In Friedman v. Khosrowshahi, C.A. No. 9161-CB (Del. Ch. July 16, 2014), the Court of Chancery dismissed the plaintiff’s claims challenging the decision by the compensation committee of Expedia Inc. to accelerate the vesting of a restricted stock unit award. Following the well-trodden path in this “seemingly increasing area of litigation,” the plaintiff claimed that, under Sanders v. Wang, C.A. No. 16640-VCS (Del. Ch. Nov. 10, 1999), and its progeny, the compensation committee violated the unambiguous terms of the corporation’s stock plan such that demand was excused under the second prong of Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984). In dismissing the claim, the court essentially limited the application of Sanders to situations where plaintiffs have alleged with particularity “a clear or intentional violation of a compensation plan.” Nevertheless, the opinion serves as a reminder that stockholders are increasingly scrutinizing actions taken under equity award plans, and that boards of directors and board committees should review the terms of the plans before making awards or adjusting the terms of existing awards.
In Friedman, the compensation committee, pursuant to a stockholder-approved compensation plan, granted the corporation’s chief executive officer a restricted stock unit award satisfying the requirements of Section 162(m) of the Internal Revenue Code of 1986 (the RSU award). In addition to requiring that the committee, as plan administrator, impose specified conditions on certain types of awards, including the RSU award, the plan also granted the committee the authority to (1) impose additional conditions on awards as it deemed appropriate, and (2) unilaterally amend the terms of an award (provided that, prior to the plan’s amendment in 2013, the committee did not have the authority to amend an award in a manner that would cause it to cease to qualify for the exemption from the limitation of deductibility imposed by Section 162(m)).
