In a recently decided case, Pfeiffer v. Leedle, a Delaware court declined to dismiss a shareholder derivative action against a board of directors for breach of fiduciary duty based on a claim that the directors had granted stock options in excess of the maximum number of options permitted to be granted to a participant under the company’s stock plan.
Under the company’s stock plan, no participant was permitted to be granted options with respect to more than 150,000 shares of stock in any calendar year. The plaintiffs claimed that the board had granted options to the company’s CEO for 450,000 shares in 2011 and for 285,000 in 2012.
The court did not conclude whether the board had breached its fiduciary duties as a result of granting options in excess of the plan limits, but it did find that the plaintiff had satisfied the technical requirements to survive a motion to dismiss by showing that the board’s actions were clear and unambiguous violations of the company’s stock plan.
Upon finding that the plaintiff was able to show that the board knowingly or deliberately failed to adhere to the terms of a stock plan, the court concluded that the court could not rely on the business judgment rule, under which a Delaware court will not second-guess business judgments of the directors.
Therefore, the breach of fiduciary duty claim could proceed to a full evidentiary trial on the merits. The court’s findings suggest that a “negligent” violation of the stock plan by the board or unambiguous terms in the stock plan would receive the benefit of the business judgment rule.