EFiled: Feb 09 2015 03:31PM EST

Transaction ID 56744765
Case No. 10626-

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

SPEAR POINT CAPITAL FUND LP
and SPEAR POINT TV RAVEN LP,
derivatively on behalf of IMATION
CORP.,
Plaintiffs,
v.
MARK E. LUCAS, L. WHITE
MATTHEWS III, DAVID B.
STEVENS, WILLIAM G. LAPERCH,
ANTHONY T. BRAUSEN, and DR.
GEOFF BARRALL,
Defendants,
-andIMATION CORP., a Delaware
corporation,
Nominal Defendant.

)
)
)
)
)
)
) Civil Action No. ______________
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)

VERIFIED STOCKHOLDER DERIVATIVE COMPLAINT

FOR BREACH OF FIDUCIARY DUTY, WASTE OF
CORPORATE ASSETS, AND UNJUST ENRICHMENT
Plaintiffs, Spear Point Capital Fund LP and Spear Point TV Raven LP
(plaintiffs and their affiliates are referred to collectively as Spear Point), by their
attorneys, submit this Verified Shareholder Derivative Complaint for Breach of
Fiduciary Duty, Waste of Corporate Assets, and Unjust Enrichment against the
defendants named herein.

NATURE AND SUMMARY OF THE ACTION

1.

This is a shareholder derivative action brought by plaintiffs on behalf

of nominal defendant Imation Corp. (Imation or the Company). Plaintiffs

bring this action, inter alia, to halt defendants illegal self-dealing and breaches of
fiduciary duty.
2.

In particular, Imations Board of Directors (the Board) grossly

overcompensates its members in relation to companies of comparable market

capitalization and size and it fails to take into account of any relevant metrics, such
as revenue and profit, in setting its compensation. In fact, despite the Companys
persistently and steadily declining revenue and continued losses over the past few
years, Imation pays its non-employee directors 131% more than its peers.
3.

Plaintiffs bring this action to recoup the excessive compensation the

Director Defendants (as defined herein) awarded themselves and impose

meaningful corporate governance reforms that will both restrict the Boards ability
to award itself excessive compensation and tie elements of compensation to the
success and long-term interests of the Company.
THE PARTIES
4.

Spear Point was a stockholder of Imation during the period of

wrongdoing complained of, has continuously been a stockholder since that time,
and is a current Imation stockholder. Spear Point currently holds 489,399 shares of

Imations common shares, an approximate 1.16% of the Companys shares

outstanding.
5.

Nominal Defendant Imation is a Delaware corporation with its

corporate headquarters located at 1 Imation Way, Oakdale, MN 55128-3414.

Imation is a global data storage and data security company. It was formed in 1996
as a result of the spin-off of substantially all of the businesses which comprised the
data storage and imaging systems groups of 3M Company.

Its products and

solutions help corporate and private customers store, manage and protect their
digital content.
6.

Defendant Mark E. Lucas (Lucas) is President and Chief Executive

Officer and a director of Imation and has been since May 2010. Lucas was
President and Chief Operating Officer of Imation from March 2009 to May 2010.
Lucas was a director of Imation from April 2007 to February 2009 and served as a
member of Imations Audit and Finance Committee and Compensation
Committee. He was again elected as a director of Imation in May 2010, a position
he has held again since then.
7.

Defendant L. White Matthews III (Matthews) is Non-Executive

Independent Chairman of the Board of Imation and has been since May 2011.
Matthews joined the board as a director in 2003. Matthews earned fees or was
paid in cash in the amount of $173,000 and received $7,500 in other compensation

and was awarded an aggregate of 70,000 shares of restricted stock with a grant date
fair value of $262,500 for the fiscal year 2013. In total, defendant Matthews
received $443,000 in compensation from Imation for that year. In addition to the
annual minimum compensation of $225,000, as Chairman of the Board, Matthews
currently receives a cash fee of $87,500 and a $87,500 stock grant, together with
other attendance fees for attending Board meetings and Board committee
meetings ($1,500 per meeting if attendance is in person or $1,000 if by phone), as
well as matching gifts to charitable institutions ($7,500).
8.

Defendant David B. Stevens (Stevens) is an independent director of

Imation and has been since March 2012. Stevens earned fees or was paid in cash
in the amount of $71,500 and was awarded 46,667 shares of restricted stock with a
grant date fair value of $175,000 for the fiscal year 2013. In total, defendant
Stevens received $246,500 in compensation from Imation for that year. Currently,
Stevens receives annual minimum compensation of $225,000, which is comprised
of a $50,000 cash retainer and a $175,000 restricted stock grant. In addition,
Stevens receives attendance fees for attending Board meetings and Board
committee meetings ($1,500 per meeting if attendance is in person or $1,000 if by
phone), as well as matching gifts to charitable institutions ($7,500).
9.

Defendant William G. LaPerch (LaPerch) is an independent director

of Imation and has been since November 2012. LaPerch earned fees or was paid in

cash in the amount of $79,000 and was awarded 46,667 shares of restricted stock
with a grant date fair value of $175,000 for the fiscal year 2013. In total, defendant
LaPerch received $254,000 in compensation from Imation for that year. Currently,
LaPerch receives annual minimum compensation of $225,000, which is comprised
of a $50,000 cash retainer and a $175,000 restricted stock grant. In addition,
LaPerch receives attendance fees for attending Board meetings and Board
committee meetings ($1,500 per meeting if attendance is in person or $1,000 if by
phone), as well as matching gifts to charitable institutions ($7,500).
10.

Defendant Anthony T. Brausen (Brausen) is an independent director

of Imation and has been since August 2014. Brausen is compensated for his
service on the Imation Board pursuant to the Companys Director Compensation
Program, as amended.

The Companys Director Compensation Program, as

amended, as of May 8, 2013, provided for directors, other than the Non-Executive
Chairman, a basic fee of $50,000 plus various other fees and, for all eligible
directors other than the Non-Executive Chairman, annual stock based grants with a
dollar value of $175,000 in restricted stock, at the time of his appointment. In
addition, Brausen receives attendance fees for attending Board meetings and Board
committee meetings ($1,500 per meeting if attendance is in person or $1,000 if by
phone), as well as matching gifts to charitable institutions ($7,500).

11.

Defendant Dr. Geoff Barrall (Barrall) is an independent director of

Imation and has been since December 2014. Barrall is compensated for his service
on the Imation Board pursuant to the aforementioned Companys Director
Compensation Program, as amended. In addition, Barrall receives attendance fees
for attending Board meetings and Board committee meetings ($1,500 per meeting
if attendance is in person or $1,000 if by phone), as well as matching gifts to
charitable institutions ($7,500).
12.

The defendants identified herein are referred to collectively as the

Director Defendants.
THE BOARD AWARDS ITSELF EXCESSIVE COMPENSATION
13.

The Director Defendants grant themselves excessive compensation in

breach of their fiduciary duties.

In 2013, the Board paid its non-employee

members who served a full term an average $288,883 per director. This is higher
than the average total director compensation for 2013 of $249,168 for an S&P 500
company1 and of $236,650 for a sample of large cap companies of a market
capitalization of more than $5 billion.2
14.

Imation is however not an S&P 500 constituent and it is not a large

cap company but a small cap company with a market cap of less than $1 billion.
1

See Spencer Stuarts Board Index 2007-2013.

See Frederic W. Cook & Co., Inc.s 2013 Director Compensation Report.

The Companys market capitalization was in fact far less than $250 million for all
of 2014.
15.

Notwithstanding, Imations average total director compensation is

more than twice the average total director compensation for 2013 for a sample of
companies of a market capitalization of less than $1 billion of $125,260.3 As such,
the non-employee Director Defendants compensation is unwarranted and grossly
excessive in comparison to other companies of similar size.
16.

The Director Defendants justify their excessive compensation by

disclosing a wholly inappropriate peer group of companies to establish the

competitive position of Board compensation.4
17.

Of the sixteen peers identified by the Director Defendants, fourteen

have a market capitalization of more than $1 billion and ten of those are large cap

Id.

For 2013, the Company had identified and approved the following 18 peer
companies for use in executive compensation reviews: Altera Corp., NetApp, Inc.,
Brocade Communications Systems, Nvidia Corp., Dot Hill Systems Corp.,
Overland Storage Inc., Harman International Industries Inc., Plantronics Inc.,
Lexmark International Corp., Qlogic Corp., Logitech International, Quantum
Corp., LSI Corp., SanDisk Corporation, Microchip Technology Inc., Symantec
Corp., Micron Technology Inc., Western Digital Corp. Two of these have been
acquired since then and therefore do not feature in this verified derivative
shareholder complaints analysis. See Imations Schedule 14A Information, filed
with the Securities and Exchange Commission on March 26, 2014, pages 26 and
27.

companies with a market capitalization of more than $5 billion. The Companys

largest peer has a market capitalization more than two hundred times that of the
Company and even the two small cap peers among the sixteen peers are both
significantly larger than the Company.
18.

Imation had a market capitalization of more than $1 billion at its peak

in 2006 and was a Fortune 500 company at various times up to 2010. In the years
following (and at present), however, the Companys market capitalization has been
about one-tenth of what it was at its peak and it is no longer a Fortune 500
constituent. Despite this significant downward-change in the Companys size and
capitalization, the Director Defendants have awarded and continue to award
themselves outsized compensation.
19.

Currently, the Director Defendants receive annual minimum

compensation of $225,000, which is comprised of a $50,000 cash retainer and a

$175,000 restricted stock grant. In addition, Board members receive attendance
fees for attending Board meetings and meetings of Board committees ($1,500 per
meeting if attendance is in person or $1,000 if by phone), as well as matching gifts
to charitable institutions ($7,500).
20.

Further, the Chairpersons of the Audit and Finance Committee

(defendant Brausen), the Compensation Committee (defendant LaPerch), and the

Nominating and Governance Committee (defendant Matthews) each receive an

additional cash fee of $25,000, $15,000, and $10,000, respectively.
21.

In November 2014, the Board announced that it would make de

minimis reductions in non-executive Board compensation which will take effect

later in 2015. These reductions include reducing the annual stock grant from
$175,000 to $150,000 and making the minimum annual Board compensation
$200,000 (prior to attendance fees and other amounts).
22.

Further, the Board announced that the additional fees for service as

Chairman of the Board will be reduced in 2015 to $75,000 in cash and $75,000 in
stock from $87,500 and $87,500, respectively. Accordingly, defendant Matthews
minimum compensation (prior to attendance fees) will be reduced slightly to
$350,000 from $400,000.
23.

Even with these modest adjustments announced by the Board, the

Director Defendants excessive compensation remains unwarranted in comparison

to the Companys financial performance and stock price development. Indeed,
Imation has experienced revenue declines over prior year in 2013, 2012, and 2011
of $145.9 million or 14.5 percent, $159.9 million or 13.7 percent, and $135.7
million or 10.4 percent, respectively and reported a loss from continuing operations
in each of those years.

24.

The Companys share price steadily declined to about $4.50 in

December 2013 from about $10.50 in January 2011. Today, Imations share price
hovers around $3.50. The Board did not and does not take account of the
Companys declining revenue, continued losses, and shrinking share price.
25.

During the same three-year period, from 2011 to 2013 inclusive, the

average total director compensation of non-employee members who served a full

term was consistently high and out of line with the Companys true peers (i.e.,
$268,905 per director in 2011, $295,917 in 2012, and $288,883 in 2013).
26.

This level of compensation is harmful to both the Company and its

stockholders as it wastes valuable and limited corporate assets.

DERIVATIVE AND DEMAND FUTILITY ALLEGATIONS
27.

Plaintiffs bring this action derivatively in the right and for the benefit

of Imation to redress injuries suffered, and to be suffered, by the Company as a

direct result of breaches of fiduciary duty, waste of corporate assets, and unjust
enrichment, as well as the aiding and abetting thereof, by the Director Defendants.
Imation is named as a nominal defendant solely in a derivative capacity. This is
not a collusive action to confer jurisdiction on this Court that it would not
otherwise have.
28.

Plaintiffs will adequately and fairly represent the interests of Imation

in enforcing and prosecuting its rights.

10

29.

Plaintiffs were stockholders of Imation at the time of the wrongdoing

complained of, have continuously been stockholders since that time, and are
current Imation stockholders.
30.

The current Board of Imation consists of the following six individuals:

defendants Lucas, Matthews, Stevens, LaPerch, Brausen, and Barrall.

31.

Because Director Defendants Lucas, Matthews, Stevens, and LaPerch

approved the compensation at issue here and all the non-employee Director
Defendants receive the challenged compensation, the Director Defendants stand on
both sides of the compensation awards. All six members of the Board received or
stand to receive the challenged compensation, and thus derived or stand to derive a
personal financial benefit from and had a direct interest in the transactions at issue
in this case. The Director Defendants therefore lack disinterest and will have the
burden of proving the entire fairness of their compensation. There is more than a
reasonable doubt that the directors could impartially consider a demand on
themselves.
32.

Further, each of the Director Defendants has wasted the Companys

assets by agreeing to and awarding or accepting to be awarded the improper

compensation detailed herein as no disinterested director would take advantage of
the opportunity to award compensation well beyond a companys true peers and in
utter disregard of the Companys deteriorating financial condition.

11

33.

Spear Point is committed to improving stockholder value for the

benefit of all stockholders of the Company. For that reason it has made repeated
demands on the present Board of Imation prior to bring this stockholder derivative
action on behalf of the Company. In a letter to the Board dated September 10,
2014 (First Demand Letter), Spear Point demanded that the Company and the
Board act to reduce Board compensation to appropriate levels in consideration of
the size and performance of the Company and demanded corporate governance
changes to ensure matters including Board compensation and Company
management are decided in the best interest of stockholders.5
34.

On November 6, 2014, Spear Point published a letter addressed to the

Common Shareholders of Imation in which it reiterated the demands made on the

Board in the First Demand Letter.
35.

In a letter to the Board dated December 5, 2014 (Second Demand

Letter), Spear Point reiterated the demands of the First Demand Letter.
Additionally, in the letter, Spear Point detailed the various cash and non-cash
components of Board compensation and set forth what it considered to be
reasonable levels of compensation for each component, thereby dismissing the

The First, Second, Third, and Fourth Demand Letters (as defined herein) and
the November 6, 2014 letter to the Common Shareholders of Imation were sent by
Spear Point Capital Partners LLC, as general partner of plaintiffs.

12

miniscule, non-material, and token changes made by the Board to its own
compensation on November 7, 2014.
36.

Spear Point stated in the Second Demand Letter that those certain

changes made are inconsequential gestures that for the Companys owners
amount to insulting window dressing and [this action] indicates a disturbing lack of
regard for the interests of shareholders. Indeed, plaintiffs argued that [i]f the
Board would adopt our proposed fee structure for members, annual Board
compensation would be reduced from the current level of $1,575,000 to a more
reasonable $405,000 per year. Even after the new changes take effect in May
2015, the total annual cost will be $1,200,000.
37.

In a letter to the Board dated December 18, 2014 (Third Demand

Letter), Spear Point reiterated the demands of the First and Second Demand
Letters and urged the Board to take appropriate action without further delay, in
response to the Boards answer to the Second Demand Letter, a letter dated
December 12, 2014 (Board Response Letter) and therein characterized as an
initial response, in which the Board refused to recognize plaintiffs concerns.
38.

The action taken by the Board on November 7, 2014, in relation to its

own compensation completely failed to meet the demand by Spear Point regarding
Board compensation since the Board intends to continue paying itself an
egregiously high compensation and the action failed to address any of the other

13

demands made by Spear Point. The Board Response Letter subsequently equally
failed to meet or to indicate the Board will meet any of Spear Points demands.
39.

In a letter to the Board dated January 21, 2015 (Fourth Demand

Letter), Spear Point reiterated the demands in the First, Second, and Third
Demand Letters as by that date Spear Point had however received no further
correspondence or other communication from the Company or the Board
responding to the demands put forth in the Third Demand letter.
40.

In the Fourth Demand Letter, Spear Point further stated that, without

an immediate indication that the Board has taken action to implement the
compensation and governance changes demanded, it will proceed on the basis of
the assumption the Board refuses to take any action with respect to its demands
and consider available actions and determine those actions necessary to compel the
Director Defendants to meet these demands for the benefit of the Company and all
stockholders, including commencing a stockholder derivative action.
41.

On January 23, 2015, the Company responded to the Fourth Demand

letter, replying without any indication that the Board would do anything more than
seek input from independent advisors.
42.

Plaintiffs therefore allege that, in addition to the Director Defendants

being guilty of waste which excuses the need for a demand and in light of the
November 7, 2014 action in relation to its own compensation which clearly

14

demonstrates the present Board lacks disinterest which excuses the need for
demand, regardless, sufficient demand has been made on the Board prior to
bringing this shareholder derivative action on behalf of the Company.
COUNT I
Against the Director Defendants for Breach of Fiduciary Duty
43.

Plaintiffs incorporate by reference and reallege each and every

allegation contained above, as though fully set forth herein.

44.

The Director Defendants, and each of them, violated their fiduciary

duty of loyalty by awarding or receiving excessive and improper compensation at

the expense of the Company.
45.

As a direct and proximate result of the Director Defendants breaches

of their fiduciary obligations, Imation has sustained significant damages, as alleged

herein. As a result of the misconduct alleged herein, these defendants are liable to
the Company.
46.

Plaintiffs, on behalf of Imation, have no adequate remedy at law.

COUNT II

Against the Director Defendants for Waste of Corporate Assets

47.

Plaintiffs incorporate by reference and reallege each and every

allegation contained above, as though fully set forth herein.

15

48.

As a result of the Director Defendants self-dealing, the Company has

wasted its valuable assets by paying the Director Defendants excessive

compensation.
49.

As a result of the waste of corporate assets, the Director Defendants

are liable to the Company.

50.

Plaintiffs, on behalf of Imation, have no adequate remedy at law.

COUNT III
Against the Director Defendants for Unjust Enrichment

51.

Plaintiffs incorporate by reference and reallege each and every

allegation contained above, as though fully set forth herein.

52.

By their wrongful acts and omissions, the Director Defendants were

unjustly enriched at the expense of and to the detriment of Imation. The Director
Defendants were unjustly enriched as a result of the compensation they received
while breaching fiduciary duties owed to Imation.
53.

Plaintiffs, as stockholders and representatives of Imation, seek

restitution from these defendants, and each of them, and seeks an Order of this
Court disgorging all profits, benefits, and other compensation obtained by these
defendants, and each of them, from their wrongful conduct and fiduciary breaches.
54.

Plaintiffs, on behalf of Imation, have no adequate remedy at law.

16

PRAYER FOR RELIEF

WHEREFORE, plaintiffs, on behalf of Imation, demand judgment as
follows:
A.

Against all of the Director Defendants and in favor of the Company

for the amount of damages sustained by the Company as a result of the Individual
Defendants breaches of fiduciary duties, waste of corporate assets, and unjust
enrichment;
B.

Directing Imation to take all necessary actions to reform and improve

its corporate governance and internal procedures to comply with applicable laws
and to protect Imation and its stockholders from a repeat of the damaging events
described herein. In particular, the Board must amend the composition of its peer
group of companies for purposes of compensation and must incorporate references
to the Companys financial performance and share price development to its
compensation plan and then present such changes to the stockholders for a vote;
C.

Extraordinary equitable and injunctive relief as permitted by law,

equity, and state statutory provisions sued hereunder, so as to assure that plaintiffs
on behalf of Imation have an effective remedy;
D.

Awarding to Imation damages from Director Defendants, and each of

them, and ordering disgorgement of all profits, benefits, and other compensation
obtained by the Director Defendants;

17

E.

Awarding to Plaintiffs the costs and disbursements of the action,

including reasonable attorneys fees, accountants and experts fees, costs, and
expenses; and
F.

Granting such other and further relief as the Court deems just and

proper.
Dated: February 9, 2015

RIGRODSKY & LONG, P.A.

By:

OF COUNSEL:
NEWMAN FERRARA LLP
Jeffrey M. Norton
1250 Broadway, 27th Floor
New York, NY 10001
(212) 619-5400

/s/ Brian D. Long

Seth D. Rigrodsky (#3147)
Brian D. Long (#4347)
Gina M. Serra (#5387)
Jeremy J. Riley (#5791)
2 Righter Parkway, Suite 120
Wilmington, DE 19803
(302) 295-5310
Attorneys for Plaintiffs

Werner R. Kranenburg

18