Lewis v. Vogelstein
699 A.2d 327 (Del.Ch. 1997)

  • The directors of the Mattel corporation developed a plan to give themselves lots of stock options as compensation. They presented this plan to the shareholders who ratified the directors’ actions.
    • The proxy solicitation materials for the plan did not estimate the present value of the stock options to be granted.
  • Some shareholders brought a derivative lawsuit against the directors for breach of fiduciary duty. The directors filed a motion to dismiss.
    • The shareholders argued that the stock plan was excessive, and therefore a breach of the duty of loyalty.
    • The directors argued that the plan had been ratified by the shareholders, so it must be fair.
  • The Trial Court found for the shareholders and denied the motion to dismiss.
    • The Trial Court found that the directors did not have a duty to disclose the estimated present value of the stock options.
    • The Court found that there were two ways in which a shareholder ratification could be ineffectual to rebut an accusation of breach of duty of loyalty:
      • If the majority of those affirming the transaction had a conflicting interest.
      • If the transaction constituted corporate waste.
        • Corporate waste can only be ratified by a unanimous vote.
    • The Court found that corporate waste can be defined as “an exchange of corporate assets for consideration so small as to lie beyond the range at which a reasonable person might be willing to trade.
      • Generally, corporate waste would equate with the concept of a gift in contract law; something that you receive no substantial consideration in exchange for.
    • The Court found that the stock options were sufficiently unusual that they might be considered corporate waste. The Court therefore denied the motion to dismiss.