## Facts

- A stockholder brought a derivative action on behalf of a Delaware corporation challenging multiple compensation decisions by the board and certain officers.
- Under a stockholder-approved equity incentive plan, only broad aggregate and per-person share caps limited awards; the board retained substantial discretion over director compensation.
- In 2009 and 2010, the board granted directors restricted-stock units valued at approximately \$743,700 and \$215,000 per director, respectively; the plaintiff alleged these self-awards were excessive.
- The board approved a \$1.8 million payment to the retiring CEO; the plaintiff alleged it was an improper retroactive bonus and corporate waste.
- The board also approved a \$1.25 million incentive payment to the CEO under a plan designed to obtain tax deductibility based on existing IRS guidance; the plaintiff alleged the structure risked future tax liability.
- Additional claims challenged other incentive payments (allegedly paid despite unmet plan conditions) and option/incentive designs that allegedly failed to minimize taxes.
- The plaintiff did not make a pre-suit demand on the board; defendants moved to dismiss under Court of Chancery Rules 12(b)(6) and 23.1.

## Issues

1. Whether demand was excused under Rule 23.1 for a challenge to directors’ self-compensation where stockholders approved an equity plan containing only broad caps, and whether the awards were reviewed under entire fairness rather than the business-judgment rule.
2. Whether the complaint pleaded non-exculpated fiduciary misconduct or corporate waste regarding the CEO retirement payment, the CEO incentive payment and asserted tax risks, and other compensation/tax-structure decisions sufficient to survive dismissal and excuse demand.

## Decision

- The court granted in part and denied in part the motion to dismiss.
- The director self-compensation claim based on directors’ equity awards survived; demand was excused and the claim was subject to entire-fairness review.
- Claims challenging the CEO retirement payment, the CEO incentive payment and tax-deductibility theory, and the remaining compensation/tax-structure claims were dismissed for failure to plead demand futility and for failure to state a claim.

## Legal Principles

- Demand futility requires particularized facts creating reasonable doubt that directors are disinterested/independent or that the challenged decision was a valid exercise of business judgment (including the stringent waste standard).
- Stockholder approval of an equity plan protects subsequent director compensation decisions under the business-judgment rule only when the plan fixes compensation or imposes meaningful limits such that the vote can be treated as ratifying the substance of future awards.
- When directors set their own compensation under a plan that gives them broad discretion without meaningful limits, the decision is treated as self-dealing and is reviewed under the entire-fairness standard (fair dealing and fair price).
- Corporate waste is pleaded only when the exchange is so one-sided that no person of ordinary, sound judgment could view the corporation as having received adequate consideration.
- Reliance on existing tax authority and choosing a non-maximally tax-efficient compensation structure, without more, generally does not support a reasonable inference of waste or bad faith.

## Conclusion

The court permitted a derivative challenge to directors’ self-awarded equity compensation to proceed because stockholder approval of a broadly capped plan did not ratify specific award levels, making entire-fairness review and demand excusal plausible, but it dismissed the remaining compensation claims as insufficiently pleaded under demand-futility and waste standards.


Seinfeld v. Slager, No. 6462-VCG, 2012 WL 2501105 (Del. Ch. June 29, 2012)