Law School Case Brief
Calma v. Templeton - 114 A.3d 563 (Del. Ch. 2015)
Delaware courts examine the merits of a claim for breach of fiduciary duty through one of (primarily) three doctrinal standards of review: business judgment, enhanced scrutiny, and entire fairness. Where a stockholder cannot rebut the presumptive business judgment standard, the stockholder must show that the board's decision cannot be attributed to any rational business purpose—which, in effect, is the standard for waste under Delaware law. But, where a stockholder rebuts the business judgment standard—for example, by establishing that at least half of the directors who approved a business decision are not independent or disinterested —the court reviews the directors' decision under the entire fairness standard, in which case the directors must establish to the court's satisfaction that the transaction was the product of both fair dealing and fair price.
Plaintiff John Calma, a Citrix Systems, Inc. ("Citrix" or the "Company") stockholder, challenges awards of restricted stock units (RSUs) that were granted to eight non-employee directors of Citrix in 2011, 2012, and 2013 (the "RSU Awards"). The majority of the directors' compensation consisted of these RSU Awards, which the board's compensation committee granted under the Company's 2005 Equity Incentive Plan (the "Plan"). That Plan, along with subsequent amendments thereto, was approved by a majority of Citrix's disinterested stockholders in informed and uncoerced votes. Citrix's directors, officers, employees, consultants, and advisors were all beneficiaries under the Plan. The only limit on compensation the Plan imposed is that no beneficiary could receive more than one million shares (or RSUs) per calendar year. There were no sub-limits based on the beneficiary's position at Citrix. Based on Citrix's stock price when this action was filed, one million RSUs were worth over $55 million. Calma contends that the RSU Awards were, when combined with the cash payments that Citrix's non-employee directors received, "excessive" in comparison with the compensation received by directors at certain of Citrix's "peers." Calma seeks to recover against the defendants, the members of Citrix's board, under three theories of liability: (i) breach of fiduciary duty; (ii) waste of corporate assets; and (iii) unjust enrichment. The defendants moved to dismiss the complaint in its entirety under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief may be granted, and under Court of Chancery Rule 23. for failure to make a pre-suit demand upon Citrix's board or to plead facts excusing such a demand. The defendants' primary argument is a ratification defense, but they concede that Citrix stockholders were not asked to ratify the specific RSU Awards at issue here. Instead, the defendants contend that Citrix stockholders ratified the Plan so that any award of RSUs to the directors under the generic one million RSU limit in the Plan must be reviewed under a waste standard. They further contend that it is not reasonably conceivable that the RSU Awards constituted waste.
Does a stockholder approval or ratification of a compensation plan subject the self-interested payment of compensation to non-employee directors under such a plan to judicial review under a waste standard instead of an entire fairness standard?
The court held that demand was excused as futile under Del. Ch. Ct. R. 23.1 in a derivative action challenging awards of restricted stock units to non-employee directors because a majority of the directors when the complaint was filed were interested by virtue of receiving the awards, whether or not that compensation was material to each individual personally. In making this ruling, the court held that the Rales test applied. The complaint stated claims for breach of the fiduciary duty of loyalty and unjust enrichment because the receipt of awards by members of the compensation committee rebutted the presumptive business judgment standard of review, an incentive plan that did not set forth the specific compensation for non-employee directors did not constitute stockholder ratification, and material factual questions existed under the entire fairness standard of review. Because the RSU Awards were self-dealing decisions, the operative standard of review is entire fairness, and it is reasonably conceivable that the total compensation received by the non-employee directors was not entirely fair to the Company. Also, the court found that the awards were not alleged to be excessive enough to support a claim for waste.
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