COURT OF CHANCERY OF THE STATE OF DELAWARE LORI W. WILL LEONARD L. WILLIAMS JUSTICE CENTER VICE CHANCELLOR 500 N. KING STREET, SUITE 11400 WILMINGTON, DELAWARE 19801-3734
June 1, 2023
Stephen E. Jenkins, Esquire Francis G.X. Pileggi, Esquire Tiffany Geyer Lydon, Esquire Aimee M. Czachorowski, Esquire Ashby & Geddes, P.A. Lewis Brisbois Bisgaard & Smith LLP 500 Delaware Avenue, 8th Floor 500 Delaware Avenue, Suite 700 Wilmington, DE 19801 Wilmington, DE 19801
Jody C. Barillare, Esquire Morgan, Lewis & Bockius LLP 1201 N. Market Street, Suite 2201 Wilmington, DE 19801
RE: Knight v. Miller, et al., and Universal Health Services, Inc., C.A. No. 2021-0581-LWW
Dear Counsel: I write regarding the proposed settlement of this derivative action challenging
equity grants awarded to directors and officers of Universal Health Services, Inc.
After a careful review of the record, I conclude that the proposed settlement is
inadequate and decline to approve it. My reasoning follows.
I. BACKGROUND
The following facts are drawn from the Verified Stockholder Derivative
Complaint (the “Complaint”) and documents it incorporates by reference (including
those produced to the plaintiff pursuant to 8 Del. C. § 220), the parties’ motion to C.A. No. 2021-0581-LWW June 1, 2023 Page 2
dismiss briefing, the court’s April 27, 2022 Memorandum Opinion denying the
motion to dismiss in part, various submissions made in connection with the proposed
settlement, and the settlement hearing transcript.1 I am not making findings of fact
in this decision. Instead, I am reciting the record as it was presented for the purpose
of evaluating the parties’ request for approval of their settlement.
A. The Awards
The plaintiff in this action is a purported stockholder of nominal defendant
Universal Health Services, Inc. (the “Company” or “UHS”). She challenges grants
of equity compensation (the “Awards”) made to directors and officers of the
Company amid COVID-19-related market volatility in mid-March 2020.
The plaintiff alleges that, despite the abnormal macroeconomic conditions,
the Compensation Committee of the Company’s Board of Directors proceeded with
a March 18, 2020 meeting concerning the Awards.2 The timing of that meeting was
fixed about six months in advance.3 The Company’s stock option grants had
historically (with one exception) been made during meetings held in March.4 Still,
1 See Verified S’holder Deriv. Compl. (Dkt. 1) (“Compl.”); Mem. Op. (Dkt. 37); Tr. of Dec. 15, 2022 Telephonic Settlement Hr’g (Dkt. 68) (“Hr’g Tr.”). 2 Compl. ¶¶ 68, 71; Mem. Op. 10. 3 Mem. Op. 8-9. 4 Id. at 9. C.A. No. 2021-0581-LWW June 1, 2023 Page 3
the plaintiff averred that the Compensation Committee treated the option grant
process in March 2020 as though it “were any other normal year when it manifestly
was not.”5
The March 18 Compensation Committee meeting began before the market
opened for trading.6 The Compensation Committee invited non-independent
director Warren Nimetz to attend the meeting.7 The meeting was also attended by
the Company’s outside compensation consultants, who delivered a presentation and
made a recommendation regarding the Awards and comparisons to the Company’s
“peer group.”8
After the consultants left the meeting, alleged controller defendant Alan
Miller and UHS Chief Financial Officer Steve Filton joined the Compensation
Committee “and the members discussed performance bonuses for executive
officers.”9 The Compensation Committee “decided to defer any discussion or
approval of the specific bonus formulae . . . for the Company’s executive officers [in
5 See id. at 10 (quoting Pl.’s Answering Br. in Opp’n to Defs.’ Mot. to Dismiss Verified S’holder Deriv. Compl. (Dkt. 24) at 8). 6 Compl. ¶ 68. 7 Id. ¶ 69 (noting that Nimetz was not a member of the Compensation Committee). 8 Id. ¶¶ 70, 77. 9 Mem. Op. 11 (citing Compl. ¶ 70; Opening Br. in Supp. of Defs.’ Mot. to Dismiss Verified S’holder Deriv. Compl. (Dkt. 20) (“MTD Opening Br.”) Ex. F at 2). C.A. No. 2021-0581-LWW June 1, 2023 Page 4
fiscal year 2020] given the significant uncertainties created by the recent emergence
of the Covid-19 crisis.”10
The Compensation Committee then discussed recommended stock option
grants, “presumably still in the presence of Nimetz and Alan Miller.”11 The
members “reviewed the previously distributed recommendations of management as
to the grant of stock options and ‘premium priced’ stock options to the senior
executives,” and passed a resolution to grant the Awards.12 Over one million options
and restricted stock units were granted to the Company’s officers and directors, with
over 750,000 options going to the Company’s controllers Alan Miller and Marc
Miller.13 “The resolution adopted by the Compensation Committee purport[ed] to
specify the closing sale price of the common stock as the strike price of the stock
options, though it would not be determined until later that day.”14
UHS common stock closed at $67.69 per share on March 18, which was 16%
lower than the closing price the prior day.15 The next day—when the federal
10 MTD Opening Br. Ex. F at 2; see also Mem. Op. 11. 11 Mem. Op. 11. 12 Id. (quoting MTD Opening Br. Ex. F at 2). 13 Compl. ¶ 72. 14 Mem. Op. 11. 15 Compl. ¶ 71. UHS stock had traded between approximately $124 and $148 per share throughout the previous three months. Id. ¶ 28. C.A. No. 2021-0581-LWW June 1, 2023 Page 5
government’s second phase coronavirus relief legislation passed—the market
improved and the Company’s stock price rose 25%.16 By the time the third phase
was signed into law on March 30, the Company’s stock price closed at $100.13.17
B. The Litigation
On July 6, 2021, the plaintiff filed the Complaint against various UHS
directors and officers. She advanced a breach of fiduciary duty claim against the
Compensation Committee for granting the Awards, a breach of fiduciary duty claim
against all defendants for accepting the Awards, an unjust enrichment claim, and a
corporate waste claim.18 The plaintiff asserted that making a pre-suit demand would
have been futile because the Board received a material financial benefit from the
Awards and faced a substantial likelihood of personal liability for breaching their
duties of loyalty.19 The defendants subsequently moved to dismiss the Complaint
under Court of Chancery Rule 12(b)(6), arguing that the price and process relating
to the equity grants were entirely fair.20
16 Id. ¶ 74. 17 Id. ¶ 75 (“This was 47% above the March 18 grant price of $67.69.”). 18 See id. ¶¶ 114-28. 19 See id. ¶¶ 104-13. 20 MTD Opening Br. 23-24. C.A. No. 2021-0581-LWW June 1, 2023 Page 6
On April 27, 2022, Vice Chancellor Glasscock issued a Memorandum
Opinion on the motion. The court largely declined to dismiss the breach of fiduciary
duty claim against the Compensation Committee for granting the Awards.21 By
granting the Awards to the Company’s outside directors—including themselves—it
was reasonably conceivable that the Compensation Committee members undertook
a self-interested compensation decision subject to the entire fairness standard of
review.22 Although the Company’s stockholders had approved a stock incentive
plan pursuant to which the Awards were issued, the plan allowed for significant
Compensation Committee discretion.23 The facts pleaded to indicate a lack of
fairness were “not overwhelming” but “sufficient” to survive a Rule 12(b)(6)
motion.24 As to the Compensation Committee approving grants to UHS’s
controlling stockholders, entire fairness likewise applied given the controllers’
“ability to elect directors” and receipt of non-ratable benefits.25
The court also denied the defendants’ motion to dismiss the unjust enrichment
claim.26 Since the court dismissed the fiduciary duty claims against all defendants
21 Mem. Op. 34-35. 22 Id. at 21 (citing In re Investors Bancorp, Inc. S’holder Litig., 177 A.3d 1208 (Del. 2017)). 23 Id. at 22-23 (citing Investors Bancorp, 177 A.3d at 1222). 24 Id. at 24-25. 25 Id. at 26-27. 26 Id. at 33-34. C.A. No. 2021-0581-LWW June 1, 2023 Page 7
except for the Compensation Committee members, the unjust enrichment claim was
not “truly duplicative” of the remaining breach of fiduciary duty claim.27
The defendants’ motion to dismiss was otherwise granted.
C. The Settlement
The defendants answered the Complaint on May 27, 2022.28 The plaintiffs
went on to serve requests for production and interrogatories on the defendants, and
the individual defendants served requests for production on the plaintiff.29 “As the
parties began to take discovery, they started to discuss a framework to address the
issues raised in the Complaint without the need for uncertain and expensive
litigation.”30 Settlement talks began on June 9.31
The parties reached a proposed settlement on August 26 and entered into a
memorandum of understanding.32 The defendants agreed to adopt “a package of
targeted governance reforms designed to strengthen controls over the Company’s
27 Id. 28 See Dkts. 43-45. 29 See Dkts. 52-53. 30 See Pl.’s Appl. for Approval of the Settlement, an Award of Att’ys’ Fees and Expenses, and the Pl.’s Serv. Award (Dkt. 58) (“Pl.’s Settlement Br.”) 8. 31 Id. 32 Id. at 8-9. C.A. No. 2021-0581-LWW June 1, 2023 Page 8
compensation practices and prevent a recurrence of the alleged misconduct.”33
These “reforms,” as detailed in the parties’ Stipulation and Agreement of Settlement
(the “Stipulation”), included the following:34
• Changes to the Individual Defendants’ Stock-Based Compensation. The Compensation Committee decreased the weighting of stock-based compensation to the Company’s top five executive officers and outside directors with an accompanying increase in the weighting of cash compensation. These individuals began receiving stock-based compensation “in a fixed dollar value rather than in a fixed number of shares” starting in March 2022.35 The executive officers also began to receive 50% of their annual stock-based compensation in performance- based restricted stock units rather than in stock options.36 Additionally, the Compensation Committee eliminated the award of stock options with five-year vesting to compensate the outside director defendants, and now awards restricted stock units that vest in one year installments.37 I refer to this category of governance enhancements as the “Stock-Based Compensation Changes.”
• Fixed Award Date for Stock-Based Compensation. The Compensation Committee “decided” to fix the annual grant date for the outside directors’ stock-based compensation to the date of the annual May Board meeting held after the annual meeting of stockholders, subject to certain exceptions.38 The individual defendants also agreed that any future changes to this date would be disclosed to stockholders.39 I refer
33 Id. at 9. 34 Stip. and Agreement of Settlement (Dkt. 54) (“Stip.”). I refer to the terms of Exhibit A to the Stipulation for a complete description of these so-called reforms. 35 Stip. Ex. A at 2-3. 36 Id. at 3. 37 Id. at 4. 38 Id. at 5. 39 Id. C.A. No. 2021-0581-LWW June 1, 2023 Page 9
to this category of governance enhancements as the “Fixed Award Date Changes.”
• Compensation Committee Executive Session. The Compensation Committee’s “principal deliberations” about Alan Miller or Marc Miller’s compensation will be held in executive session.40 But the Compensation Committee is not prohibited from “any incidental discussion of, or taking any formal action concerning, such compensation outside of executive session, nor from discussing or negotiating compensation with Alan Miller or Marc Miller.”41 I refer to this governance enhancement as the “Executive Session Change.”
• Compensation Committee Training. The Compensation Committee will “receive training from the Company’s outside counsel or an independent consultant,” which can include previously engaged counsel or consultants, “regarding the laws and regulations governing the Company’s current stock incentive plan and other compensation plans.”42 I refer to this governance enhancement as the “Training.”
• Outside Advisor Process Review. The Compensation Committee will “engage outside counsel or an independent consultant,” which can include previously engaged counsel or consultants, “to review the process by which the Committee grants stock options or other equity awards.”43 The results of this review will be presented to the Compensation Committee. I review to this governance enhancement as the “Process Review.”
• Review of Changes to Stock-Based Compensation Policies. The Company’s in-house or outside counsel will review and advise the Compensation Committee on any changes proposed or made to the Company’s policies and procedures about the award of stock-based
40 Id. 41 Id. at 6. 42 Id. 43 Id. at 6-7. C.A. No. 2021-0581-LWW June 1, 2023 Page 10
compensation.44 I refer to this governance enhancement as the “Policy Review.”
• Review of Public Disclosures. The Compensation Committee—either separately or with the full Board—will “review the Company’s proxy statements and Form 8-K disclosures relating to executive or director compensation prior to filing.”45 The directors will be assisted by “outside counsel or independent consultants,” “as they deem necessary.”46 I refer to this governance enhancement as the “Disclosure Review.”
The Stipulation was filed with the court on September 28, 2022. In addition
to the governance enhancements discussed above, the Stipulation explained that the
parties bargained for a release of claims relating to the matters raised in the
Complaint and the underlying Section 220 demand.47 The Stipulation further stated
that the defendants and Company agreed not to oppose the plaintiff’s counsel’s
application for an award of fees and expenses of $925,000.48
On September 29, the court entered a scheduling order with respect to notice
and a settlement hearing.49 A settlement hearing was held on December 15. At the
hearing, Vice Chancellor Glasscock expressed concern that the settlement amounted
44 Id. at 7. 45 Id. 46 Id. 47 See Stip. ¶ 1(j)-(q). 48 Id. ¶ 13. 49 Dkt. 55. C.A. No. 2021-0581-LWW June 1, 2023 Page 11
to “a handful of nothing.”50 The court took the parties’ request to approve the
settlement under advisement. The plaintiff’s counsel noted that they would be
willing to “serv[e] discovery” and “continue to litigate the case.”51
The court “strongly suggest[ed]” that the parties “talk about whether there is
something more tangible that can be done in the way of corporate governance.”52
Two letters from counsel followed. First, the defendants’ counsel told the court that
the defendants would be willing to supplement the Process Review to require that
the Compensation Committee adopt any process-related recommendations made,
unless doing so was deemed not in the best interest of the Company or its
stockholders.53 Next, the plaintiff’s counsel informed the court that the plaintiff was
“unable to join Defendants in submitting” the supplemental Process Review
provision for the court’s review.54 The plaintiff proposed recommencing the
litigation if the court concluded that the proposed settlement was unsatisfactory.55
50 Hr’g Tr. 36. 51 Id. at 41-42. 52 Id. at 42. 53 See Dkt. 67 at 3. 54 Dkt. 69 at 1. 55 Id. at 3. The letter also indicated that the court could consider the additional term proposed by the defendants in assessing the overall reasonableness of the settlement, despite declining to join the defendants in proposing it. Id. After these letters were filed, the action was reassigned to me. Dkt. 70. C.A. No. 2021-0581-LWW June 1, 2023 Page 12
II. ANALYSIS
Court of Chancery Rule 23.1(c) requires court approval of the dismissal or
settlement of derivative actions.56 The court must determine whether the settlement
is “fair and reasonable,” exercising “a form of business judgment to determine the
overall reasonableness of the settlement.”57 The court is to “consider the nature of
the claim, the possible defenses thereto, [and] the legal and factual circumstances of
the case, and then . . . apply its own business judgment in deciding whether the
settlement is reasonable in light of these factors.”58 In doing so, the court must
carefully scrutinize “the reasonableness of the ‘give’ and the ‘get’”—that is, what
the nominal defendant received “in exchange for ending the litigation.”59
A. The “Get”
The plaintiff’s brief in support of the settlement argues that she achieved
significant benefits for the Company in the form of the Stock-Based Compensation
Changes and the Fixed Award Date Changes.60 The Stock-Based Compensation
56 Ct. Ch. R. 23.1(c). 57 Polk v. Good, 507 A.2d 531, 536 (Del. 1986). 58 Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1284 (Del. 1989) (quoting Polk, 507 A.2d at 535). 59 In re Trulia, Inc. S’holder Litig., 129 A.3d 884, 891 (Del. Ch. 2016) (addressing a putative class action settlement). 60 See Pl.’s Settlement Br. 15-17. C.A. No. 2021-0581-LWW June 1, 2023 Page 13
Changes were purportedly intended to address the plaintiff’s assertion that awarding
equity compensation with a value based on grant-date market prices may result in
an unearned windfall if UHS’s stock price increases shortly after the grant date.61
The Fixed Award Date Changes were purportedly designed to eliminate the
directors’ discretion concerning the grant date of the defendants’ stock-based
compensation and ensure that stockholders have an opportunity to be heard before
any such compensation is granted.62
These categories of enhancements might arguably have provided some
tangible (albeit modest) benefits to the nominal defendant. But they were
implemented well before the settlement was reached.63
61 See Compl. ¶¶ 76-77. 62 Pl.’s Settlement Br. 17-18. 63 Stip. Ex. A at 1-5 (describing changes already undertaken: “[t]he Compensation Committee has decreased the weighting of stock-based compensation . . .”; “commencing in March 2022, each of the Executive Officer Defendants began receiving stock-based compensation denominated in a fixed dollar value . . .”; “the Executive Officer Defendants now receive 50% of their annual stock-based compensation not in stock options . . .”; “[t]he Compensation Committee has likewise decreased the weighting of stock-based compensation to individual Defendants . . .”; “commencing in 2022, each Outside Director Defendant began receiving stock-based compensation denominated in a fixed dollar value . . .”; “the Compensation Committee decided to fix the annual grant date for the Outside Director Defendants’ stock-based compensation to the date of the Board of Directors’ meeting held in May”); see supra notes 35-46 and accompanying text; see also Universal Health Servs., Inc. Schedule 14A (Apr. 6, 2022) at 57-58 (describing changes to director compensation undertaken by the Compensation Committee and Board in March 2022). C.A. No. 2021-0581-LWW June 1, 2023 Page 14
The plaintiff’s counsel maintains that these governance enhancements were
undertaken by the Board because of the lawsuit.64 That may well be true. And the
defendants’ counsel, for their part, avers that the Board was mindful of the issues
raised by the lawsuit and did not “want to wait” to make improvements.65 I do not
doubt it. Insofar as these changes were caused by the lawsuit, they might support a
mootness fee. They are not, however, present consideration for a settlement. To
treat them as such would deprive the court of its “important oversight role” in
approving derivative settlements.66
That leaves the remaining enhancements, which Vice Chancellor Glasscock
observed were “largely precatory.”67 I agree.
The Executive Session Change, which ensures the “principal deliberations”
on the controllers’ compensation are made outside of their presence, seems to be the
64 Hr’g Tr. 31. 65 Id. at 32. 66 Barkan, 567 A.2d at 1284 (explaining the general rule that settlements cannot be approved without present consideration); see also Chickering v. Giles, 270 A.2d 373, 375 (Del. Ch. 1970) (declining to approve a settlement the parties implemented before the court had an opportunity to rule on its fairness and observing than an exception might be present if the parties were “faced with an emergency or facts which compel action before the Court can give notice or hold a hearing on a settlement petition”). I see no basis to make an exception to this general rule. 67 Hr’g Tr. 30. C.A. No. 2021-0581-LWW June 1, 2023 Page 15
most considerable.68 It provides for baseline good governance. But it is heavily
qualified and makes explicit that “incidental discussion[s]” and “formal action”
about the controllers’ compensation can occur outside of an executive session.69 The
Executive Session Change does little to remove the potential for influence by the
controllers, despite this being a pervasive theme described in the Complaint and in
the court’s Memorandum Opinion.
The other enhancements—the Training, Process Review, Policy Review, and
Disclosure Review—are trifling. The Compensation Committee met with outside
compensation consultants before setting the challenged Awards.70 The Process
Review does not seem to require a markedly different process. For example, the
Compensation Committee is not required to follow the advice of the outside counsel
or consultant (subject to its fiduciary duties, of course). It is also not apparent to me
that the Policy Review requires any changes from the Compensation Committee’s
prior process. One would expect that Company counsel was already reviewing
proposed changes to UHS’s stock-based compensation policies and procedures. As
to the Disclosure Review, the Board members have an enduring obligation to review
certain compensation-related disclosures. Despite acknowledging this, the
68 Stip. Ex. A at 6. 69 Id. 70 Compl. ¶¶ 70, 77. C.A. No. 2021-0581-LWW June 1, 2023 Page 16
plaintiff’s counsel believes that the settlement will make the directors “more
diligent” in performing this task.71
As I previously noted, the defendants proposed a favorable change to the
Process Review after the settlement hearing.72 The plaintiff was “unable to join
Defendants in submitting [the] provision to the court.”73 Because there has been no
meeting of the minds on an amended settlement, I must limit my analysis to the terms
of the initial settlement presented.
B. The “Give”
In exchange for the governance enhancements (i.e., those not adopted
pre-settlement), the plaintiff agreed to dismiss this action and to a release of claims.
The Stipulation defines the “Released Plaintiff’s Claims” as “claims, rights, duties,
controversies” and the like—whether known or unknown—that:
(i) were or could have been asserted by the Company, or by Plaintiff or any other UHS Stockholder derivatively on the Company’s behalf, and (ii) arise out of or relate to the allegations, transactions, facts, matters, disclosures, or non-disclosures set forth in the Complaint filed in the Action or in Plaintiff’s January 11, 2021 inspection demand, or that arise out of or relate in any way to the defense or settlement of the claims against Defendants, except for claims relating to the enforcement of the Stipulation.74
71 Hr’g Tr. 28-29. 72 See Dkt. 67. 73 Dkt. 69. 74 Stip. ¶ 1(n). C.A. No. 2021-0581-LWW June 1, 2023 Page 17
The plaintiff’s claims were not especially strong and were found to be viable
in no small part based on inferences.75 The plaintiff acknowledges that she faced
“significant obstacles.”76 Still, certain claims survived a motion to dismiss and were
subject to the entire fairness standard of review. The plaintiff ultimately agreed to
release claims that could have potentially recovered a small money damages award
for the nominal defendant, if the defendants failed to prove entire fairness at trial.
C. Balancing the “Give” and the “Get”
In Investors Bancorp, the Delaware Supreme Court held that—in most
situations—actions taken by directors in setting their own compensation should be
reviewed under the entire fairness standard because of the inherent conflicts of
interest involved.77 Since then, the Court of Chancery has had a steady diet of breach
of fiduciary duty suits regarding allegedly excessive director compensation. These
claims have become fodder for quick settlements and substantial fee requests.
In resolving such suits, the parties generally agree to some form of prospective
governance enhancements or therapeutic terms in exchange for a release. This
approach is, in my view, often appropriate. To require disgorgement from the
75 E.g., Mem. Op. 25, 34. 76 Pl.’s Settlement Br. 13-14. 77 177 A.3d at 1217 (“Although authorized to do so by statute, when the board fixes its compensation, it is self-interested in the decision because the directors are deciding how much they should reward themselves for board service.”). C.A. No. 2021-0581-LWW June 1, 2023 Page 18
directors or officers who received the compensation—before those defendants are
found to have engaged in wrongdoing—would create an inequitable bar to the
voluntary settlement of claims that Delaware law encourages.78 A derivative action
is not about punishment.79
The settlement terms presented in post-Investors Bancorp director
compensation cases vary wildly. In some cases, the parties agreed to meaningful
improvements like fixed caps on compensation or quantifiably lower director
compensation more in line with the companies’ peers.80 In others, the settlement
78 See Rome v. Archer, 197 A.2d 49, 53 (Del. 1964); see also In re Salesforce.com, Inc. Deriv. Litig., C.A. No. 2018-0922-AGB, at 57 (Del. Ch. Dec. 17, 2019) (TRANSCRIPT) (“I disagree with the objector’s criticism of the settlement for not obtaining disgorgement from the current directors. Prospective benefits can provide consideration for a derivative settlement, and indeed this court has approved such arrangements many times.”); J & S Eppers Revocable Tr. v. De Backer, C.A. No. 2021-0084-PAF, at 25-26 (Del. Ch. Jan. 21, 2022) (TRANSCRIPT) (“Although the settlement does not involve a cash payment to the company or disgorgement from these director defendants, the benefit of capping the outside directors’ compensation based on a percentage of peers is a quantifiable and meaningful benefit.”). 79 See Beals v. Wash. Int’l, Inc., 386 A.2d 1156, 1159 (Del. Ch. 1978) (“Traditionally and historically, the Court of Chancery as the Equity Court is a court of conscience and will permit only what is just and right with no element of vengeance and therefore will not enforce penalties or forfeitures.”). 80 E.g., In re Salesforce.com, C.A. No. 2018-0922-AGB, at 55-56, 61 (overruling an objection and approving a settlement of claims challenging non-employee director compensation where the parties agreed to a “meaningful ‘get’” of capping average director compensation at the 75th percentile of the company’s peers, which reduced the average annual compensation by approximately $200,000 per director); Solak v. Starr, C.A. No. 2020-0674-KSJM, at 44-46 (Del. Ch. Oct. 11, 2022) (TRANSCRIPT) (approving a settlement of claims regarding non-employee director compensation where the settlement consideration included backstop “caps” for initial and annual equity grants and dollar- C.A. No. 2021-0581-LWW June 1, 2023 Page 19
consideration was modest and approval was granted because the released claims
were of correspondingly limited value.81 A few proposed settlements of such claims
have been rejected.82
based caps on cash compensation, provided “meaningful limits on director compensation,” and required the company to seek approval of a non-employee director equity compensation plan); De Backer, C.A. No. 2021-0084-PAF, at 15, 25-26 (approving a settlement of excessive director compensation claims where the terms included a substantial reduction in the directors’ annual pay for a five year period, including that total annual compensation could not exceed the mean per-director compensation awarded by the 60th percentile of the company’s peer group, with an estimated present value of $6.8 million); Solak v. Barrett, 2017-0362-JRS, at 19-20 (Del. Ch. May 30, 2018) (TRANSCRIPT) (approving a settlement of compensation-related claims where the company agreed to set compensation at a specific amount with specific limitations and a binding stockholder vote would be taken on the compensation plan); Pascal v. Czerwinski, C.A. No. 2020-0320-SG, at 19-20 (Del. Ch. Feb. 7, 2022) (TRANSCRIPT) (approving a settlement of director and officer compensation claims where the settlement contemplated three separate ratification votes, which the court viewed as “an ideal settlement under the circumstances” because it gave stockholders the opportunity to decide whether the compensation was fair); Alvarado v. Lynch, C.A. No. 2020-0237-LWW, at 23-24, 27-29 (Del. Ch. June 4, 2021) (TRANSCRIPT) (approving a settlement of non-employee director compensation claims where the company agreed to “meaningful benefits,” including to modify its compensation policy to provide that the average total compensation will not exceed the 75th percentile of its agreed-upon peer group, and that the peer group will be approved by its compensation committee with the aid of a compensation consultant); see also Solak v. Sato, C.A. No. 2020-0775-JTL, at 42-44 (Del. Ch. Apr. 16, 2021) (TRANSCRIPT) (approving a settlement of seemingly viable excessive compensation claims where the settlement terms were the same “relatively common package of settlement measures,” which had “some value” but not “overwhelming value,” and a peer group limitation was the “most meaningful” benefit achieved). 81 E.g., Solak v. Huff, C.A. No. 2022-0400-LWW, at 30 (Del. Ch. Jan. 11, 2023) (TRANSCRIPT) (approving a settlement of claims concerning non-employee director compensation where the plaintiff obtained “mild” benefits in exchange for “the release of a claim that isn’t particularly strong” and the “give and the get [were] roughly even”). 82 See Shumacher v. Loscalzo, C.A. No. 2022-0059-LWW, at 54-55, 61 (Del. Ch. Sept. 21, 2022) (TRANSCRIPT) (rejecting an initial settlement where an objector who filed a separate suit desired to pursue claims and the proposed release was overbroad (citing C.A. No. 2021-0581-LWW June 1, 2023 Page 20
This case presents a more extreme scenario. It did not settle shortly after it
was filed. Instead, certain claims survived a motion to dismiss—including a claim
suggesting that a controller had forced the Compensation Committee’s hand to
award him a windfall.83 The governance enhancements serving as settlement
consideration do little to address this issue. Nor do they alleviate the inherent
conflicts in self-compensation that the court’s Memorandum Opinion highlighted.
The settlement does not (for example) require the Board to adopt meaningful caps
on director compensation or mandate stockholder approval of specific compensation
awards or a self-executing formula.84 In fact, it does nothing of consequence.85
Griffith v. Stein, 283 A.3d 1124 (Del. 2022)); Shumacher v. Dukes, C.A. No. 2020-1049- PAF, at 42-43 (Del. Ch. Nov. 17, 2022) (TRANSCRIPT) (declining to approve a settlement of excessive compensation claims where the court was “not persuaded that the get is worth the give”). 83 See supra note 25 and accompanying text. 84 See Investors Bancorp, 177 A.3d at 1218, 1222 (explaining that stockholder approval of director compensation may allow for the application of business judgment review if the stockholders approve specific awards or a self-executing compensation formula (citing Kerbs v. Cal. E. Airways, Inc., 90 A.2d 652 (Del. 1952); Gottlieb v. Heyden Chem. Corp., 91 A.2d 57 (Del. 1952))). 85 Compare Howland v. Kumar, 2018-0804-KSJM, at 25-27 (Del. Ch. Oct. 1, 2019) (TRANSCRIPT) (approving a settlement filed after the court denied a motion to dismiss that “provide[d] for 15 internal corporate governance reforms” including “special parameters within which the compensation committee must operate when discussing the CEO’s compensation,” a “say-on-pay vote,” and “a two-year moratorium on repricing stock options,” as well as requiring the compensation committee “to adopt resolutions fixing the exercise price for all unexercised stock options that were repriced in 2017” and the repayment of funds by certain defendants). C.A. No. 2021-0581-LWW June 1, 2023 Page 21
If the Stock-Based Compensation Changes and the Fixed Award Date
Changes were part of the settlement, I might have found that the settlement fell
within a range of fairness.86 But they are not. The plaintiff could have opted to
dismiss her suit and seek a mootness fee. But she did not. That leaves a proposed
settlement that is both insufficient and incongruent.
I do not relish rejecting a settlement and I recognize the difficulties parties
face in resolving these actions. I am, however, charged with acting as a fiduciary
for the nominal defendant in this circumstance.87 The slight governance
enhancements that form the “get” are inadequate consideration in view of the “give”
of the release of claims.88
The plaintiff’s counsel insist that if the court concludes the settlement is
inadequate, they are eager to push ahead with the litigation. They are welcome to
86 During the settlement hearing, Vice Chancellor Glasscock observed that the Fixed Award Date Changes “may have some value.” Hr’g Tr. 30. Counsel did not, however, emphasize that the Fixed Award Date Changes had long since been implemented—as my review of the Stipulation and the Company’s proxy statement indicates. See supra note 63. I do not believe that this was untoward; it was a misunderstanding. In any event, the only aspect of the Fixed Award Date Change that I read as perhaps not being implemented pre-settlement is that any “future change” to the date for awarding outside director stock- based compensation will be “disclosed to stockholders.” Stip. Ex. A at 5. It is not clear to me, though, whether this adds anything to the Company’s current disclosure obligations. 87 In re Infinity Broad. Corp. S’holders Litig., 802 A.2d 285, 289 (Del. 2002) (“Any decision of the Court of Chancery regarding the fairness of a proposed settlement is within the discretion of that court and requires an application of its own business judgment.”). 88 See Trulia, 129 A.3d at 907. C.A. No. 2021-0581-LWW June 1, 2023 Page 22
do so. Given the burden and expense that an entire fairness trial would impose on
the Company and that some governance enhancements were admittedly undertaken
in response to this litigation, I urge the plaintiff to first consider whether dismissing
her claims is in the best interest of the nominal defendant she purports to represent.
Continued litigation may ultimately prove detrimental to all parties. Barring that, I
encourage the parties to confer about an amended settlement with meaningful
benefits for the Company.
III. CONCLUSION
For the foregoing reasons, I decline to approve the settlement as presented.
The plaintiff may dismiss her claims and, if she chooses, seek a mootness fee for the
benefits already achieved. Otherwise, the case should proceed.
To the extent necessary for this decision to take effect, IT IS SO ORDERED.
Sincerely yours,
/s/ Lori W. Will Lori W. Will Vice Chancellor
cc: All counsel of record (by File & ServeXpress)