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Shaev v. Adkerson, C.A. No. 10436-VCN (Del. Ch. Oct. 5, 2015) (Noble, V.C.)

October 5, 2015

In this memorandum opinion, the Court of Chancery granted defendants’ motion to dismiss plaintiff’s claims that in granting one million restricted stock units, defendants, the board of directors of a corporation, violated its certificate of incorporation and bylaws and breached their fiduciary duties, including the duty of disclosure.

In 2013, Freeport-McMoran Inc. (“Freeport”) acquired two other companies. Prior to the acquisitions, defendant Richard Adkerson had been the sole CEO of Freeport. As part of the acquisitions, the Freeport board limited Adkerson’s authority as CEO to one part of Freeport’s business, installed another individual as CEO for the remaining portion of Freeport’s business, and adopted bylaw amendments that subjected both CEOs’ authority to the chairman of the board of directors. Adkerson agreed to these changes and voted in favor of the bylaw amendments. The Freeport board subsequently became concerned that these changes in governance triggered a clause in Adkerson’s employment agreement that allowed him to terminate his employment for “good reason,” and potentially receive a $46 million severance package (the “Good Reason” provision). After consulting with an expert, the board agreed to grant Adkerson one million restricted stock units (“RSUs”) to resolve the potential Good Reason claim. Plaintiff filed suit challenging the validity of the RSU grant.

Plaintiff’s first claim was a direct claim alleging that the granting of the RSUs violated Freeport’s certificate of incorporation and bylaws. Plaintiff reasoned that because the board of directors had a right to amend the bylaws, Freeport was safe from a contract claim relating to such amendment and therefore that the granting of the RSUs was in bad faith. The Court found that, regardless of the board of directors’ right to amend the bylaws, the amendment triggered Adkerson’s Good Reason claim. Because Adkerson’s claim was at least arguable, the business judgment rule applied. The court held that defendants’ desire to retain Adkerson as CEO and avoid litigation satisfied the standards of the business judgment rule and therefore dismissed plaintiff’s direct claims.

Before addressing the merits of plaintiff’s derivative claims alleging breaches of fiduciary duties, the Court considered whether plaintiff had satisfied the demand requirements of Court of Chancery Rule 23.1. Plaintiff first claimed that the demand requirement was not implicated in this case because the board of directors made a legal decision, not a business decision, since the board’s grant of RSUs was based on its opinion regarding the merits of the Good Reason claim. The Court found that the board made a business decision because it chose to grant the RSUs in order to avoid potential litigation based on expert advice. The Court held that while a decision regarding the validity of a contract may be a legal decision, the decision to grant a payment in lieu of a severance payment was a business decision subject to demand futility requirements.

Plaintiff next argued that the board of directors’ conduct was so egregious on its face that it could not satisfy business judgment, that there was a substantial risk of director liability and therefore that demand was futile and excused. To support this claim, plaintiff claimed that because the board had two defenses to the Good Reason claim, Adkerson’s promise to refrain from bringing the Good Reason claim was worthless. Plaintiff first claimed that the board would have an acquiescence defense because Adkerson approved the appointment of Flores and associated bylaw amendments, and because the board of directors knew of such approval. However, the Court found that Adkerson was not challenging the appointment of Flores or the bylaw amendments, but was instead asserting rights that resulted from those events. Because Adkerson had a good faith, reasonable belief that the Good Reason provision remained valid, the minimum standard for settling the claim was met. Plaintiff next alleged that Adkerson’s claim would be void as a matter of public policy since Delaware law forbids parties to contracts from imposing early termination penalties. However, because Delaware courts have routinely upheld similar provisions, the Court held that plaintiff’s public policy argument failed. Finally, the Court noted that plaintiff’s allegations of bad faith necessitated a showing that the board of directors consciously disregarded their fiduciary responsibilities. The Court held that because the board employed an expert, met several times, finalized an agreement that resolved the Good Reason claim, reduced and deferred the potential cash outlay and retained Adkerson as CEO, the board did not act in bad faith, and thus dismissed plaintiff’s derivative claims.

Plaintiff’s final argument was that though the Freeport stockholders voted to approve the grant of RSUs, the vote was not fully informed because there were material false statements and omissions and that defendants breached their duty of disclosure. Plaintiff first claimed that the board statement that the $35 million grant of RSUs was “$11 million less than the potential cash payout under Mr. Adkerson’s employment agreement,” was inaccurate because plaintiff alleged that the board omitted the fact that Freeport only owed Adkerson $2.6 million and that $46 million was an unenforceable penalty. The Court disagreed because such a disclosure would have required the board to disclose a legal theory, which is not required under Delaware law. Plaintiff also claimed that defendants were required to make several disclosures that the Court found were immaterial. The Court therefore found that the stockholders were fully informed when they approved the grant. The Court also noted that assuming plaintiff’s disclosure allegations were valid, there was no relief available to plaintiff because the entire board was reelected during Freeport’s 2015 shareholder meeting, which mooted plaintiff’s claims regarding 2014 proxy disclosure violations. The Court therefore dismissed plaintiff’s duty of disclosure claims.

The full opinion is available here