It is well-established that an entity may be deemed a director subject to Section 16 if the entity has “deputized” a person to serve as its representative on the issuer’s board of directors. Almost all of the litigated deputization cases have involved an investment fund that designated a principal or employee to serve on the board, but a court has just held that a family trust, too, may be a director by deputization.
In Calenture LLC v. Pulte, the judge denied a motion to dismiss a complaint filed against Karen Pulte and her stepson, Mark Pulte, as successor trustees of a trust established by the late William Pulte Sr., alleging that the trust was a director by deputization based on Pulte Sr.’s nomination of his grandson, William Pulte Jr., to serve on the board of PulteGroup Inc. As in all deputization cases, the court recounted the factors generally considered relevant to a determination of director by deputization status but noted that, in any particular case, some factors (or other factors) may be entitled to more weight than others.
Allegations in the Complaint
The complaint alleges that Pulte Sr. founded PulteGroup and was, at various times, a Section 16 officer and a director until he retired in 2010. By 2015, Pulte Sr. soured on the issuer’s CEO, Richard Dugas, and successfully sought to have another company executive, James Grosfeld, appointed to the board. At the time, Pulte Sr. was the settlor and trustee of the family trust. Pulte Sr. later met with Grosfeld and Pulte Jr. to develop a strategy to remove Dugas as CEO. Soon after, Grosfeld resigned from the board and a few months later Dugas resigned as CEO and, pursuant to a “settlement agreement” among Pulte Sr., the trust and PulteGroup, Pulte Jr. was simultaneously appointed to the board. The complaint alleges that Pulte Jr. was appointed because Pulte Sr. wanted a “family representative” on the board. Pulte Sr. died in 2018, and his (second) wife and his son (Pulte Jr.’s father) succeeded him as trustee.
Factors Supporting Inference of Deputization
In declining to hold that the complaint did not allege facts sufficient to support an inference of deputization, the court noted the following factors:
- Pulte Jr. served on the issuer’s board “at the behest and direction” of the trust;
- The timing of Pulte Jr.’s appointment to the board supports an inference that he became a director for the purpose of replacing Grosfeld as the trust’s representative; and
- While Pulte Jr. had no investment control over the trust’s assets and no formal role with the trust, his family relationship with the trustees supports an inference that he likely shared confidential information with the trustees that could have influenced their investment decisions.
Whether the trust will ultimately be deemed a director by deputization depends on what, if anything, the plaintiffs are able to uncover during discovery to support their allegations. The court’s decision makes clear, though, that any entity can be deemed a director by deputization based on its affiliation with a director.
— Alan Dye, Section16.net, April 11, 2022
