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In re American Capital Agency Corp. Stockholder Derivative Litigation

United States District Court, D. Maryland

August 2, 2017

IN RE AMERICAN CAPITAL AGENCY CORP. STOCKHOLDER DERIVATIVE LITIGATION This Document Relates To ALL ACTIONS

          MEMORANDUM OPINION

          THEODORE D. CHUNGS United States District Jadge.

         James Clem and William Wall, Plaintiffs in these consolidated actions, have brought suit derivatively on behalf of nominal defendant AGNC Investment Corporation ("AGNC"), alleging that certain AGNC officers and directors breached fiduciary duties and violated federal securities law in connection with a management contract with, and a later acquisition of, a related entity, and that defendant American Capital Asset Management, LLC ("ACAM") aided and abetted those violations. The same facts giving rise to this civil action (the "Maryland Action") also sparked litigation in the Delaware Court of Chancery (the "Delaware Action"), brought by a different plaintiff, H&N Management Group, Inc. & Aff Cos Frozen Money Purchase Plan ("H&N"), against AGNC and many of the same individuals named as Defendants here. Pending before the Court are two mo~ions related to the Delaware Action: Defendants have filed a Motion to Stay Proceedings seeking a stay of the Maryland Action while the Delaware Action proceeds, and H&N has filed a Motion to Intervene requesting leave to intervene in this case in support of Defendants' Motion to Stay. For the reasons set forth below, both Motions are denied.

         BACKGROUND

         I. The Amended Complaint

         The Court summarizes the facts set forth in the Amended Complaint only to the extent necessary to resolve the Motions. Plaintiffs, both citizens of California, are shareholders of nominal defendant AGNC. AGNC is a Delaware-incorporated real estate investment trust ("REIT"), with principal executive offices in Bethesda, Maryland. Defendants Gary Kain, Peter J. Federico, Prue B. Larocca, Morris A. Davis, Larry K. Harvey, Malon Wilkus, John R. Erickson, Samuel A. Flax, Robert M. Couch, Randy E. Dobbs, and Alvin N. Puryear (the "Individual Defendants") have each served, at various times, as officers of AGNC, as members of the AGNC Board of Directors, or both. Defendant ACAM is a wholly owned portfolio company of American Capital Ltd. ("American Capital"), AGNC's parent company.

         The claims in this case relate primarily to a series of transactions involving the management of AGNC. According to Plaintiffs, prior to May 23, 2016, AGNC was externally managed by a related entity, AGNC Management, LLC ("AGNC Management"), which was subject to the supervision and oversight of AGNC's Board. At the time, AGNC had no dedicated employees of its own. Rather, AGNC Management was responsible for administering AGNC's day-to-day business activities. AGNC and AGNC Management were both subsidiaries of American Capital. Other American Capital subsidiaries included MTGE Investment Corporation ("MTGE"), another REIT; MTGE Management, LLC ("MTGE Management"), which was responsible for administering MTGE's day-to-day operations; Defendant ACAM; and several other related entities. American Capital, AGNC, and AGNC Management, along with other American Capital subsidiaries, shared multiple officers and directors, some of whom are Defendants in this case.

         The primary focus of the Amended Complaint is the contract that governed the relationship between AGNC and AGNC Management prior to May 23, 2066 (the "Management Agreement"). According to Plaintiffs, the terms of the Management Agreement required AGNC to pay AGNC Management "exorbitant fees in excess of $100 million" each year, regardless of the performance of AGNC's investment portfolio. Am. Compl. ¶ 6, ECF No. 39. Plaintiffs allege that the fees were unreasonable and in excess of the costs of services performed; subsidized the operations of MTGE and MTGE Management whose Board of Directors, employees, and management overlapped with those of AGNC and AGNC Management; and ultimately ended up in the pockets of the Individual Defendants, who served as Board members and officers of AGNC, AGNC Management MTGE, MTGE Management and other American Capital entities, rather than being paid to shareholders in the form of dividends. Plaintiffs assert that the members of AGNC's Board of Directors owed a fiduciary duty to AGNC that required them to renegotiate or cancel the Management Agreement, but because they personally benefited from the payment of the fees, they failed to do so.

         Plaintiffs also allege that AGNC's directors negligently made false and misleading statements relating to the Management Agreement in proxy statements issued between 2014 and 2016 (the "Proxy Statements"). The Proxy Statements acknowledged that AGNC would be forced to pay a penalty for terminating the Management Agreement without cause, but they failed to disclose or explain favorable provisions of the Management Agreement that provided opportunities to negotiate more reasonable terms. According to Plaintiffs, the Proxy Statements misled shareholders to believe that AGNC was locked into the Management Agreement unless it was willing to pay a large termination fee. Plaintiffs also assert that the Proxy Statements failed to disclose and explain the extent of AGNC's overpayment to AGNC Management or that AGNC's management fees were being used to cover the external management of MTGE. Plaintiffs claim that had AGNC's shareholders been aware that the Proxy Statements were misleading, they would not have voted to reelect the Board.

         The second focus of the Amended Complaint is the May 23, 2066 transaction that altered the relationship between AGNC and AGNC Management ("the Internalization"). On that date, AGNC announced that it would acquire American Capital Mortgage Management, LLC ("ACMM"), the parent company of AGNC Management, for $562 million in cash and become an internally-managed REIT. The $562 million was paid to ACAM, which at the time employed Defendants Wilkus, Erickson, and Flax as executives. According to Plaintiffs, the Internalization was damaging to AGNC because it cost $200 million more than AGNC would have had to pay had it simply terminated the Management Agreement and brought its management functions in-house. Plaintiffs claim that the Internalization grossly overvalued AGNC Management, the value of which was inflated due to the excessiveness of the management fees. Plaintiffs assert that ACAM knowingly assisted the Individual Defendants in breaching their fiduciary duties and that without its assistance, the Internalization would not have occurred.

         II. Procedural History

         On September 21, 206,, Plaintiff James Clem filed a shareholder derivative complaint on behalf of AGNC. Plaintiff William Wall filed a shareholder derivative complaint on September 30, 2016. Pursuant to a stipulation, the Court consolidated the cases on October 21, 2016. Plaintiffs filed their consolidated Amended Complaint on December 23, 2016, alleging against Defendants Couch, Davis, Dobbs, Erickson, Flax, Harvey, Larocca, Puryear, and Wilkus a violation of Section 14(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. S 78n(a) (2012), (Count I); against all Individual Defendants a claim of breach of fiduciary duty (Count II); and against ACAM a claim of aiding and abetting the breach of fiduciary duty (Count III). Plaintiffs seek a declaratory judgment, damages, equitable and injunctive relief, restitution, and costs.

         Meanwhile, concurrent proceedings arising from many of the same facts were initiated in the Delaware Court of Chancery. On July 6, 2016, H&N served on AGNC a demand to inspect corporate books and records pursuant to Section 220 of the Delaware General Corporation Law, Del. Code Ann. tit. 8, S 220 (West 2006) (the "Section 220 Demand".. Section 220 permits any stockholder to "inspect for any proper purpose .... [t]he corporation's stock ledger, a list of its stockholders, and its other books and records." Del. Code Ann. tit. 8, S 220(b)(1). After Defendants failed to produce books and records in response to the Section 220 Demand, H&N filed suit on July 19, 2016 in the Delaware Court of Chancery seeking production of the requested materials (the "Delaware 220 Action"). The Delaware 220 Action was resolved through the disclosure of certain books and records of AGNC to H&N.

         On October 21, 2016, H&N filed a shareholder derivative lawsuit in the Delaware Court of Chancery on behalf of AGNC against current and former directors and officers of AGNC. See H&N Mgmt. Grp., Inc. & Aff Cos Frozen Money Purchase Plan v. Couch, et al., No. 12847-VCMR (Del. Ch. Oct. 21, 2016). H&N's amended complaint, filed on December 12, 2016, asserts two counts of breach of fiduciary duty and one count of corporate waste in connection with the Management Agreement and the Internalization. H&N seeks a declaratory judgment, damages, disgorgement, and costs. A motion to dismiss H&N's amended complaint was filed in the Delaware Court of Chancery and has now been fully briefed.

         DISCUSSION

         I. Motion to Intervene

         H&N seeks intervention as of right in this case pursuant to Federal Rule of Civil Procedure 24(a) or, in the alternative, permissive intervention under Rule 24(b). According to H&N, intervention is warranted because legal and factual determinations in the Maryland Action could "hinder and potentially even collaterally estop H&N from prosecuting derivative claims on AGNC's behalf in the Delaware Action." Mot. Intervene at 6, ECF No. 58-1. Defendants do not oppose H&N's motion to the extent H&N seeks a stay of the Maryland Action. Plaintiffs contend that intervention is unnecessary and unwarranted.

         A. Legal Standards

         Rule 24 provides that "[o]n timely motion, the court must permit anyone to intervene who . . . claims an interest relating to the property or transaction that is the subject of the action, and is so situated that disposing of the action may as a practical matter impair or impede the movant's ability to protect its interest, unless existing parties adequately represent that interest." Fed.R.Civ.P. 24(a)(2). Accordingly, in addition to timeliness, intervention of right is dependent upon the proposed intervenor's fulfillment of three requirements: "interest, impairment of interest and inadequate representation"" Gould v. Alleco, 883 F.2d 281, 284 (4th Cir. 1989); see also Newport News Shipbuilding & Dry dock Co. v. Peninsula Shipbullder'' Ass'n, 646 F.2d 117, 120 (4th Cir. 1981). All three requirements must be met. Virginia v. Westinghouse Elec. Corp., 542 F.2d 214, 216 (4th Cir. 1976).

         Permissive intervention may be allowed "on timely motion" to anyone who "has a claim or defense that shares with the main action a common question of law or fact." Fed.R.Civ.P. 24(b)(1)(B). In exercising its discretion under Rule 24(b), the Court "must consider whether the intervention will unduly delay or prejudice the adjudication of the original parties' rights." Fed.R.Civ.P. 24(b)(3). A decision to grant or deny permissive intervention otherwise lies within the sound discretion of the trial court. Smith ...


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