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In re AGNC Investment Corp.

United States District Court, D. Maryland

February 6, 2019




         James Clem and William Wall, Plaintiffs in these consolidated actions, have brought shareholder derivative suits on behalf of nominal Defendant AGNC Investment Corporation ("AGNC"), alleging that certain AGNC directors and officers (the "Individual Defendants") breached their fiduciary duties to AGNC and violated federal securities law. Plaintiffs also allege that Defendant American Capital Asset Management, LLC ("ACAM") aided and abetted the Individual Defendants in the breach of their fiduciary duties. Pending before the Court is Plaintiffs' Motion for Leave to File Amended Verified Consolidated Stockholder Derivative Complaint ("Motion to Amend"). The Court held a hearing on the Motion on January 23, 2019. For the reasons set forth below, Plaintiffs' Motion to Amend is GRANTED IN PART and DENIED IN PART.


         Plaintiffs, both citizens of California, are shareholders of AGNC. AGNC is a Delaware-incorporated real estate investment trust ("REIT") with principal executive offices in Bethesda, Maryland. The 11 Individual Defendants include Defendants Gary Kain, 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, who have each served, at various times, as members of the AGNC Board of Directors, and Defendant Peter J. Federico, who was an officer of AGNC. Defendants Kain, Wilkus, Erickson, and Flax have also served as officers of AGNC. Defendant AC AM was a wholly owned subsidiary of American Capital, Ltd. ("American Capital"). AC AM owned American Capital Mortgage Management, LLC ("ACMM"), which in turned owned American Capital AGNC Management, LLC ("AGNC Manager"). Prior to May 23, 2016, AGNC Manager externally managed AGNC, subject to the supervision and oversight of the AGNC Board, and was responsible for administering AGNC's day-to-day business activities.

         American Capital also owned, by way of its subsidiaries ACAM and ACMM, an entity called American Capital MTGE Management, LLC ("MTGE Manager"). MTGE Manager was responsible for administering the daily operations of another REIT called American Capital Mortgage Investment Corporation ("MTGE"). American Capital, AGNC, AGNC Manager, MTGE, and MTGE Manager, along with other American Capital subsidiaries, shared multiple directors and officers, some of whom are Defendants in this case.

         The Court has set forth the detailed factual and procedural background for the challenged transactions in its July 3, 2018 Memorandum Opinion on Defendants' Motions to Dismiss, so it sets forth only those facts specifically relevant here or which have been modified in or added to the proposed Second Amended Complaint. See In re AGNC Inv. Corp., No. TDC-16-3215, 2018 WL 3239476, at * 1-2 (D. Md. July 3, 2018). The primary focus of the proposed Second Amended Complaint is the contract that governed the relationship between AGNC and AGNC Manager before May 23, 2016 (the "Management Agreement"). According to Plaintiffs, 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 benefited from the payment of fees associated with the Management Agreement, 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 solicitations sent to shareholders between 2014 and 2016 (the "Proxy Statements"), in which AGNC requested that shareholders vote to re-elect its directors to AGNC's Board.

         The second focus of the proposed Second Amended Complaint is the May 23, 2016 transaction that altered the relationship between AGNC and AGNC Manager ("the Internalization"). On that date, AGNC announced that it would acquire ACMM, the parent company of AGNC Manager and MTGE Manager, for $562 million, thereby becoming an internally managed REIT. According to Plaintiffs, the Internalization was damaging to AGNC because it cost $200 million more than AGNC would have paid had it simply terminated the Management Agreement and arranged to manage its own activities internally. Plaintiffs assert that AC AM, by selling ACMM to AGNC and preventing AGNC directors from obtaining information about the Internalization transaction, knowingly assisted the Individual Defendants in breaching their fiduciary duties to AGNC.

         Plaintiffs' First Amended Complaint, filed on December 23, 2016, included three counts. In Count I, Plaintiffs alleged a violation of Section 14(a) of the Securities Exchange Act of 1934 ("Section 14(a)"), 15 U.S.C. § 78n(a) (2012). In Count II, Plaintiffs alleged that the Individual Defendants breached their fiduciary duties to AGNC by renewing the Management Agreement from 2014 to 2016 and by approving the Internalization. Finally, in Count III, Plaintiffs alleged that ACAM aided and abetted the Individual Defendants in the breach of their fiduciary duties regarding the Internalization. In the Court's July 3, 2018 Memorandum Opinion, the Court dismissed Plaintiffs' Section 14(a) claim for failure to show transaction causation. The Court also dismissed Plaintiffs' breach of fiduciary duty claim as to the Internalization for failure to demonstrate that demand was futile. Finally, the Court dismissed Plaintiffs' aiding and abetting claim against ACAM, again because Plaintiffs failed to demonstrate that demand was futile. However, finding that the case was still in its early stages, the Court granted Plaintiffs leave to file the pending Motion.


         Plaintiffs move to amend their Section 14(a) claim to challenge not the renewal of the Management Agreement, the basis for the claim in the First Amended Complaint, but the compensation paid to the directors elected in 2014-2016 who engaged in activities amounting to a breach of their fiduciary duties. They argue that with this change in theory, they have satisfied loss causation and transaction causation, have alleged material omissions from the Proxy Statements, and have thereby stated a valid Section 14(a) claim. Plaintiffs also move to amend their breach of fiduciary duty claim as to the Internalization and argue that with the new allegations, they have established demand futility because the directors who approved the Internalization were inadequately informed and are thus not protected by the business judgment rule, and there is a substantial likelihood that they face personal liability for breach of fiduciary duty. Finally, Plaintiffs argue that because they can now establish demand futility as to the breach of fiduciary duty claim regarding the Internalization, they can also show demand futility as to their aiding and abetting claim against ACAM. They further argue that their new allegations in the proposed Second Amended Complaint state a viable aiding-and-abetting claim against ACAM because they support a reasonable inference that ACAM knowingly participated in the Individual Defendants' breach of fiduciary duty.

         I. Legal Standard

         Under Federal Rule of Civil Procedure 15(a)(2), a court "should freely give leave" to amend "when justice so requires." "A motion to amend should be denied 'only when the amendment would be prejudicial to the opposing party, there has been bad faith on the part of the moving party, or the amendment would be futile.'" HCMF Corp. v. Allen, 238 F.3d 273, 276 (4th Cir. 2001) (quoting Edwards v. City of Goldsboro, 178 F.3d 231, 242 (4th Cir. 1999)). Amendment is futile if the complaint, as amended, fails to state a claim upon which relief could be granted. See Id. at 277 (finding that the plaintiffs amended complaint was futile because although it stated a new legal theory, it failed to articulate a cognizable claim upon which relief could be granted).

         II. Section 14(a)

         In both the First Amended Complaint and the proposed Second Amended Complaint, Plaintiffs allege that Defendants Couch, Davis, Dobbs, Erickson, Flax, Harvey, Larocca, Puryear, and Wilkus, who served on AGNC's Board of Directors from 2014 to 2016, negligently caused AGNC to issue false and misleading Proxy Statements, which solicited shareholder votes for their re-election to AGNC's Board. The Court dismissed this claim as articulated in the First Amended Complaint because "[transaction causation mandates that the challenged conduct that caused the economic loss be an action authorized by shareholder vote, not later misconduct undertaken by the Board," and the Section 14(a) claim in the First Amended Complaint challenged only the annual renewals of the Management Agreement, not any decision actually authorized by the votes solicited by the Proxy Statements. In re AGNC Inv. Corp., 2018 WL 3239476, at *6 (citing Gen. Elec. Co. v. Cathcart, 980 F.2d 927, 933 (3d Cir. 1992) and Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc., 594 F.3d 783, 796-97 (11th Cir. 2010)).

         To remedy this defect, Plaintiffs now purport to challenge the director election itself, as opposed to later misconduct undertaken by the re-elected Board. They assert that by failing to fully disclose in the 2014-2016 Proxy Statements material information regarding the nature of the Management Agreement and its financial impact on AGNC, AGNC prevented its shareholders from making informed decisions whether to re-elect the directors and compensate them accordingly. As relief, they seek "damages inflicted upon the Company in connection with the improper election of and compensation paid to defendants Couch, Davis, Dobbs, Harvey, Larocca, and Puryear" and "new director elections on the basis of a special proxy with appropriate corrective disclosures." Second Am. Compl. ("SAC") ¶ 220, ECF No. 115-2.

         A. Injunctive Relief

         Because intervening Board elections have been held since the 2014-2016 elections, the proposed amendment of the Section 14(a) claim to seek injunctive relief in the form of a new director election by special proxy would be futile because such relief cannot be granted. All United States Courts of Appeals to address this issue have held that challenges to elections of directors for lapsed terms are moot. See, e.g., Buckley v. Archer-Daniels-Midland Co., 111 F.3d 524, 526-27 (7th Cir. 1997) (holding that an action to oust directors due to misrepresentations in proxy solicitation statements for their election was moot because a new board had since been elected); Gen. Elec. Co. v. Cathcart, 980 F.2d 927, 934 (3d Cir. 1992) (dismissing an equitable claim for new director elections as moot when an intervening, unchallenged election had taken place between the time the district court granted the motion to dismiss and the time the court of appeals decided the case); Lee v. Schmidt-Wenzel, 766 F.2d 1387, 1389-90 (9th Cir. 1985) (finding that a declaratory claim challenging whether vacancies on a board of directors were properly filled was rendered moot by the subsequent election of a new board of directors); Maldonado v. Flynn, 597 F.2d 789, 797 n. 10 (2d Cir. 1979) (stating that the "terms of those elected in 1975 have expired, rendering moot the question of the validity of the election," but allowing the claim to continue as to later elections where the terms of the elected directors had not yet expired).

         At the hearing on the Motion to Amend, Plaintiffs conceded that their request for a new director election is now moot, and they state in their Motion: "Given the passage of time, subsequent director elections, and the Internalization transaction in which AGNC purchased AGNC Manager, it would be exceedingly difficult and costly to 'unscramble the egg' through injunctive relief at this point." Mot. Am. at 4, ECF No. 115-1. Accordingly, to the extent that Plaintiffs ...

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