## Facts

- A stockholder brought a derivative action on behalf of Linear Technology Corporation (a Delaware corporation) against members of its board and certain officers.
- Linear had stockholder-approved stock option plans authorizing the board to grant options, including to directors, at an exercise price equal to the “fair market value on the date of the grant.”
- The complaint alleged the board had an undisclosed practice of timing option grants around quarterly earnings releases to benefit from material nonpublic information.
- The alleged practices included granting options before favorable earnings releases (“spring-loading”) and delaying grants until after unfavorable releases (“bullet-dodging”), producing more favorable exercise prices.
- The plaintiff alleged stockholders were not told, in proxy materials seeking plan approval, that directors would time grants in this manner.
- The complaint asserted that, because the grant dates were allegedly selected using undisclosed inside information, the resulting options were not authorized by the plans’ “fair market value” requirement.
- Claims included breach of fiduciary duty, waste of corporate assets, and unjust enrichment.
- Defendants moved to dismiss for failure to plead demand futility under Court of Chancery Rule 23.1 and for failure to state a claim under Rule 12(b)(6).

## Issues

1. Whether the complaint pled particularized facts creating a reasonable doubt that a majority of the board could impartially consider a litigation demand, given allegations they approved and benefited from unauthorized option grants (Rule 23.1).
2. Whether allegations that directors knowingly timed option grants using undisclosed material nonpublic information stated non-exculpated fiduciary duty and related claims (Rule 12(b)(6)).

## Decision

- The court denied the motion to dismiss.
- The court held the complaint adequately pled demand excusal because a majority of directors allegedly approved and received benefits from option grants that were plausibly unauthorized under the stockholder-approved plans, creating a substantial likelihood of liability.
- The court held the complaint stated claims for breach of fiduciary duty (and related theories) by alleging intentional use of inside information and nondisclosure in connection with self-interested compensation decisions.

## Legal Principles

- Demand is excused under Rule 23.1 when particularized allegations support a reasonable doubt that a board majority is disinterested/independent or that the challenged conduct is a valid exercise of business judgment, including where directors face a substantial likelihood of personal liability.
- Stockholder approval of an equity compensation plan does not ratify director conduct that materially departs from what stockholders were asked to approve or that exceeds the authority granted by the plan’s terms.
- Allegations that directors intentionally use material nonpublic information to set compensation for themselves, while concealing that practice from stockholders, can support a loyalty/good-faith theory rather than a mere care claim.
- At the pleading stage, the court accepts well-pleaded particularized allegations as true and draws reasonable inferences in the plaintiff’s favor; a pleaded pattern of grants clustered around earnings announcements may support an inference of knowing misconduct.

## Conclusion

The court allowed the derivative action to proceed because the complaint plausibly alleged that directors secretly timed stock option grants using inside information, rendering the grants unauthorized under stockholder-approved plans and supporting both demand excusal and non-exculpated fiduciary duty claims.


Weiss v. Swanson, 948 A.2d 433 (Del. Ch. 2008)