Delaware Business Litigation Report

Chancery Sustains Fiduciary Duty Claims Arising From Option Grants At Pandemic-Low Price

Knight v. Miller, C.A. No. 2021-0581-SG (Del. Ch. Apr. 27, 2022)
In mid-March 2020, at a time when the COVID-19 pandemic caused the corporation’s stock price to trade at a periodic low, the corporation’s compensation committee awarded stock options to themselves and other directors and officers. Addressing the defendants’ motion to dismiss, the Court reasoned that the circumstances did not support an inference of bad faith. Nevertheless, because the compensation committee members received options and thus were personally interested in determining their terms, such claims were subject to entire fairness review. Similarly, option grants to certain directors who together also were the corporation’s controlling stockholders would be subject to entire fairness review as involving non-ratable benefits to a controller. The Court rejected, however, the stockholder-plaintiffs’ theory that certain officer-defendants breached their fiduciary duty of loyalty by receiving the awards. Surveying prior cases, the Court reasoned that to sustain such a claim, the circumstances would have to be such that the recipient acted with scienter (i.e., in “bad faith”) by receiving the compensation at-issue. Finally, given that the awards potentially resulted from breaches of fiduciary duty by the director-defendants, the Court sustained at the pleading stage a claim that all recipients were unjustly enriched. 

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