## Facts

- A stockholder filed a derivative action challenging a corporation’s payment of more than $130 million in executive bonuses from 2004–2007 that were not tax deductible.
- The complaint alleged the board knowingly chose not to adopt an Internal Revenue Code § 162(m) compensation plan that could have made certain bonuses deductible, because it did not want compensation decisions constrained by plan requirements.
- After the complaint was filed, the board adopted a § 162(m) plan, and stockholders approved it at the 2009 annual meeting.
- The corporation later merged into an acquiring company in 2010, and the § 162(m) plan was never used.
- The plaintiff agreed to dismiss the action as moot and sought $1 million in attorneys’ fees, asserting the litigation conferred a corporate benefit by prompting adoption of the plan.

## Issues

1. Whether a board’s decision to pay executive bonuses without adopting an available IRC § 162(m) plan can constitute corporate waste under Delaware law.
2. Whether, in a mootness dismissal, attorneys’ fees may be awarded under the corporate-benefit doctrine when the complaint was not “meritorious when filed.”

## Decision

- The Delaware Supreme Court affirmed the denial of the fee application.
- The Court held the complaint did not plead corporate waste with the required particularity.
- Because the complaint would not have survived a motion to dismiss when filed, it was not “meritorious when filed,” and the plaintiff was not entitled to corporate-benefit fees.

## Legal Principles

- Corporate waste is pleaded only in the rare case where the challenged decision is so irrational that it amounts to a decision no reasonable person would make.
- Executive compensation decisions are generally protected by the business judgment rule and are not actionable as waste absent allegations supporting bad faith, an ill-informed process, or an exchange so one-sided as to be functionally a gift.
- Under the corporate-benefit doctrine following a mootness dismissal, attorneys’ fees require a showing that the underlying claim was “meritorious when filed,” meaning it could have withstood a motion to dismiss at filing.
- A corporation’s subsequent voluntary action consistent with requested relief does not justify fees if the original complaint failed to state a viable claim.

## Conclusion

The court treated the board’s choice to forgo potential tax deductions in favor of compensation flexibility as a rational business judgment, not waste, and denied mootness-based attorneys’ fees because the derivative complaint was not meritorious when filed.


Freedman v. Adams, 58 A.3d 414 (Del. 2013)