## Facts

- Mattel, Inc. adopted a 1996 director stock option compensation plan that granted options to outside directors, including incumbent directors who approved the plan.
- The plan was submitted to shareholders and approved at Mattel’s 1996 annual meeting.
- A shareholder brought suit challenging the plan as a self-interested director compensation arrangement.
- The complaint alleged the proxy statement soliciting approval was misleading because it did not disclose an estimated present value of the options using an option-pricing model (e.g., Black-Scholes).
- The complaint also alleged the option grants were excessively large relative to directors’ services, amounting to a breach of fiduciary duty and corporate waste.
- Defendants moved to dismiss for failure to state a claim.

## Issues

1. Whether fiduciary disclosure duties require directors soliciting shareholder approval of an option plan to estimate and disclose the options’ present value using an option-pricing model.
2. Whether allegations that a shareholder-approved, self-interested director option plan is excessively generous can state a claim for corporate waste and breach of fiduciary duty.
3. What effect shareholder ratification has on judicial review of a self-interested director compensation plan, including whether ratification can foreclose a waste claim.

## Decision

- The court granted the motion to dismiss as to the disclosure claim.
- The court held Delaware fiduciary law did not require directors to provide a present-value estimate of future option grants in the proxy materials for this plan.
- The court denied the motion to dismiss as to the corporate waste/breach of fiduciary duty claim.
- The court held that shareholder approval did not, at the pleading stage, eliminate the possibility of a waste claim challenging the magnitude of the compensation.

## Legal Principles

- A motion to dismiss is granted only if, accepting well-pleaded facts and reasonable inferences, the plaintiff could not obtain relief under any set of provable facts consistent with the pleading.
- Delaware fiduciary disclosure law requires disclosure of material facts, but does not require disclosure of speculative, model-dependent “soft information” such as an estimated present value of option grants under an option-pricing model.
- Corporate waste is an exchange of corporate assets for consideration so small that no reasonable person would view it as a fair trade; it is conceptually similar to a gift.
- Shareholder ratification may affect the standard of review for self-interested transactions, but it does not automatically insulate director compensation from challenge.
- A claim of corporate waste is not defeated by non-unanimous shareholder ratification; waste, as a gift-like transfer, can be ratified only by unanimous shareholder approval.
- In a shareholder-approved director compensation plan, a plaintiff’s “entire fairness” framing does not avoid the practical constraint that the complaint must plausibly allege waste-level excess to proceed.

## Conclusion

The court rejected a disclosure theory requiring option present-value estimates in proxy materials, but allowed a claim to proceed that a shareholder-approved director option plan could constitute corporate waste, holding that ordinary shareholder ratification does not bar waste challenges to self-interested director compensation.


Lewis v. Vogelstein, 699 A.2d 327 (Del. Ch. 1997)