• Skip to primary navigation
  • Skip to content
  • Skip to primary sidebar

McCarter & English Logo

  • People
  • Services
  • Insights
  • Our Firm
    • Leadership Team
    • Social Justice
    • Diversity, Equity & Inclusion
    • Pro Bono
    • Client Service Values
    • Alumni
  • Join Us
    • Lawyers
    • Summer Associates
    • Patent Professionals
    • Professional Staff
    • Job Openings
  • Locations
    • Boston
    • Philadelphia
    • East Brunswick
    • Indianapolis
    • Stamford
    • Hartford
    • Trenton
    • Miami
    • Washington, DC
    • New York
    • Wilmington
    • Newark
  • Share

Share

Browse Alphabetically:

  • A
  • B
  • C
  • D
  • E
  • F
  • G
  • H
  • I
  • J
  • K
  • L
  • M
  • N
  • O
  • P
  • Q
  • R
  • S
  • T
  • U
  • V
  • W
  • X
  • Y
  • Z
  • All
Bankruptcy, Restructuring & Litigation
Blockchain, Smart Contracts & Digital Currencies
Business Litigation
Cannabis
Coronavirus Resource Center
Corporate
Crisis Management
Cybersecurity & Data Privacy
Delaware Corporate, LLC & Partnership Law
Design, Fashion & Luxury
E-Discovery & Records Management
Energy & Utilities
Environment & Energy
Financial Institutions
Food & Beverage
Government Affairs
Government Contracts & Global Trade
Government Investigations & White Collar Defense
Healthcare
Hospitality
Immigration
Impact Investing
Insurance Recovery, Litigation & Counseling
Intellectual Property
Labor & Employment
Life Sciences
Manufacturing
Products Liability, Mass Torts & Consumer Class Actions
Public Finance
Real Estate
Renewable Energy
Sports & Entertainment
Tax & Employee Benefits
Technology Transactions
Transportation, Logistics & Supply Chain Management
Trusts, Estates & Private Clients
Venture Capital & Emerging Growth Companies
  • Broadcasts
  • Events
  • News
  • Publications
  • View All Insights
Search By:
DE Corporate Law
Main image for The Court of Chancery Clarifies the Standard for Evaluating Claims Predicated on Acceptance of Allegedly Unfair Compensation
Publications|Alert

The Court of Chancery Clarifies the Standard for Evaluating Claims Predicated on Acceptance of Allegedly Unfair Compensation

Delaware Law Update

5.25.2022

On April 27, 2022, the Delaware Court of Chancery declined to dismiss claims for breach of fiduciary duty arising from the acceptance of allegedly underpriced equity grants. The grants at issue were made to directors and officers of Universal Health Services, Inc. (“UHS” or the “Company”) during the period of market volatility at the beginning of the COVID-19 pandemic, prompting allegations that they were unfairly timed to take advantage of dips in the company’s stock price.

The grants were determined—and the strike price set—on March 18, 2020, during a meeting of the company’s Compensation Committee. The company’s Compensation Committee historically had conducted compensation meetings in March or April each year, and the March 2020 meeting had been scheduled at least six months prior to that date. It just so happened that UHS’s stock reached its lowest point since 2013 that very same day, closing at $67.69 per share. However, the company’s stock price rebounded shortly thereafter to a closing price of $100.13 per share by March 30, 2020, after an announcement of federal COVID-19 relief legislation.

The plaintiff asserted that each of the named defendants, including the members of the Compensation Committee, violated the fiduciary duty of loyalty “by accepting the March 2020 Awards despite knowing that the March 2020 Awards were issued at strike prices that did not reflect the real value of the Company.”  The plaintiff alleged a separate breach of fiduciary duty claim against the committee members for granting the awards and also pled claims for unjust enrichment against the option recipients and corporate waste against the committee members. The defendants moved to dismiss all of the claims for failure to state a claim.

Addressing the corporate waste claim first, the Court dismissed the count based on its determination that the grants served a legitimate business purpose—namely, retention of employees—and therefore could not constitute waste.

Turning next to the fiduciary duty claim against the committee members for approval of the awards, the Court dismissed the claim as to grants made to non-committee directors and officers based on application of the business judgment rule. However, for grants to committee members in which committee members were on “both sides” of the transaction, the Court was compelled to analyze the grants through the lens of “entire fairness.”  Accordingly, the Court found that the plaintiff’s allegations against the committee members for grants made to themselves and to the Company’s controlling stockholders supported a reasonably conceivable inference of unfairness at the pleadings stage to preclude dismissal. The plaintiff had also asserted an alternate theory of liability predicated on the committee’s alleged bad faith, but the Court found that the plaintiff had failed to plead facts supporting an inference of knowing bad faith conduct.

The Court next addressed the fiduciary duty claim against all defendants based on the acceptance of the awards. The plaintiff alleged generally that the defendants “knew or should have known that the stock price of UHS on March 18, 2020, was not reflective of the actual value of the Company,” and she cited two cases for the proposition that a director or officer “can breach fiduciary duties . . . by accepting compensation that is clearly improper.”

While the Court noted a relative lack of case law establishing types of compensation that would be “clearly improper,” it acknowledged opinions finding that claims for breach of fiduciary duty relating to compensation awards can survive a motion to dismiss where:

  • “[t]he compensation awarded was ultra vires, and the recipients knew it,” or
  • “[w]here compensation was repriced advantageously in light of confidential and sensitive business information, which the recipients knew and which they accordingly used to the company’s detriment.”

In either case, the Court determined that a plaintiff must make a sufficient pleading of scienter to support a determination of bad faith.

Recalling that the plaintiff had failed to make such a showing even as to the committee members, the Court declined to advance the claim for breach of fiduciary duty against the defendants for acceptance of the awards. The Court reasoned that the allegations of the complaint supported merely an inference that the defendants had accepted awards that just so happened to have been issued at the bottom of the market.

Finally, the Court was unwilling to dismiss the claims for unjust enrichment against the non-committee member defendants arising out of the same awards, finding that the plaintiff had satisfied the law pleading threshold to state a claim.

While this ruling from the Court of Chancery is an important reminder of the considerations and care that should be afforded to compensation determinations, the decision also serves as a particularly helpful reminder of the various standards of judicial review that the Court will apply in analyzing both interested and independent transactions. Perhaps most notably, it further clarifies standards to be applied to claims based solely on acceptance of allegedly unfair compensation. The Court’s ruling makes it clear that claims unsupported by allegations of scienter will be subject to dismissal.

sidebar

pdfemail

Related People

Media item: Sarah E. Delia
Sarah E. Delia

Partner

Media item: John Basenfelder
John Basenfelder

Associate

Related Services

Delaware Corporate, LLC & Partnership Law
Subscribe to our Insights
McCarter & English, LLP
Copyright © 2023 McCarter & English, LLP. All Rights Reserved.
  • Login
  • Attorney Advertising
  • Privacy
  • Awards Methodology
  • Contact
  • Subscribe
  • Sitemap

The McCarter & English, LLP website is for informational purposes only. We do not provide legal advice on this website. We can provide legal advice only to our clients in specific inquiries that they address to us. If you are interested in becoming a client, please contact us, but do not send any information about your specific legal question. We cannot serve as your lawyers until we establish an attorney-client relationship, which can occur only after we follow procedures within our firm and after we agree to the terms of the representation.

Accept Cancel