the public. Before the board meeting in which the payment was disclosed, however, Kozlowski asked Walsh to return the fee. Walsh refused. Aware that at least some board members wanted him to repay the fee, Walsh consulted an attorney in advance of the Tyco board meeting.
The first time the board discussed the $20 million payment to Walsh was during a board huddle in Boca Raton, Florida on January 16, 2002, held on the eve of a formal board meeting scheduled to take place in Bermuda.*fn2 The huddle was described in an itinerary prepared for the directors as a "board of directors' business review." The main topic of discussion at the huddle was a proposal put forth by Kozlowski to separate Tyco into four independent, publicly traded companies, using the proceeds from the initial public offerings to pay down Tyco's debt. Walsh participated in the board's discussion of the break-up proposal and other issues, which lasted several hours.
Near the end of the huddle, the board took up the issue of the $20 million payment to Walsh for his role in Tyco's acquisition of CIT. During its initial discussion of the payment, the Board told Walsh to return the payment and advised him that if he refused, he would not be renominated to the Board. Walsh refused to return the payment, referring to a letter dated January 15, 2002 that he had received from James R. Tannenbaum at Stroock & Stroock & Lavan LLP in support of his position that he was entitled to the payment,*fn3 and walked out, bidding his fellow directors "adios."
After Walsh left the meeting, the remaining directors agreed that Walsh would not be renominated to the board. Many board members were deeply distressed to learn that a payment of this magnitude had been made by Kozlowski to a director, but the board took no other steps at the meeting either to ratify the payment or to seek its return. The decision to take no further steps to get Walsh to repay the money can be attributed principally to two factors. First, there was confusion among the directors as to whether Kozlowski had the authority to approve the $20 million payment to Walsh. Second, Kozlowski essentially made the payment a referendum on him. He told the board that if it challenged Walsh's right to keep the payment, it was challenging him. In effect, Kozlowski gave the board the option to remove him as Chief Executive Officer, and it declined to do so. In presenting this ultimatum, Kozlowski was well aware that Tyco's board would be particularly reluctant to remove him at a time when Tyco was facing serious challenges and as the board was considering and Tyco was likely to embark upon a major restructuring of the company. As of January 16, the board still had great confidence in Kozlowski's leadership of Tyco, and therefore the board chose not to pursue the issue of the payment to Walsh any further. The day after the board huddle, Kozlowski reported to Walsh that "the board finally came around" on the issue of the payment.
A special meeting of the board held in Bermuda on January 20 addressed the Kozlowski proposal to break up the company into four separate companies that had been presented at the January 16 board huddle. The board unanimously approved the plan. The board took no action whatsoever regarding the payment to Walsh, and the Walsh payment is not mentioned in the minutes of the January 20 meeting.
Tyco promptly disclosed the $20 million payment to Walsh in its January 28, 2002 proxy statement, prepared for Tyco's annual shareholders meeting. Kozlowski's cover letter to the proxy statement drew shareholders' attention to the plan Tyco had announced on January 22 to separate itself into four independent, publicly traded companies. Within the proxy statement, under the section titled "Related Party Transactions," the payment to Walsh was described in a passage which reads in its entirety as follows:
Mr. Walsh, a director, was instrumental in bringing about the acquisition by a subsidiary of the Company of The CIT Group, Inc. (now Tyco Capital Corporation) of Livingston, New Jersey. For his services, Tyco paid Mr. Walsh a fee of $10 million. In addition, at Mr. Walsh's request, Tyco contributed $10 million to a charitable fund established under The Community Foundation of New Jersey. Mr. Walsh, as trustee of this fund, recommends the public charities to which contributions are made. At the time of the acquisition, Mr. Walsh owned 50,000 shares of common stock of The CIT Group, Inc., which were converted to 34,535 Tyco common shares at the exchange ratio applicable to all stockholders of CIT.*fn4 (Emphasis supplied). Berman, a Tyco director and employee, who had been appalled to learn of the payment to ...