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Ravenswood Investment Company, L.P. v. Winmill,
C.A. No. 3730-VCN (Del. Ch. May 31, 2011).
This case involved a plaintiff who is a significant
stockholder in a holding company managed by the individual defendants, a father
and his two sons. The complaint alleges breaches of fiduciary duty
regarding the adoption of a stock buyback plan, the adoption of an options
plan, the issuance of options to themselves, and the decision by the company to
vote in favor of a transaction involving the sale of the interest of a
subsidiary in a third entity. This memorandum opinion grants in part and
denies in part a motion to dismiss. The Court only denied a motion to
dismiss to the extent that the Court allowed a claim to proceed
regarding the vote of the defendants in favor of the sale of an interest
in an affiliated third entity that was alleged to be both self-interested
and unfair to the company.
Brief Overview of Legal Analysis
First, the Court reviewed the familiar standard for a
motion to dismiss under Court of Chancery Rule 23.1 based on the two-pronged
test of Lewis v. Aronson to determine whether presuit demand was
excused. See 473 A.2d 805, 814 (Del. 1984). The Court also
discussed the separate analysis under Rule 12(b)(6) for a motion to dismiss for
failure to state a claim.
(1) Adoption of Stock Option Plan
The Court observed the well-known deference that applies
to compensation decisions by a company for its executives but
also recognized the exception where the individuals comprising the board
and the management of the company are the same as those receiving the
compensation. In those instances, the board bears the burden of proving that
the salary and bonuses they pay themselves are entirely fair unless the board
employs an independent compensation committee or submits the compensation plan
to shareholders for approval. See footnote 44. Neither
safeguard was employed here, and therefore, the defendants had the burden of
demonstrating that the stock option plan was entirely fair to the company and
its shareholders, although the plaintiff bears the burden of alleging facts
that suggest the absence of fairness. See footnote 45.
The plaintiff here alleged that defendants adopted the
stock option plan with the intention to acquire a larger percentage of the
shares of the company in order to dilute the public shareholders' equity.
Of course, the Court cited to other decisions holding that an options plan is
not necessarily unfair simply because it has a dilutive effect on shareholders'
equity. Moreover, the motion to dismiss in this case did not seek
dismissal of the claims regarding the issuance of the options, and
therefore, the Court did not need to address the dilution claim. However,
a problem for the plaintiff in this case was that it did not allege facts
suggesting unfairness in adopting the options plan because even if all the
options were exercised the defendants would not obtain a majority, and
therefore, the Court dismissed the claims challenging the adoption of the
plan-as opposed to the issuance of the options.
(2) Claims Regarding the Adoption and Execution of a Stock Buyback Plan
The Court regarding these claims as derivative in
nature, and interpreted the claims as challenging the buyback plan in
terms of either: (i) diminishing the value of the company, or
(ii) reducing the proportional ownership of the public shareholders.
However, the Court found that the plaintiff did not allege with sufficient
particularity facts indicating that the defendants were interested parties to
the stock buyback plan or that the decision to engage in the buyback program
was not the product of a valid business judgment. In sum, the Court could
not discern any "particularized allegation that would excuse Ravenswood from
making demand with regard to this plan."
(3) Sale by Company of its Interest Affiliate
The plaintiff challenged the approval by the company, as
a 22% shareholder in an affiliate, of the sale of the affiliate's 50% interest
in a company called York and the acceptance by two directors of the company of
separate compensation in connection with that sale. The allegation is
that the acceptance of that compensation tainted the decision of the company to
vote its shares in favor of selling the interest that the company owned in the
affiliate. The Court discussed whether those claims were direct or
derivative and whether the derivative claims survived the motion to dismiss
under Rule 23.1.
Because two of the three directors involved had a
"material, disqualifying self interest" when they voted the shares of the
company in favor of the sale of York, the claims did survive a motion to
dismiss under Rule 23.1. Likewise, the claims survived a motion to
dismiss under Rule 12(b)6 because the allegations in the complaint were that
the compensation was wrongfully paid to the directors in connection with the
transaction which resulted in a benefit to the company from the transaction
being smaller than it should have been.
Read more Delaware business
litigation case summaries and commentary on Delaware
Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X.
Pileggi, of Fox Rothschild LLP.
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