Calma v. Templeton, C.A. No. 9579-CB (Del. Ch. Apr. 30, 2015) (Bouchard, C.)

In this opinion, the Court of Chancery denied a motion to dismiss a claim challenging grants of compensation to non-employee directors pursuant to a compensation plan that had been approved prospectively by stockholders.  The Court held that the entire fairness standard of review applies when directors grant themselves compensation pursuant to stockholder-approved compensation plans, unless those plans provide either the specific magnitude of compensation for the directors or director-specific ceilings on that compensation.  Because the compensation plan at issue provided only a limit on the amount of compensation for all types of beneficiaries, rather than on the compensation for the non-employee directors specifically, the Court held that the complaint stated a claim under the entire fairness standard.

In May 2005, stockholders of Citrix Systems, Inc. (“Citrix”) approved a 2005 Equity Incentive Plan (the “Plan”) that permitted grants of equity compensation in the form of restricted stock units (RSUs) to its beneficiaries – directors, officers, employees, consultants, and advisors of Citrix.  The Plan limited such compensation to one million RSUs per calendar year for each type of beneficiary.  Between 2010 and 2013, the Compensation Committee, comprised of non-employee directors, granted RSUs to all non-employee directors, including themselves, pursuant to the Plan.  A stockholder filed suit derivatively on behalf of Citrix to challenge such grants.

The Court first determined that the requisite demand upon the board to take action on behalf of the Company was excused.  The Court held that the test articulated in Rales v. Blasband applied instead of the test governing demand set forth in Aronson v. Lewis because the three-director Compensation Committee that awarded the compensation constituted less than half of the board.  Under Rales, demand is excused if the complaint creates a reasonable doubt that the board could properly have exercised its independent and disinterested business judgment in responding to the demand as of the time the complaint was filed. 

The Court found that demand was excused under Rales.  According to the Court, the law is skeptical that a director can fairly and impartially consider whether to have the corporation initiate litigation challenging his or her own compensation.  The Court also held that a complaint need not contain facts showing that the compensation was material to the directors to create a reasonable doubt of disinterestness.

The Court then found that the complaint stated a viable challenge to the grant of compensation.  The Court first noted that director self-compensation decisions are conflicted transactions, and the receipt of self-determined benefits is subject to an affirmative showing that the compensation arrangements are fair to the corporation.  Because the Compensation Committee approved their own compensation, the transaction would be reviewed for entire fairness.

The Court proceeded to evaluate whether the stockholders’ approval of the Plan prospectively ratified the decision of the Compensation Committee and therefore triggered judicial review under a waste standard instead of entire fairness.  The Court denied the ratification defense because the stockholders did not approve the specific grants that were challenged.  The Court surveyed cases evaluating prospective ratification of director compensation and noted that prospective ratification served as a defense only where the stockholders approved the magnitude of compensation in advance or approved a plan that provided a ceiling on grants of compensation specific to directors.  Because the Plan approved by the stockholders only contained limits that applied to each of the various types of beneficiaries, the Court held that approval of the Plan did not ratify the challenged grants.

Finally, the Court held that the complaint stated a claim under entire fairness review.  The Court found that the complaint raised meaningful questions as to whether the grants were in line with director compensation at peer companies and whether certain large companies should be included in the peer group.  Accordingly, the Court denied the motion to dismiss.

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