The Court of Chancery of Delaware follows well-settled standards governing motions to dismiss for failure to state a claim. At the motion to dismiss stage, all well-pleaded factual allegations made in the complaint are to be accepted as true. Moreover, the court must draw all reasonable inferences in favor of the non-moving party, and dismissal is inappropriate unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof. Conclusory allegations are not considered as expressly pleaded facts or factual inferences. Such facts must be put forth in the complaint and not merely in subsequent briefs. In the context of a motion to dismiss for failure to state a claim, however, the pleading standard does not reach so high a bar as Del. Ch. Ct. R. 23.1. Thus, where a plaintiff alleges particularized facts sufficient to prove demand futility by showing doubt that a board's action was a valid exercise of business judgment, that plaintiff a fortiori rebuts the business judgment rule for the purpose of surviving a motion to dismiss pursuant to Del. Ch. Ct. R. 12(b)(6).
On March 18, 2006, The Wall Street Journal published a one-page article, based on an academic's statistical analysis of option grants, which revealed an arguably questionable compensation practice of backdating. This practice involves a company issuing stock options to an executive on one date while providing fraudulent documentation asserting that the options were actually issued earlier. These options may provide a windfall for executives because the falsely dated stock option grants often coincide with market lows. Such timing reduces the strike prices and inflates the value of stock options, thereby increasing management compensation. This practice allegedly violated any stock option plan that requires strike prices to be no less than the fair market value on the date on which the option is granted by the board. Further, this practice runs afoul of many state and federal common and statutory laws that prohibit dissemination of false and misleading information. After the article appeared in the Journal, Merrill Lynch issued a report demonstrating that officers of numerous companies, including Maxim Integrated Products, Inc., had benefited from so many fortuitously timed stock option grants that backdating seemed the only logical explanation. The report engendered this action. Plaintiff Walter E. Ryan alleged that defendants breached their duties of due care and loyalty by approving or accepting backdated options that violated the clear letter of the shareholder-approved Stock Option Plan and Stock Incentive Plan ("option plans"). Individual defendants move to stay this action in favor of earlier filed federal actions in California ("federal actions"). In the alternative, they move to dismiss this action on its merits, particularly, on account of plaintiff’s failure to make a demand or prove demand futility.
Did the shareholder provide sufficient particularity in the pleading to survive a motion to dismiss for failure to make demand under Del. Ch. Ct. R. 23.1?
The court found that the stay request was to be denied as Delaware had an overwhelming interest in resolving questions of first impression under Delaware law and the doctrine of forum non conveniens did not require the stay. Additionally, the shareholder provided sufficient particularity in the pleading to survive a motion to dismiss for failure to make demand under Del. Ch. Ct. R. 23.1. Further, there were sufficient allegations to raise a reason to doubt the disinterestedness of the board. In addition, the complaint alleged bad faith and, thus, a breach of the duty of loyalty sufficient to rebut the business judgment rule and survive a motion to dismiss. However, the shareholder lacked standing under Del. Code Ann. tit. 8, § 327 to assert claims arising before he became a shareholder. Finally, the action was not time-barred under Del. Code Ann. tit. 10, § 8106.