In this memorandum opinion, the Court of Chancery granted defendant’s motion to dismiss, finding that plaintiff was not entitled to attorneys’ fees under the corporate benefit doctrine because plaintiff had not presented a meritorious cause of action for breach of fiduciary duty.
Astoria Financial Corporation (“Astoria”) is a publicly traded Delaware corporation engaged primarily in the operation of its wholly-owned subsidiary, Astoria Federal, whose business includes various banking activities. The plaintiff in this action is the custodian of Astoria common stockholder Malka Raul UTMA, NY.
This litigation arose from a dispute over whether Astoria’s board satisfied disclosure requirements under the Dodd-Frank Reform and Consumer Protection Act (“Dodd-Frank”). Among other things, Dodd-Frank requires certain companies, including Astoria, to hold non-binding stockholder votes (i) to approve executive compensation arrangements (the “Say-On-Pay Vote”) and (ii) to determine how often advisory votes on executive compensation should occur (the “Frequency Vote”). The companies must disclose the results of the Frequency Vote and the decision on how often Say-On-Pay Votes will be held. In addition, the companies are required to disclose in their proxy statements whether and how their boards considered the results of the Say-On-Pay Vote in making executive compensation decisions. Those two requirements were at issue in this litigation.
Before its 2011 annual stockholders’ meeting, Astoria submitted a proxy statement describing the proposed executive compensation packages. The proxy statement included the board’s recommendations that the stockholders vote to approve the compensation packages and hold future Say-On-Pay Votes annually. A majority of the stockholders voted to follow these recommendations. Astoria filed a Form 8-K, which included the statement, “based on the vote indicated above, the results of the future advisory shareholder votes to approve the compensation of the Company’s named executives is every year.”
Before its 2012 annual stockholders’ meeting, Astoria distributed a proxy statement describing the executive compensation packages, as well as the board’s recommendation that the stockholders approve those compensation packages. Plaintiff contended that this proxy statement did not disclose whether, and if so, how, the Astoria board considered the results of the 2011 Say-On-Pay vote in making its executive compensation decisions. Plaintiff sent a demand letter (the “Demand”) to the Astoria board on April 16, 2012, ten days after the release of the 2012 proxy statement, alleging that this omission violated the disclosure requirements and that the board had breached its fiduciary duty of loyalty, candor, and good faith. Plaintiff also demanded that Astoria (1) issue corrective disclosures, (2) adopt stronger protocols regarding disclosures and (3) amend the Compensation Committee’s Charter to require the Compensation Committee to consider the results of future Say-On-Pay Votes when making executive compensation decisions. The Demand did not request that Astoria conduct any litigation.
Astoria responded to the Demand by letter dated May 3, 2012. Astoria’s response explained that (i) on April 20, 2012, Astoria filed an amendment with the SEC to its form 8-K/A declaring its intention to hold annual Say-On-Pay Votes, (ii) on April 25, 2012, Astoria mailed a letter to shareholders clarifying the use of the advisory shareholder vote on compensation approval and (iii) Astoria had authorized its Director of Investor Relations to review the reporting requirements and implement an education program on the requirements. On September 19, 2012, the board amended Astoria’s charter as requested by plaintiff to require the Compensation Committee to consider the results of future Say-On-Pay votes in executive compensation decisions and to reach out to shareholders who voted against compensation packages to determine the reasons for their opposition.
Plaintiff requested that Astoria pay attorneys’ fees in connection with investigating and mailing the Demand. When the request was denied, plaintiff filed a complaint alleging that his efforts to remedy the alleged disclosure violations conferred a benefit upon Astoria that justified an award of attorneys’ fees. Under the corporate benefit doctrine, a plaintiff may receive attorneys’ fees when (i) the underlying claim was meritorious when filed; (ii) the defendant took the action benefitting the corporation before a judicial resolution was achieved; and (iii) the resulting corporate benefit was causally related to the lawsuit. The Court noted that the requirement that an underlying claim be “meritorious when filed” referred to the presentation of the complaint to the board and did not require the plaintiff to file an action in the Court of Chancery. The Court assumed, for the purpose of defendant’s motion to dismiss, that plaintiff’s actions had resulted in a corporate benefit to Astoria.
The Court then analyzed whether plaintiff’s complaint contained allegations that stated a meritorious cause of action for the breach of the duty of candor, loyalty, or care. The Court found that the omissions identified by plaintiff did not rise to a level of a breach of the duty of candor. The Court found that how the board considered the results of the 2011 Frequency Vote was not material information, given that Astoria included the annual frequency recommendation in the 2011 proxy statement, subsequently disclosed the adoption of the measure in the 8-K form, and included the board’s intent to hold a second Say-On-Pay Vote in the 2012 proxy statement. Similarly, the Court found that whether and how the board considered the results of the 2011 Say-On-Pay Vote was not material, and noted that plaintiff had not relied on any authority in Delaware law requiring boards to disclose all of the factors they considered when approving executive compensation.
The Court then found that plaintiff did not state a claim for breach of the duty of good faith under the Caremark standard. Caremark requires a sustained or systematic failure of a board to oversee compliance with applicable legal standards to establish a lack of good faith. However, plaintiff conceded that Astoria’s response to the Demand indicated that the company regularly evaluates its compensation related disclosures, policies, and procedures. A breach of the duty of good faith independent of Caremark requires a finding that the board intentionally broke the law or acted not in the best interests of the corporation. The Court found that plaintiff did not provide a basis for finding that Astoria intentionally violated Dodd-Frank disclosure requirements. Emphasizing that the corporate benefit doctrine required the actual existence of a meritorious claim at the time of a demand rather than a hypothetical claim, the Court rejected plaintiff’s argument that, if Astoria had disregarded the Demand, the company would have violated the disclosure requirements.
Finally, the Court found that plaintiff did not plead facts sufficient to state a meritorious claim for breach of the duty of care. To succeed on such a claim, plaintiff would have to show that the Astoria board acted with gross negligence, and the Court noted that plaintiff had presented no allegations that this had occurred. The Court concluded that plaintiff had not presented an underlying meritorious claim for breach of fiduciary duty. Accordingly, the Court granted Astoria’s motion to dismiss, finding that the complaint failed to state a claim for entitlement to attorneys’ fees under the corporate benefit doctrine.
The full opinion is available here.