In this memorandum opinion, the Court of Chancery granted the defendants’ motion to dismiss a stockholder’s complaint, challenging the accelerated vesting of the CEO’s restricted stock units based on an alleged violation of the terms of the applicable compensation plan, for failure to establish demand futility under Court of Chancery Rule 23.1.
Under its incentive compensation plan (the “Plan”), Expedia, Inc. issued 400,000 restricted stock units to its CEO, Dara Khosrowshahi. Pursuant to the applicable RSU award, the units would vest upon the achievement of one of two “performance goals” related to EBITA and stock price, and upon the achievement of an additional operating income “business goal.” The EBITA and stock price performance goals were subsequently achieved. On August 2, 2012, Expedia management recommended, and the compensation committee approved, the accelerated vesting of Khosrowshahi’s RSUs, even though the operating income target was not achieved.
On December 13, 2013, the plaintiff filed a derivative action against Expedia’s directors for breach of their duty of loyalty by agreeing to accelerate the RSUs in violation of the terms of the award, and against Khosrowshahi for unjust enrichment. The defendants moved to dismiss the action for failure to state a claim upon which relief can be granted and failure to make a pre-suit demand on the Expedia board or plead facts to excuse demand as futile.
The plaintiff argued that the Plan prohibited the compensation committee from amending or waiving the RSU award’s “performance goals” that were established for the purpose of satisfying a specified exclusion under Section 162(m) of the Internal Revenue Code, and that the operating income target constituted such a “performance goal.” The defendants argued that only the EBITA and stock price targets constituted performance goals for purposes of Section 162(m), and that the operating income target was only a “business goal” that the compensation committee was free to amend or waive. The Court agreed with the defendants, because the RSU award defined the operating income target separately from the EBITA and stock price performance goals. The Court also concluded that even if the RSU award was ambiguous on the point, the award and the Plan granted to the compensation committee the authority to interpret the award and resolve such ambiguities.
The Court then determined that the plaintiff failed to establish demand futility under either the first or second prong of Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984). With respect to the first prong, the complaint failed to plead particularized facts creating a reasonable doubt concerning the disinterestedness or independence of at least seven of the ten directors on the board when the lawsuit was filed. With respect to the second prong, because the plaintiff failed, for the reasons discussed above, to allege a clear or intentional violation of the Plan, the Court concluded that the plaintiff failed to plead particularized facts supporting a reason to doubt that the waiver of the operating income target was anything other than the product of a valid business judgment. Accordingly, the Court granted the defendants’ motion to dismiss both claims.
The full opinion is available here.