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Friedman v. Maffei, C.A. No. 11105-VCMR (Del. Ch. Apr. 13, 2016) (Montgomery-Reeves, V.C.)

April 13, 2016

In this memorandum opinion, the Court of Chancery granted defendants’ motion to dismiss pursuant to Rule 23.1, finding that plaintiff failed to demonstrate that the board of directors wrongfully refused plaintiff’s demand on the board to take appropriate action concerning the allegedly improper vesting of a director’s restricted stock units.

On December 20, 2011, TripAdvisor, Inc. (“TripAdvisor”) entered into an agreement with Dara Khosrowshahi, a member of TripAdvisor’s board of directors (the “RSU Agreement”), concerning the vesting of his TripAdvisor restricted stock units (the “RSUs”). Under the RSU Agreement, 50% of the RSUs would vest immediately upon any “Change of Control” (as defined in the RSU Agreement).  The remaining RSUs would vest if Khosrowshahi was terminated from the board without cause within a year of a Change of Control, or would be forfeited if, within that period, he was terminated for cause or voluntarily resigned.

A transaction occurred on December 11, 2012, constituting a “Change of Control” under the RSU Agreement, and 50% of the RSUs immediately vested. That same month, a company on which Khosrowshahi served as Chief Executive Officer, Expedia, announced it would purchase a 61.6% equity interest in trivago GmbH (“Trivago”).  Khosrowshahi emailed TripAdvisor’s CEO and President Stephen Kaufer the day of that announcement stating, “[l]et me know if you want me off the [TripAdvisor board.]”  Based on Kaufer’s view that Trivago was a competitor of TripAdvisor, Kaufer replied, “[it would be] best if [Khosrowshahi] drop[ped] off the Trip[Advisor] board . . . .”  TripAdvisor informed Khosrowshahi the following month that his remaining RSUs would vest immediately based on TripAdvisor’s understanding that Khosrowshahi would “tender[] at [TripAdvisor’s] request [his] resignation . . . .”

Plaintiff, a TripAdvisor stockholder, sent a letter to the TripAdvisor board of directors demanding that the board rescind the RSUs or seek damages against certain TripAdvisor individuals. In the letter, plaintiff asserted that the vesting of the remaining RSUs violated the RSU Agreement.  TripAdvisor formed a special committee to consider the demand and the committee subsequently found no basis on which to rescind the vested RSUs or seek damages.  Plaintiff filed a complaint asserting that the board wrongfully refused her demand.

In considering the complaint, the Court explained that a board’s decision to refuse a demand receives the protection of the business judgement rule unless the plaintiff can allege particularized facts raising a reasonable doubt that the board’s refusal was the product of a valid exercise of business judgement. This determination, the Court explained, involves consideration of whether the board acted on an informed basis, consistent with the board’s duty of care, and in good faith, consistent with the board’s duty of loyalty.

The Court found that plaintiff failed to allege the requisite particularized facts. In reaching its conclusion, the Court first found that plaintiff failed to raise a reasonable doubt as to whether the board complied with its duty of care.   The Court considered the process undertaken by the board in responding to plaintiff’s demand and determined that the board informed itself of material information reasonably available to it through the special committee’s investigation.

The Court next found that plaintiff failed to raise a reasonable doubt that the board refused her demand in good faith. In response to plaintiff’s argument that Khosrowshahi must return the RSUs because he either was terminated for cause or voluntarily resigned, the Court emphasized that the inquiry is whether there is reason to doubt that the board’s action was taken in good faith.  The Court explained that the question is not whether the board’s conclusion was wrong, but whether the board intentionally disregarded the company’s best interests.  The board’s refusal of the demand was, in  the Court’s view, within the bounds of reasonable judgment.  The Court also found the record indicated that Khosrowshahi’s resignation was not voluntary and that TripAdvisor had made the decision that he resign.

The full opinion is available here