Delaware Court Of Chancery Denies Motion To Dismiss Breach Of Fiduciary Duty And Unjust Enrichment Claims Related To Compensation Committee Awards
On April 27, 2022, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery denied, in part, a motion to dismiss a derivative complaint against directors for breaches of fiduciary duties brought by stockholders of Universal Health Services Inc. (the “Corporation”). Knight v. Miller, C.A. No. 2021-0581-SG (Del. Ch. Apr. 27, 2022). Plaintiff, a stockholder, alleged that the directors serving on the board’s compensation committee took advantage of an “obvious dip” in stock price in the wake of the emergence of COVID-19 in March 2020 to grant option awards, including to themselves. Noting that “[s]elf-interested compensation decisions are subject to the entire fairness standard of review,” the Court found that plaintiff “cleared the low hurdle of pleading sufficient facts to make it plausible that the price and process of the option awards transaction were not entirely fair.”
Plaintiff alleged that the stock option awards were granted—and the strike price set—on the day that the Corporation’s stock price dropped to its lowest point during the pandemic. Plaintiff asserted claims for breach of fiduciary duty against the compensation committee directors for granting the awards and against the remaining directors for “accepting the awards.” Plaintiff also asserted claims for unjust enrichment and corporate waste.
Denying the motion to dismiss the claims against the compensation committee directors, the Court referenced several allegations “implying a lack of entire fairness.” The Court noted, for example, that the complaint alleged that (i) the committee “disregarded certain considerations” related to the pandemic; (ii) the compensation exceeded that of the Corporation’s peers; (iii) the Corporation’s CFO had indicated that the stock was a “buy” even at a price more than $20 in excess of the strike price; and (iv) the Corporation’s controlling stockholder was allegedly lobbying the federal government and potentially knew of the timing of federal relief the Corporation might receive. The Court found that the facts alleged were “not overwhelming” but “sufficient” to “raise a reasonably conceivable inference of an unfair transaction at the plaintiff-friendly pleading stage.”
By contrast, the Court dismissed the breach of fiduciary duty claims against the other directors for accepting the awards. The Court explained that such a claim could only be sustained if the complaint pleads “knowingly wrongful acceptance of compensation, and that the standard must be bad faith.” The Court concluded that the complaint failed to plead bad faith.
However, the Court declined to dismiss claims for unjust enrichment against those directors. The Court explained that, while the case is “not strong,” plaintiff was entitled to a pleading-stage inference that the compensation committee set its own awards in an unfair manner and similarly set the other awards “to be consistent,” thereby unjustly enriching the other directors.
Finally, the Court dismissed the claim for waste, which the Court noted requires a “showing that the fiduciaries knowingly entered a transaction of virtually no value to the corporation.” The Court explained that even the complaint itself acknowledged that the option awards were “compensation” and thus they “clearly had a business purpose,” even if allegedly excessive.