Director Pay: Delaware Chancery Deals Procedural Blow to Plaintiffs
Director pay has been getting more scrutiny lately – but a Skadden memo covers one procedural bright spot for companies. Here’s the intro:
On October 30, 2019, the Delaware Court of Chancery struck a major blow against the plaintiffs’ bar’s efforts to lower the statutory hurdle to maintaining stockholder derivative claims. A stockholder of Ultragenyx Pharmaceutical Inc. claimed that the company’s board of directors had awarded its non-employee directors excessive pay.
Under applicable Delaware law, a stockholder asserting such a claim has two mutually exclusive options: make a pre-suit demand on the board or plead with particularity the reason it would have been futile to do so. A stockholder who makes a pre-suit demand may not later claim demand futility, but instead must make the more difficult claim that the board wrongfully refused the demand, which is essentially a business judgment analysis.
Plaintiffs have been taking a dual-track approach – by sending pre-suit letters to boards that meet the requirements of a demand and “suggest” that the board take remedial action – while at the same time expressly stating that the letter isn’t a demand, so they can preserve the “futility” pleading.
The Chancery Court sees through these shenanigans! They permitted the Ultragenyx board to treat a letter as a demand and deferred to the board’s decision not to pursue the allegations.
-Liz Dunshee, CompensationStandards.com November 7, 2019
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