Francis Pileggi has blogged a recent decision by Vice-Chancellor Strine entitled Sample v. Morgan. The case involves the issuance of 200,000 shares of stock of Randall Bearings, Inc. to three senior officers of the company, who together comprised the majority of the company's five-member board of directors. The grant was made pursuant to a stock incentive plan (and accompanying charter amendment) that had been approved by the company's stockholders. The Compensation Committee that approved the grant was comprised of the two "independent" directors on Randall Bearings's board of directors. Perhaps the most important fact: the "200,000 shares represented a 46% increase in the number of shares that were issued and outstanding, from 431,680 as of the time the board approved the Charter Amendment and Incentive Plan, to 631,680 if all the Plan shares were issued."

Yikes!

Vice-Chancellor Strine's opinion denies the defendants' motion to dismiss -- a pretty easy call -- but it contains some interesting nuggets. Here are some quick takes on the case:

• Darian Ibrahim is writing a paper about individual v. collective liability of directors, and he discusses In re Emerging Communications, Inc. S'holders Litig., 2004 WL 1305745, *38 (Del. Ch.2004) at length. In Emerging Communications, then-Vice-Chancellor Jacobs wrote: "The liability of the directors must be determined on an individual basis because the nature of their breach of duty (if any), and whether they are exculpated from liability for that breach, can vary for each director." As Darian observes, Chancellor Chandler noted in his Disney opinion the tension between this view and the collective liability view espoused by Smith v. Van Gorkom. Vice-Chancellor Strine's new opinion comes down squarely on the side of individual liability: "Each director’s motivations and actions must be assessed individually before any finding of liability can be made." (citing Emerging Communications)

• Vice-Chancellor Strine uses the phrase "just ducky" (all of the directors of Randall Bearings "share the same counsel and have filed one brief taking the un-nuanced position that everything that was done was just ducky"). A Westlaw search reveals that this is the first use of this phrase in any opinion in the "allcases" database. It appears in three other cases, but in each case as a product or store name.

• Waste cases are almost as rare as Caremark cases, but just as Vice-Chancellor Strine found a viable Caremark claim in December, he has found what may be a viable waste claim in this case. His discussion is characteristically insightful:

Claims of waste are sometimes misunderstood as being founded on something other than a breach of fiduciary duty. Conceived more realistically, the doctrine of waste is a residual protection for stockholders that polices the outer boundaries of the broad field of discretion afforded directors by the business judgment rule. The wording of the test implies as much, as it condemns as wasteful a transaction that is on terms so disparate that no reasonable person acting in good faith could conclude the transaction was in the corporation’s best interest. When pled facts support an inference of waste, judicial nostrils smell something fishy and full discovery into the background of the transaction is permitted. In the end, most transactions that actually involve waste are almost found to have been inspired by some form of conflicting self-interest. The doctrine of waste, however, allows a plaintiff to pass go at the complaint stage even when the motivations for a transaction are unclear by pointing to economic terms so one-sided as to create an inference that no person acting in a good faith pursuit of the corporation’s interests could have approved the terms.

• Vice-Chancellor Strine refers to Santa Claus: "Even in an era when many scholars believe that compensation committees perhaps misunderstand the pertinence of Santa Claus to their work, the grants to the Insider Majority are extraordinary." This is the first reference to Santa Claus by a judge on the Court of Chancery (Vice-Chancellor Strine quotes a Texas court's reference to Santa Claus in Allied Capital Corp. v. GC-Sun Holdings, L.P., 910 A.2d 1020 (Del.Ch. 2006).) Could this signal a new line of cases in Delaware? Perhaps a law review article is in order.

• Vice-Chancellor Strine discusses the plaintiffs' "abdication" claim. This is not a Caremark/Stone claim (under which a director "consciously avoid[s] any attempt to carry out one's duties"), but a claim that the board has given away crucial powers. In this case, the plaintiffs claimed that the directors had abdicated their power to issue equity. Vice-Chancellor Strine wasn't buying that argument: "Although it is undoubtedly correct that a board of directors’ authority to issue equity is an important, statutorily-authorized power, that does not mean that a board cannot, for proper business reasons, enter into contracts limiting its ability to exercise that power." Again, that seems exactly right.

• Finally, Vice-Chancellor Strine offers a provocative footnote, re-interpreting a couple of famous Delaware Supreme Court opinions, Quickturn and Omnicare. Both opinions were authored by Justice Holland and suggested that certain actions of a board of directors were "invalid under Section 141(a)"  or "per se invalid," rather than breaches of fiduciary duty. Both of the opinions were adventurous and incoherent, and Vice-Chancellor Strine attempts to make sense of them by bringing them under the fiduciary umbrella:

I understand that certain Supreme Court decisions have purported to address board decisions that limit the future flexibility of the board in a starker manner, reflecting a view that such decisions were illegal, not just inequitable. The decision in Quickturn Design Systems, Inc. v. Shapiro, 721 A.2d 1281 (Del.1998), involving a board’s unilateral adoption of a slow-hand poison pill, is an example. But it is easy to reach the same result – namely, a holding that a slow-hand poison pill should be condemned – employing the more nuanced tool of equity. Certainly, that is rather obviously the case in the more extreme instance of a dead-hand poison pill, the only equitable justifications of which would seem to reside in sentiments commonly expressed by dictators seeking to justify their retention of permanent authority in the face of electoral risk (i.e., only they can protect the citizenry). The more controversial majority decision in Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del.2003), also condemned as per se invalid certain actions. But that was in part precisely the reason that the decision was so controversial and drew two well-reasoned dissents. Those actions were specifically authorized by statute and therefore could not be condemned except on equitable grounds.

For present purposes, it is worth noting that both of these decisions were rendered in cases involving board conduct in the mergers and acquisitions context, in which the concern arises that directors may seek to restrict their own authority (or that of their successors) in order to retain control or favor a particular bidder. The Delaware General Corporation Law does not contain provisions that prevent directors from entering into contracts with third-parties for legitimate reasons simply because those contracts necessarily impinge on the directors’ future freedom to act. If the judiciary invented such a per se rule, directors would be rendered unable to manage, because they would not have the requisite authority to cause the corporation to enter into credible commitments with other actors in commerce.

The opinion also has a discussion of ratification, though I found that more mundane than the points highlighted above. If you would like to read the opinion, you can download an edited version here.

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