Lewis v. Vogelstein

699 A.2d 327 (Del. Ch. 1997)

 

RULE:

A motion to dismiss a complaint for failure to state a claim upon which relief may be granted arises when it appears reasonably certain that plaintiff would not be entitled to the relief requested, even if all the facts as stated in the complaint are true and all inferences fairly inferable from those allegations are drawn in plaintiff's favor.

FACTS:

This shareholders' suit challenged a stock option compensation plan for the directors of Mattel, Inc., which was approved or ratified by the shareholders of the company at its 1996 Annual Meeting of Shareholders. It contemplated two forms of stock option grants to the company's directors: a one-time grant of options on a block of stock and subsequent, smaller annual grants of further options.

With respect to the one-time grant, the Plan provided that each outside director will qualify for a grant of options on 15,000 shares of Mattel common stock at the market price on the day such options are granted. With respect to the second type of option grant, the Plan qualified each director for a grant of options upon his or her re-election to the board each year.

The plan was then presented to the company’s shareholders at the annual meeting for a vote. The shareholders approved the plan. Harry Lewis (plaintiff) brought a shareholders’ suit in the Court of Chancery of Delaware against Mattel and its directors (defendants). Lewis argued that the theory advanced is that the alleged non-disclosure itself breached the duty of candor and gives rise to a remedy. The defect alleged is that the shareholders were not told the present value of the compensation to the outside directors that the Plan contemplated i.e., the present value of the options that were authorized. 

Lewis further asserted that the directors breached the duty of loyalty, because the option grants represented self-dealing and thus had to be proven entirely fair to the corporation. The directors filed a motion to dismiss the shareholders' complaint for failure to state a claim upon which relief could be granted. 

ISSUE:

Should the directors’ motion to dismiss the shareholders' complaint for failure to state a claim be granted?

ANSWER:

No

CONCLUSION:

The Court held that it could decline to require the board of directors to include information as to present value of stock options proposed to be offered to directors, in information provided to shareholders approving options, on the grounds that pricing of options was insufficient to provide anything but soft data, even though Financial Standards Board required that financial statements value options, because those valuations were easier to make, as they occurred after the market price for exercise of options was known. Also, shareholders bringing derivative action stated a claim against directors of corporation, 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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