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Lewis v. Vogelstein - 699 A.2d 327 (Del. Ch. 1997)

Rule:

A corporate waste entails an exchange of corporate assets for consideration so disproportionately small as to lie beyond the range at which any reasonable person might be willing to trade. Such a transfer is in effect a gift. If, however, there is any substantial consideration received by the corporation, and if there is a good faith judgment that in the circumstances the transaction is worthwhile, there should be no finding of waste, even if the fact finder would conclude a post that the transaction is unreasonably risky.

Facts:

This case involved a shareholders’ suit that challenged a stock option compensation plan for the directors of Mattel, Inc. The stock option compensation plan was approved or ratified by the shareholders of the company at its 1996 Annual Meeting of Shareholders. The plaintiff shareholder, Harry Lewis, asserted that the proxy statement that solicited shareholder proxies to vote in favor of the adoption of the 1996 Mattel Stock Option Plan ("1996 Plan" or "Plan") was materially incomplete and misleading, because it did not include an estimated present value of the stock option grants to which directors might become entitled under the Plan. Lewis further asserted that the grants of options actually made under the 1996 Plan did not offer reasonable assurance to the corporation that it would receive adequate value in exchange for such grants, and that such grants represent excessively large compensation for the directors in relation to the value of their service to Mattel. For these reasons, the granting of the option constituted a breach of fiduciary duty. The directors of Mattel, Inc. filed a motion to dismiss the Lewis’ complaint for failure to state a claim upon which relief could be granted.

Issue:

Did the complaint fail to state a claim upon which relief could be granted, and thus, should be dismissed?

Answer:

No.

Conclusion:

The Court held that the complaint brought by Lewis stated a claim against directors of Mattel, Inc., for commission of waste by causing issuance of stock options to themselves, even though options were ratified by shareholders because suing shareholders claimed some options were exercisable immediately upon issuance and others remained in effect regardless of continued board membership.

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