On April 30, 2014, Chimicles & Tikellis LLP (“C&T”) made a demand to inspect the books and records of Simon Property Group, Inc. (“SPG” or the ”Company”) pursuant to 8 Del. C. § 220 in order to investigate whether SPG’s Board of Directors breached their fiduciary duties to SPG and its stockholders in connection with its approval of the Amended and Restated Series CEO LTIP Unit Award Agreement (“Amended Award”) granted to the Company’s Chief Executive Officer, David Simon. Subsequently, SPG agreed to produce documents responsive to the Demand.
On July 6, 2011, in a Form 8-K (“2011 Form 8-K”), the SPG Board announced it had approved a new long-term employment agreement with Mr. Simon. In addition to his base salary and annual bonus, Mr. Simon’s employment agreement provided him with a “Retention Award” of 1,000,000 long-term incentive performance units (“LTIP Units”) (the “Original Award”). The LTIP Units awarded to Mr. Simon pursuant to the Original Award were subject to time vesting requirements, vesting in increments over an eight-year period.
On January 2, 2014, in a Form 8-K filed with the Securities and Exchange Commission (“2014 Form 8-K”), the Compensation Committee of the SPG Board announced that it had approved modifications to the Original Award. Under the terms of the Amended Award, instead of receiving a one-time grant of 1,000,000 LTIP Units, Mr. Simon will receive the same amount of units in three tranches. To effectuate the changes to the Original Award, the Company cancelled 720,000 LTIP Units granted under the Original Award and replaced them with two grants of 360,000 LTIP Units on December 31, 2013 (“A Units”) and January 1, 2014 (“B Units”). The SPG Board and Mr. Simon agreed to leave the remaining 280,000 LTIP Units from the Original Award outstanding until January 1, 2015 (“C Units”) when they will be cancelled and replaced with new LTIP Units. The Amended Award also transformed the vesting requirements of the LTIP Units from time based to performance based and allowed Mr. Simon to retain the 46,439 shares of SPG Common Stock that he acquired from the dividends on the 720,000 cancelled LTIP Units. It appears that it is a near certainty that Mr. Simon will attain the performance metrics, given the Company is estimating that by year-end 2014 it will surpass the criteria set for Mr. Simon to obtain the B Units in 2016.
According to the 2014 Form 8-K, the performance criteria in the Amended Award were “designed to incentivize Mr. Simon to continue and improve upon” the Company’s performance. The Company also stated in the 2014 Form 8-K that it believed the Amended Award mooted the claims in the actions Louisiana Municipal Police Employees Retirement System, et al. v. Bergstein, et al., Del. Ch. C.A. No. 7764-CS and Shepherd v. Simon, et al., Del. Ch. C.A. No. 7902-CS pending before the Court of Chancery of the State of Delaware (the “Delaware Actions”). The Delaware actions alleged, among other things, that the Original Award violated the 1998 Plan because the Original Award was not performance based and awarded more than 600,000 LTIP Units in one year.
After receiving and reviewing the Section 220 documents, on October 17, 2014 Chimicles & Tikellis LLP filed a shareholder lawsuit derivatively on behalf of SPG in the Court of Chancery of the State of Delaware (the “Action”). A public version of the Verified Derivative Complaint for Breach of Fiduciary Duties, which was filed under seal, is available here. The Action alleges wrongdoing by the SPG directors for approving the Amended Award without informing themselves of the appropriateness or necessity of either the total amount of the Amended Award or the performance metrics established therein. The Action further alleges that the Amended Award was not adopted to incentivize Mr. Simon to grow the Company’s profitability, but for SPG’s directors to escape personal liability in the Delaware Actions.