## Facts

- Stockholders of Computer Associates International, Inc. (CA) brought a derivative action challenging a large equity award approved by CA’s board compensation committee.
- In August 1995, CA stockholders approved the Key Employee Stock Ownership Plan (KESOP), which authorized the compensation committee to grant up to six million shares to key executives.
- The KESOP included an early-vesting feature tied to CA stock reaching and maintaining a specified price, and it provided for certain adjustments related to stock splits.
- Between 1995 and 1997, CA effected three 3-for-1 stock splits.
- In May 1998, the compensation committee determined the early-vesting condition was satisfied and granted executives 20.25 million shares, treating the plan’s six-million-share authorization as upwardly adjustable for the stock splits and related effects.
- Stockholders alleged the committee exceeded the plan’s shareholder-approved share limit and that directors breached fiduciary duties by authorizing an unauthorized equity issuance.
- Directors asserted they had discretion to interpret the plan and that the plan’s purpose required adjusting the number of shares to preserve intended equity value after the stock splits.

## Issues

1. Whether a shareholder-approved equity plan authorizing “up to six million shares” permitted the compensation committee to increase the plan’s share cap to reflect later stock splits.
2. Whether allegations that directors knowingly authorized equity grants beyond shareholder-approved limits raised reasonable doubt that the action was a valid exercise of business judgment, excusing demand under Aronson.
3. Whether granting equity in excess of plan authority stated a claim for breach of fiduciary duty (including waste and loyalty/care-based theories) at the pleadings stage.

## Decision

- The Court of Chancery held that the KESOP authorized only six million shares and did not authorize increasing that ceiling to account for stock splits.
- The court concluded the compensation committee exceeded its authority by awarding shares beyond the amount approved by stockholders.
- The court determined that allegations of a knowing and intentional decision to exceed the shareholder-granted authority created reasonable doubt that the directors acted within valid business judgment, excusing demand under Aronson.
- The court resolved the merits at the pleadings stage in favor of the stockholders on the challenged grant as unauthorized and constituting a fiduciary breach theory.

## Legal Principles

- A shareholder-approved equity compensation plan operates as a binding limit on director authority; directors must act within the plan’s express terms.
- Plan provisions allowing adjustments for stock splits do not permit directors to override an unambiguous numerical cap on shares authorized for issuance.
- A board’s knowing and intentional decision to exceed stockholder-approved limits can fall outside business judgment protection.
- In a derivative action, particularized allegations that directors knowingly exceeded shareholder-granted authority can create reasonable doubt under Aronson and excuse pre-suit demand.

## Conclusion

The court treated the KESOP’s six-million-share limit as controlling, rejected an interpretation that expanded the share cap after stock splits, and held that allegations of a knowing over-issuance supported fiduciary-duty liability and demand futility under Aronson.


Sanders v. Wang, 1999 WL 1044880 (Del. Ch. Nov. 8, 1999)