The day after the fee was disclosed in the company's proxy statement, Tyco's stock dropped sharply, resulting in an almost $17 billion decline in the company's market capitalization in a single day. The suit seeks compensatory and punitive damages for the harm Mr. Walsh's actions caused Tyco and its shareholders.
In a statement, Tyco said: "We are taking this action because Frank Walsh violated his fiduciary duties as a Tyco director and put his personal gain ahead of the interests of the company and its shareholders. Mr. Walsh engaged in a pattern of self-dealing and unethical conduct. He had a clear and unambiguous disclosure obligation to the Board that he chose not to honor. We will pursue this matter aggressively so that Mr. Walsh is held accountable for the damage done to Tyco and its shareholders. The company is also continuing its investigation of Dennis Kozlowski's conduct and will pursue whatever remedies are appropriate based on the results of that investigation."
The Complaint, filed in U.S. District Court, Southern District of New York, asserts causes of action for restitution, breach of fiduciary duty, conversion, unjust enrichment, constructive trust and inducing breach of fiduciary duty. The Complaint reviews a timeline of key events involving Mr. Walsh's misconduct from late in 2000 through January 2002, including:
· Late 2000, when Walsh proposed Tyco acquire CIT and introduced Dennis Kozlowski to the CEO of CIT;
· Mid-2001, after the terms of the CIT transaction had been agreed to, when Walsh asked Kozlowski for a "finder's fee" to compensate him for his role in the transaction, and Walsh ultimately induced Kozlowski to agree to pay him a $20 million "fee" in connection with the acquisition without the knowledge or consent of the Tyco Board;
· On or about July 31, 2001, when Walsh received $20 million from Tyco as his "finder's fee";
· Early January 2002, when non-executive members of the Tyco Board first learned of the payments to Walsh as part of the preparation of the company's proxy statement for its 2002 annual general meeting, informed him that they believed the payments were improper, and asked him to return the money. Walsh refused; and
· January 28, 2002, when Tyco filed its proxy statement, which disclosed the payments to Walsh.
Contrary to his obligation to adhere to the highest standards of a fiduciary, including duties of loyalty, honesty and disclosure, Mr. Walsh, according to the Complaint:
· Asked Dennis Kozlowski for the finder's fee and agreed to the $20 million payment without informing his fellow directors, a clear violation of Tyco's corporate by-laws. "By demanding a fee in addition to his normal compensation as a director, by not seeking Board approval for that fee, and by promoting and actively participating in the discussion of the CIT acquisition without disclosing to the Board that he had a substantial, personal interest in the transaction, Walsh breached his fiduciary duties to Tyco and induced Kozlowski to breach his duties to the Board," the Complaint states;
· Refused to return the fee when confronted at the January 16, 2002 Board meeting. According to the Complaint, "After hearing Walsh's defense of his actions, he was excused from the room while the directors discussed the matter. Walsh was then called back and informed that it was the unanimous view of the directors that his €˜fee' had not been authorized, was improper, and had to be returned. Walsh again refused, gathered his papers, and left the meeting"; and
· Knew by January 16 that Tyco was obligated to disclose his payments in its proxy statement that was being prepared and was to be released in two weeks. "Walsh also knew, and had been advised, that the disclosure of the payments, particularly if Walsh had not agreed to return them, would cause significant damage to Tyco," the Complaint states.
On January 29, 2002, the day after the Walsh payment was disclosed in the company's proxy statement, Tyco's shares fell from $42 to $33.65, reducing the company's market capitalization by almost $17 billion in one day. The Complaint notes that Walsh's position at the time as Tyco's Lead Director and a member of its Corporate Governance and Nominating Committee "made it overwhelmingly likely that the disclosure of his payments would cause substantial harm to the company's reputation and credibility in the marketplace, which it did. Walsh is therefore liable to Tyco for all the loss suffered by the Company as a result of Walsh's conduct, including his refusal in January 2002 to return the funds in question."
The payments to Walsh on July 31, 2001 consisted of $10 million that was paid to him personally and another $10 million that was paid to a charitable fund that Walsh designated and controlled. Since the Board first learned of the payments in January 2002, Tyco has sought, without success, the return of these funds in ways short of litigation.
The law firm of Boies, Schiller & Flexner LLP was retained in this matter last month and is representing Tyco in the litigation.