The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Hat tip to the Society of Corporate Secretaries for this info: The Delaware Court of Chancery granted in part and denied in part a motion to dismiss a derivative suit claiming breach of fiduciary duty and corporate waste concerning compensation paid to the non-executive directors. In Cambridge Retirement System v. Slavko James Joseph Bosnjak, et al. and Unilife Corp., C.A., plaintiff Cambridge challenged two components of compensation awarded to Unilife directors: (1) equity awards the directors granted to themselves which were approved by stockholders; and (2) cash compensation the directors paid to themselves without obtaining stockholder approval. The entire compensation awarded directors (all directors and both cash and equity) was “$1,356,040 in fiscal year 2012, or approximately 25% of the Company’s revenues that year, and a total of $668,240 in fiscal year 2013, or approximately 24% of the Company’s revenues that year,” an amount the plaintiff alleged was excessive compared to total revenues and to other companies in Unilife’s sector.

The defendants moved to dismiss both claims for failure to make demand. The court excused demand given the directors were not disinterested. The defendants also moved to dismiss the claim relating to the equity component under Rule 12(b)(6). They did not move to dismiss the allegations regarding most of the cash compensation, but did move to dismiss the claims made against cash compensation awarded to one director because it included amounts paid to a consulting entity of which the director was a principal.

With respect to the fiduciary duty claim on the equity component of the compensation, the court granted the motion to dismiss:

[D]efendants argue that they are protected by the business judgment rule because each of those awards was approved by a disinterested majority of Unilife’s stockholders. I agree and dismiss this aspect of the fiduciary duty claim because plaintiff has failed to plead facts to legitimately call into question the validity of the stockholders’ approval or to rebut the presumption of the business judgment rule.

The court also granted the motion to dismiss the waste claim, noting:

These allegations raise questions concerning the fairness of the outside directors’ compensation, but they do not rise to the level necessary to establish a complete failure of consideration or that the director defendants authorized an exchange that was so onesided that no reasonable business person could conclude that Unilife received adequate consideration.

The Court did not dismiss the fiduciary duty claim related to the cash compensation.