Freedman v. Adams, et al.

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Justia Opinion Summary

Plaintiff, a former shareholder of XTO, moved for an award of attorneys' fees and expenses following the stipulated dismissal of her derivative action, which was largely mooted by measures taken by XTO's Board shortly after plaintiff's complaint was served. In addition to XTO, the former members of XTO's Board were named as defendants. Plaintiff objected to the fact that the cash bonuses paid to XTO's CEO and four other officers were not tax-deductible because they did not meet the requirements of section 162(m) of the Internal Revenue Code. The court denied the motion because an arguably poor business judgment, without more, did not excuse demand on the Board in a derivative action.

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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE SUSAN FREEDMAN, : : Plaintiff, : : v. : : WILLIAM H. ADAMS, III, KEITH A. : HUTTON, JACK P. RANDALL, : PHILLIP R. KEVIL, HERBERT D. : SIMONS, VAUGHN O. : VENNERBERG, II, LANE G. COLLINS, : SCOTT G. SHERMAN, BOB R. : SIMPSON and XTO ENERGY INC., : : Defendants. : C.A. No. 4199-VCN MEMORANDUM OPINION Date Submitted: December 14, 2011 Date Decided: March 30, 2012 Robert D. Goldberg, Esquire of Biggs and Battaglia, Wilmington, Delaware; Alexander Arnold Gershon, Esquire and Michael A. Toomey, Esquire of Barrack, Rodos & Bacine, New York, New York; and Daniel E. Bacine, Esquire and Robert A. Hoffman, Esquire of Barrack, Rodos & Bacine, Philadelphia, Pennsylvania, Attorneys for Plaintiff. Raymond J. DiCamillo, Esquire and Margot F. Alicks, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware, Attorneys for Defendants. NOBLE, Vice Chancellor I. INTRODUCTION Plaintiff Susan Freedman (t , a former shareholder of Nominal D expenses following the stipulated dismissal of her derivative action, which was largely mooted by measures taken by XTO board of d In addition to XTO, the former members of Board were named as defendants: William H. Adams , Keith A. Hutton Kevil , Jack P. Randall , Herbert D. Simons , Vaughn O. Vennerberg, II , Lane G. Collins Bob , Phillip R. , Scott G. Sherman , together with the other director-defendants, the XTO and the Board Defendants (together, the oppose this motion on several grounds. The Complaint, consisting of eight pages and filed on November 26, 2008, -approved executive compensation plan. Specifically, the Plaintiff objected to the fact that the cash bonuses paid our other officers were not tax-deductible because they did not meet the requirements of § 162(m) of the Internal Revenue Code .1 Importantly, the cash bonuses did not meet the § 162(m) definition 1 26 U.S.C. § 162(m) (2011). 1 ther performance- which must be contingent upon achieving performance goals meeting certain statutory requirements.2 As a result, the Plaintiff claimed that XTO forwent approximately $75 million in tax deductions from 2005 through 2007.3 The Plaintiff asserted that, by failing to structure the cash bonuses as taxdeductible compensation, the Board Defendants had breached their fiduciary duties and committed waste. She also claimed that the Board Defendants proxy statements to contain material misstatements or omissions related to the deductibility of these bonuses. The Plaintiff sought relief in the form of an accounting for the losses sustained by XTO, a mandatory injunction requiring the Board Defendants to formulate a tax-deductible bonus plan, an injunction against further payment of non-tax-deductible compensation fees and expenses. Shortly after being served with the Complaint, the Board adopted a tax-deductible cash bonus plan, 4 claims. o 2 3 See id. at § 162(m)(4)(C). Compl. ¶ 5. 4 Statement (Schedule 14A) (Apr. -2. 2 during this period, the Plaintiff sold all of her XTO stock,5 and, later, XTO was acquired by and merged with and into a wholly owned subsidiary of Exxon.6 Eventually, the parties agreed to a stipulated order of dismissal, which was granted by this Court on April 6, 2011. The shortly thereafter. In this Memorandum Opinion, the Court denies the motion, ultimately, for reasons that can best be summarized thusly: an arguably poor business judgment, without more, does not excuse demand on the board of directors in a derivative action. II. BACKGROUND7 Simpson was one of the founders of XTO, its CEO from 1986 until at least 2008, and a longtime Board m 8 In the years 2005 through 2007, XTO paid Simpson $97.5 million in non-tax-deductible cash bonus compensation. During 5 Robert D. Goldberg, Esq. to Raymond J. DiCamillo, Esq. (July 21, 2010)). 6 Second Mot. to Dismiss, Ex. B (Exxon press release). XTO had been a Delaware corporation. Compl. ¶ 3. 7 Because the motion to dismiss standard is applied throughout this opinion, the facts are drawn proxy statements for the years 2004 through 2008 are considered to have been incorporated into the Complaint because they were expressly referred to and heavily relied upon in the Complaint. See infra Part IV.A. Facts drawn from sources other than the Complaint and the documents incorporated into it are included only to provide the reader with a better understanding of the 8 Compl. ¶ 5. 3 the years 2004 through 2007, XTO paid other officers approximately $23.5 million in non-tax-deductible cash bonus compensation. Assuming a corporate tax rate of 35%, the non-tax-deductible bonuses paid to Simpson and the other officers resulted in lost tax benefits of approximately $40 million. Generally, under § 162(m), compensation in excess of $1 million paid to the CEO and the other four highest-paid officers of a public company (together with is not tax-deductible.9 But, § 162(m) includes 10 ther performance- To be eligible for this exception, compensation must be: (1) paid solely on account of the attainment of one or more performance goals determined by a compensation committee comprised solely of two or more outside directors; (2) the material terms of the plan must be disclosed to shareholders and approved by a majority in a separate shareholder vote before the payment of such compensation; and (3) before payment, the compensation committee must certify that the performance goals were satisfied . 11 Cash bonuses Officers were not tax-deductible because they were not paid under a § 162(m) plan. When the Complaint was filed, XTO had not proposed a § 162(m) plan to its shareholders. 9 26 U.S.C. § 162(m)(1). Id. at § 162(m)(4)(C). 11 Id. 10 4 The Board was aware that the cash bonuses paid to the Covered Officers were not taxthrough 2008 each included a disclosure substantially similar to the following: Section 162(m) of the Internal Revenue Code generally limits the corporate tax deduction for annual compensation paid to certain of our executive officers named in the summary compensation table to $1,000,000, unless the compensation satisfies the requirements for performance-based compensation. Stock options granted under the [1998 or 2004] stock incentive plan have generally been entitled to the full tax deductions available because the compensation has qualified as performance-based and, therefore, not applied against the $1,000,000 limit. Base salary and cash bonuses have not been performance-based for purposes of Section 162(m) and, therefore, were not fully deductible by the company. While the compensation committee monitors compensation paid to our named executive officers in light of the provisions of Section 162(m), the committee does not believe that compensation decisions should be constrained necessarily by how much compensation is deductible for federal income tax purposes, and the committee is not limited to paying compensation under plans that are qualified under Section 162(m). During [the year in question], compensation paid to covered named executive officers exceeded the maximum deductible amount.12 12 See XTO Energy Inc., Definitive Proxy Statement (Schedule 14A) 23 (Apr. 13, 2007) chedule 14A) 13 (Apr. 13, oxy Statement (Schedule 14A) 12 (Apr. 15 Proxy Statement (Schedule 14A) 5 Although the contested proxy statements never quantified the forgone tax deductions, each contested proxy statement included a table disclosing the salaries and cash bonuses received by Simpson and the other Covered Officers.13 In the contested proxy statements, XTO reported that five of its nine directors were independent: Adams, Collins, Kevil, Sherman, and Simons Outside Although not an employee of XTO, Randall was not reported as an independent director in the contested proxy statements; his employer provided services to XTO. 14 In addition to serving as directors, Simpson, Hutton, and Vennerberg were Covered Officers, and each was paid nondeductible bonuses. The Plaintiff contends that the Outside Directors were 15 basis for this large compensation [was] the significant time commitment for extensive involvement in extra work at [B]oard and committee meetings, attendance at two management 16 The Plaintiff further alleged that the Outside Directors were in fact employees because work was assigned to them by Simpson, Hutton, Vennerberg, or people 13 See 2008 Proxy at 27, 2007 Proxy at 24, 2006 Proxy at 16, 2005 Proxy at 15, 2004 Proxy at 14. 14 See 2007 Proxy Statement at 39. 15 Compl. ¶ 18. 16 Id. 6 under their control, and they received health benefits, retirement plans, and severance pay. On February 17, 2009, the Board approved a § 162(m) plan for cash bonuses, 17 hareholders for a vote on April 17, 2009. 18 The XTO shareholders approved the plan at the annual stockholders meeting in May 2009.19 In early 2010, the Plaintiff sold her XTO stock.20 On June 25, 2010, XTO was merged with and into a subsidiary of Exxon.21 Due to the merger with Exxon, XTO never received any tax deductions as a result of the § 162(m) plan it adopted. After the merger in 2010, XTO could not benefit from the § 162(m) plan because it was not a public company, and, therefore, the deductibility limitations of § 162(m) did not apply to it.22 In 2009, the § 162(m) plan would have allowed XTO to receive a tax deduction, but, due to agreements among 2009 bonuses were paid before the end of 2009, rendering them non-deductible under the § 162(m) plan.23 The Plaintiff alleged that XTO still received a benefit from the § 162(m) plan, however, in the form of reduced bonus payments to the 17 2009 Proxy at C-2. 2009 Proxy at Appendix C. 19 Answering Br., Ex. 3 (Form 8-K) 2. 20 Second Mot. to Dismiss, Ex. A (Email from Robert D. Goldberg, Esq. to Raymond J. DiCamillo, Esq. (July 21, 2010)). 21 Second Mot. to Dismiss, Ex. B (Exxon press release). 18 22 23 Id. at 9-10. 7 Covered Officers in 2009.24 The 2009 bonuses received by the Covered Officers were $6.575 million less than the bonuses that would have been under the § 162(m) plan.25 Had XTO paid 2009 bonuses under the § 162(m) plan, it would have received an $8.12 million tax benefit. 26 According to the Plaintiff, the Covered Officers accepted lower 2009 bonuses because XTO forfeited the § 162(m) tax deduction in order to pay the bonuses in 2009.27 Finally, the Plaintiff alleged that the § 162(m) plan created prospective tax savings of $56 million for the years 2010 through 2013 measured at the date of its approval (before the Exxon merger).28 III. CONTENTIONS The Plaintiff contends th fees and expenses by the Defendants under the corporate benefit doctrine29 because the Board Defendants mooted the bulk of her claims when they approved a § 162(m) plan shortly after the Complaint was served. According to the Plaintiff, the Complaint properly pled claims of waste and a bad faith breach of the duty of 24 Id. Id. at 10. 26 Id. at 9. 27 Id. at 10. Receiving their 2009 bonuses in 2009, as opposed to 2010, benefitted the Covered Officers because it allowed them to receive larger consulting and retention payments from Exxon without paying an excise tax, and it allowed Exxon to deduct more of the consulting and retention payments. Id. at 9-10 n.10. 28 Id. at 11. 25 29 , 902 A.2d 1084, 1090 n.11 (Del. 2006). 8 loyalty. She also contends that demand would have been excused because she sufficiently pled all or any of the following: (1) that a majority of the Board was interested or lacking independence § 162(m) plan for cash bonuses was not protected by the business judgment rule because it constituted waste; or (3) that the contested proxy statements contained material misstatements or omissions. The Plaintiff argues that her Complaint caused the Board to adopt a § 162(m) plan and that adoption of the § 162(m) plan provided a benefit to XTO in the form of prospective tax savings, some of which were realized when XTO paid reduced bonuses to the Covered Officers in late approximately $5,000 in expenses. The amount of fees requested is justified, the reckoning, the § 162(m) plan conferred a benefit upon XTO of $6.575 million in 2009 and a prospective benefit of $56 million for the years 2010 through 2013. meritorious when filed because the Complaint did not allege sufficient facts to excuse demand or to state a claim. The Defendants also contend that the Plaintiff lacked standing to assert certain claims that arose before she became an XTO shareholder and that other claims were barred by a laches-borrowed statute of 9 limitations. Next, the Defendants argue that, even if the Court finds that the § 162(m) plan and, regardless, the § 162(m) plan conferred no benefit upon XTO. In support of their argument that the § 162(m) plan created no benefit, the payment of the 2009 bonuses, XTO never received any tax benefits from compensation paid under the plan. The Defendants also contend that the her claim for fees, noting that a short complaint was the only substantial filing made by the Plaintiff before her application for fees. Finally, the Defendants argue that a percentage-of-benefit analysis is inappropriate in this case, and fees should be awarded under a quantum meruit standard, if at all. Based on the method would be $91,800, as calculated by the Defendants, although, the Defendant argues, because no benefit was achieved, it would be inappropriate to award the Plaintiff any fees under the quantum meruit standard. In response, the Plaintiff repeats her arguments in favor of demand excusal, the sufficiency of her pleadings, and the use of 10 IV. ANALYSIS A plaintiff is entitled to an award of corporate benefit doctrine when her claims were mooted, if she can show that: (1) the suit was meritorious when filed; (2) the action that provided a benefit to the corporation was taken by the defendant before a judicial resolution was achieved; and (3) the resulting corporate benefit was causally related to the lawsuit.30 claim is meritorious within the meaning of [the corporate benefit doctrine] if it can 31 The Defendants argue that the suit was not meritorious when filed because her Complaint failed to plead facts sufficient to excuse demand or to state a claim for relief. Because the futility of demand issue is dispositive, it is the only issue reached by the Court. A. Court of Chancery Rule 23.1 Standard Under Court of Chancery Rule 23.1, a derivati with particularity the efforts, if any, made by the plaintiff to obtain the action the 32 Aronson v. Lewis, 33 Under the familiar test set forth in to establish demand futility, a plaintiff must plead particularized factual allegations that raise a reasonable doubt that: (1) the directors 30 Allied Artists Pictures Corp. v. Baron, 413 A.2d 876, 878 (Del. 1980). Id. at 879 (internal quotation and citation omitted). 32 Ct. Ch. R. 23.1. 33 473 A.2d 805 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). 31 11 are disinterested and independent; or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.34 A p en under Rule 23.1 is more onerous than that required to withstand a motion to dismiss for failure to state a claim under Court of Chancery Rule 12(b)(6).35 Wh cases this Court must make all inferences in favor of plaintiffs, . . . in the Rule 23.1 36 pled allegations of the complaint, documents incorporated into the complaint by reference, and judicially- 37 These allegations are accepted as true in deciding a motion to dismiss, although the Court need not accept conclusory allegations not supported by allegations of particularized facts.38 When a plaintiff expressly refers to and heavily relies upon documents in her complaint, these documents are considered to be incorporated by reference into the complaint; 39 this is true even where the documents are not expressly incorporated into or attached to the complaint.40 Because the contested proxy statements were expressly referred to 34 Id. at 818. In re Tyson Foods, Inc., 919 A.2d 563, 582 (Del. Ch. 2007). 36 Id. 37 Breedy, 2010 WL 718619, at *9 (Del. Ch. Feb. 25, 2010). 38 , 2003 WL 139768, at *8 (Del. Ch. Jan. 10, 2003). 39 Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 1594085, at *12 (Del. Ch. June 29, 2005). 40 e4e, Inc. v. Sircar, 2003 WL 22455847, at *3 (Del. Ch. Oct. 9, 2003). 35 12 and heavily relied upon in the Complaint, they are considered to be incorporated by reference into the Complaint. B. Director Disinterestedness and Independence When assessing the independence and disinterestedness of directors under Rule 23.1, the Court considers the b at the time the plaintiff brought the complaint, not when the alleged wrong occurred;41 here, apparently, the same directors were on the Board at both times. Directors are deemed disinterested when they neither appear on both sides of a transaction nor expect to derive any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which devolves upon the corporation or all stockholders 42 a materially detrimental impact on a director, but not on the corporation or stockh 43 Generally, the interest at issue must be material to the director, and materiality is assessed based upon the individual d circumstances.44 merits of the subject before the board rather than extraneous considerations or 41 Tyson Foods, 919 A.2d at 582. edit, 2003 WL 139768, at *8 (quoting Aronson, 473 A.2d at 812). 43 Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993). 44 Orman v. Cullman, 794 A.2d 5, 23 (Del. Ch. Mar. 1, 2002). 42 13 influences, 45 such as may exist when the challenged director is controlled by another.46 The p directors are beholden [to the controlling person] or so under their influence that their discretion would be sterilized 47 48 The Plaintiff argues that the entire Board49 lacked either disinterestedness or independence with regard to the decision not to implement a § 162(m) plan. Simpson, Hutton, and Vennerberg were interested, the 45 Aronson, 473 A.2d at 816. Orman, 794 A.2d at 24. 47 Rales, 634 A.2d at 936. 48 Aronson, 473 A.2d at 816. 46 49 compensation is determined by the [compensation] committee in executive session, with the other nonthe compensation committee in the Complaint, and, in her briefs, she did not address the impact of this committee on which 2007 Proxy at 12. According to the contested proxy statements, the compensation committee was composed entirely of Outside Directors. See 2008 Proxy at 6, 2007 Proxy at 6, 2006 Proxy at 11, 2005 Proxy at 10, 2004 Proxy at 10 (In each of the cited proxy statements the compensation committee was reported to consist of some combination of the following directors: Adams, Collins, Sherman, Kevil, and Simons.). Because the Plaintiff failed to challenge of the Memorandum Opinion, the Court need not address whether the compensation committee, and not the entire Board, is the appropriate population of directors to inspect for loyalty issues in the demand excusal context, since both would have had majorities of directors whose independence and disinterestedness have not been successfully challenged. Furthermore, throughout this Memorandum Opinion, when discussing certain challenged actions, the Court will refer to the entire Board in instances where the Plaintiff did so in her Complaint, even if the contested proxy statements would suggest that the actions were taken by the compensation committee. At all relevant times majorities of both the compensation committee and the Board were composed of directors whose independence and disinterestedness have not been successfully challenged, as explained above; therefore, whether or not a challenged action was ta of the challenged action. 14 Plaintiff contends, because each received bonuses that would have been subject to a § 162(m) plan, and such a plan could have been detrimental to them, if they did not be considered independent because he was not reported as such in the contested proxy statements. The Defendants contest the Pla directors were not disinterested and independent. The Court need not assess the independence and disinterestedness of these four directors a majority or half of the Board who did not constitute because the arguments challenging the independence and disinterestedness of the remaining Board Defendants (the Outside Directors) who, together, did constitute a majority of the Board are based upon facts and legal theories common to all of the Outside Directors. As a result, whether or not the Plaintiff has successfully challenged the independence and disinterestedness of a majority of the Board turns on whether she has successfully challenged the independence and disinterestedness of the Outside Directors. 1. Board Compensation Exceeding What is Usual and Customary independence and disinterestedness 50 much by XTO to be ac 50 Compl. ¶ 18. 15 Generally, the fact that directors receive customary compensation for their service on the Board does not lead to an inference of a material conflict.51 It has been suggested, however, that director fees could have a disqualifying effect if the 52 The Plaintiff did not allege sufficient particularized facts in the Complaint to show or to allow the Court reasonably to infer t met this standard. In her Complaint, the Plaintiff provided total annual compensation for 2006 and 2007; she also provided the amount of their cash retainers for 2004 and 2005 and alleged that they received stock options in each of those years. 53 Additionally, she alleged that their compensation increased each year and that they received health benefits, retirement plans, and severance.54 Although the Plaintiff has alleged that the Outside Directors received substantial compensation, she simply has not alleged any particularized facts from which this Court could infer that this compensation materially exceeded what is 51 Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery § 9.02[b][3], at 9 75 n.327 (2011). 52 Orman, 794 A.2d at 29 n.62. , 2003 WL 139768, at *11. 53 Compl. ¶ 18. In 2006, Outside Director compensation ranged from $459,676 to $516,860. Id. In 2007, Outside Director compensation ranged from $678,555 to $792,198. In 2004, each Outside Director received a cash retainer of $100,000, and this amount increased to $180,000 in 2005. The Plaintiff included compensation amounts for Randall, too, although the Court is not addressing the question alleged to have lacked independence under another theory. 54 Id. 16 55 for instance, if it was a small, private company that underperformed the market, as opposed to a relatively large, public company that outperformed the market (at least in the years 2004 through 2008) 56 the Court could draw a reasonable inference that these compensation amounts, on their faces, materially exceeded what was usual and customary. But, with the facts as they are, the Plaintiff simply leaves the Court to speculate as to whether the so far exceeded what was customary that it was disabling. This argument fails. 2. Board Compensation Received in Exchange for Not Pursuing a § 162(m) Plan Second, the Plaintiff makes a related argument that the Outside Directors were paid generous compensation as part of a quid pro quo understanding with the Officer Directors. Under this theory, the Outside Directors received allegedly high compensation in exchange for not seeking to implement a § 162(m) plan. In support of this theory, the Plaintiff relies on In re National Auto Credit, Inc. 55 In her Brief in Support, the Plaintiff cites a short news article in support of the proposition that Supp. 26. This article was not quoted in, cited in, or attached to the Complaint. Therefore, the Court will not consider this article in its assessment of whether or not the suit was meritorious when filed, for which it must utilize the motion to dismiss standard. 56 See ation and Production Index). 17 Shareholders Litigation,57 but that case highlights why the Plaintiff did not plead sufficient particularized facts to allow the Court to infer a quid pro quo arrangement. National Auto Credit involved a claim that seven members of its board (the quid pro quo conduct Chief 58 Executive Officer, James In exchange for a massive increase in director compensation, stock options, and compensation for past services, the Interested Directors allegedly voted in favor of two resolutions that granted McNamara a hefty raise and other compensation and served to solidify his control over the company.59 In National Auto Credit, the plaintiff pled many particularized facts that allowed the Court to infer that a quid pro quo exchange had taken place. There, the plaintiff showed that McNamara took actions to entrench himself before the board meeting where the alleged quid pro quo votes occurred .60 shareholders by which those shareholders sold all or most of their holdings and 57 2003 WL 139768 (Del. Ch. Jan. 10, 2003). See id. 59 Id. at *11. 60 Id. at *3. 58 18 entered into standstill agreements. 61 Also, under pressure from McNamara, the then-Chairman and CEO and another Director resigned; McNamara was named interim Chairman and CEO.62 Three resolutions were adopted at the Meeting. First, McNamara was named permanent Chairman and CEO and granted a generous compensation package for heading what was, essentially, a passive corporation.63 Second, the Board approved a resolution that increased including s fees from $1,000 per meeting to $55,000 per year, significant compensation for past services rendered, and stock options.64 Third, the board approved a transaction in which NAC acquired ZoomLot, an unprofitable internet company, in exchange for consideration valued between $27.5 million and $36.5 million that included NAC common shares equal to 23.5% of NAC outstanding common shares. 65 The common shares and other affiliates.66 In consideration were issued to Ernest the past, as an NAC shareholder, Garcia had supported McNamara in his battles for control of NAC after engaging in potential quid pro quo transactions with NAC.67 The common shares issued to Garcia and his affiliates were sufficient to enable 61 Id. Id. 63 Id. at *5, *14. 64 Id. at *6. 65 Id. at *5. 66 Id. 67 Id. at *2. 62 19 them to block any attempt which included a staggered Board provision.68 Before these resolutions were adopted, however, an unusual event occurred at the Meeting. While deliberations regarding the resolutions were ongoing, the Board took a break, during which a representative of NAC approached two directors appointed by Reading Entertainment, Inc. buyout of the NAC stock owned by Reading. 69 One of these directors had previously circulated a memo asserting that McNamara was unqualified to serve as Chairman and CEO. 70 directors; Reading agreed to the buyout and its Directors immediately tendered their resignations.71 In National Auto Credit, the Court ultimately concluded that the particularized facts of the complaint and the reasonable inferences drawn from them created reasonable doubt as to the disinterestedness of the board regarding its adoption of the three resolutions.72 The d agreement appeared to be the products of a quid pro quo exchange for the large 68 Id. at *5. Id. at *4. 70 Id. 71 Id. 72 Id. at *11. 69 20 increase in their own compensation. 73 In support of this conclusion, the Court noted not only the large increase in the d the fact that they received compensation for past services and, crucially, the timing of the votes.74 Indeed, the Court stated that 75 decision included: (1) the resolutions were adopted within minutes of each other; (2) their adoption immediately followed the proposed buyback of the Reading stock; and (3) their adoption occurred less than a month and a half after a bitter contest for control of NAC. 76 Resolutions authorizing both the McNamara Employment Agreement and the ZoomLot Agreement with a known causal link to their remuneration. 77 Fees [were] large amounts paid increases which reasonably [could] be inferred to have been granted in return for 78 73 Id. Id. 75 Id. at *10. 76 Id. 77 Id. at *11. 78 Id. 74 21 Here, the Plaintiff has not approached pleading sufficient particularized facts to allow the Court to infer that a quid pro quo trade took place. The only relevant non-conclusory facts pled in her Complaint were the amounts of the Outside that this 79 While the Plaintiff correctly points out that the total compensation and increases in compensation (measured in dollar terms) received by the Outside Directors were significantly larger than those received by the Interested Directors in National Auto Credit,80 she presented no factual allegations from which the Court could reasonably infer that we decision to not adopt a § 162(m) plan. decisions to not implement a § The Complaint contains no factual broad allegations that ompensation has grown over a period of time during which the Board has taken (or not taken) certain actions are simply insufficient for this 79 Compl. ¶ 18. Although the key factor that distinguishes the instant case from National Auto Credit is the absence of a causal nexus between the acts that purportedly constitute a quid pro quo arrangement, the Court also notes that, in percentage terms, the pay increases received by the Interested Directors in that case dwarf those received by the Outside Directors. Furthermore, here, there are no accusations that the Outside Directors received compensation for past services rendered, which was another factor that seemed to trouble the Court in National Auto Credit. See , 2003 WL 139768, at *11. 80 22 Court reasonably to infer a causal connection between these two circumstances. As such, the Court cannot reasonably infer that the Outside Directors engaged in a quid pro quo process with the Officer Directors and cannot doubt their disinterestedness under such a theory. 3. Third and finally, the Plaintiff argues that the Outside Directors were not independent because they were actually employees of XTO working under the direction of the Officer Directors or their subordinates. It is unhelpful to frame this argument in terms of which label (director or employee) should be applied to the Outside Directors for reasons including, but not limited to, the fact that the Plaintiff somewhat contradictory.81 But, the C s broader proposition that if the Outside Directors routinely behaved in the manner of employees that is to say that their actions demonstrated that an interested director, like an employer, controlled the performance of their duties82 the Court could infer that they were not independent. When viewed this way, the employee- 81 [were] assuredly not employees of the Company, they [were] in fact employees . 82 Control is one of the key factors in determining whether someone is an employee. See Fisher v. Townsends, Inc., 695 A.2d 53, 58 (Del. 1997) (discussing the distinctions between servants (employees) and independent contractors for purposes of determining vicarious liability); White v. Gulf Oil Corp., 406 A.2d 48, 51 (Del. 1979) establishing workme 23 employer argument is just a more focused argument that the Outside Directors were controlled by the Officer Directors. Therefore, the Court will assess the particularized facts alleged by the Plaintiff in support of her employee-employer argument to determine whether these facts permit an inference that the Outside Directors were controlled by the Officer Directors; whether or not the facts support an inference that the Outside Directors not determinative, and such a conclusion is not necessary for this Court to determine that the Outside Directors were not independent. Again, the relevant, particularized facts set forth by the Plaintiff are rather pensation, the Plaintiff alleged that Board membership required a significant time commitment, including extra work at Board and committee meetings, attendance at two management conferences each year, and frequent informal discussions with management.83 The Plaintiff also asserted assigned to them by defendants Simpson, Hutton, and Vennerberg or persons acting under their direction and contr 84 Moreover, the Plaintiff alleged that the Outside Directors received health benefits, retirement plans, and severance pay. 85 83 Compl. ¶ 18. Id. 85 Id. 84 24 These factual allegations are insufficient to allow this Court to infer that the Outside Directors were controlled by the Officer Directors. As discussed above, d 86 This Court has already considered and rejected the allegations concerning the significant time commitment required of the Outside Directors also do not contribute to an inference that they are somehow controlled by the Officer Directors. The alleged activities may go beyond what is asked of directors of some other corporations, but they do not appear improper or support an inference that the Outside Directors were controlled by the Officer Directors. Indeed, this Court is loath to make a ruling under which a board member 87 somewhat more may be seen as casting a shadow over that director s presumed loyalty. Finally, defendants Simpson, Hutton, and Vennerberg or persons acting under their 88 is too vague for the Court to draw an inference of control from it under the heightened pleading standard of Rule 23.1. The Plaintiff did not allege what particular types of work were assigned to the Outside Directors. If this 86 , 2003 WL 139768, at *10 (internal quotation and citations omitted). 87 by or under the direction of a board of directors, except as may be otherwise provided in this Del. C. § 141(a). 88 Id. 25 work was the type of work normally performed by a director, or if the work was part of a process whereby the directors, in their capacities as directors, divvied would not support an inference of control. In short, the Plaintiff did not plead the sort of particularized indicative irectors. For the foregoing reasons, this argument fails. C. Valid Exercise of Business Judgment When a majority of the Board is independent and disinterested under Aronson Plaintiff prong.89 The Court begins its analysis presuming that the business judgment rule applies, and the plaintiff must establish facts rebutting this presumption.90 To do the action was taken honestly and in good faith or (2) the board was adequately 91 The Plaintiff contends that prong is satisfied because the Board second § 162(m) 89 Wolfe & Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery § 9.02[b][3], at 9 84 (citing White v. Panic, 783 A.2d 543, 551 (Del. 2001)). 90 Aronson, 473 A.2d at 812. 91 Wolfe & Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery § 9.02[b][3], at 9 84 (citing In re Walt Disney Co. Deriv. Litig., 825 A.2d 275, 286 (Del. Ch. 2003)). 26 plan was made in bad faith,92 constituted waste, and was not properly disclosed in the contested proxy statements. 1. Bad Faith The second prong of Aronson may be met by pleading particularized facts that raise a reasonable doubt d faith.93 This Court has stated that the three most salient examples of bad faith are: (1) intentionally acting for a reason other than advancing the best interests of the corporation; (2) acting with the intent of violating applicable positive law; or (3) intentionally failing to act in the face of a known duty to act, demonstrating a duties.94 The Plaintiff argues that the Board a. Intentionally Acting for a Reason Other Than Advancing the Best Interests of the Corporation § 162(m) plan was made to advance the interests of the Officer Defendants,95 not the best interests of XTO. This decision ran counter to the best interests of XTO, 92 The Plaintiff presented her bad faith arguments in support of the contention that the Complaint stated a claim for relief, but, since a showing that the Board Defendants acted in bad faith could also excuse demand, the Court will consider these arguments in determining whether the Plaintiff met her burden under Rule 23.1. 93 In re Walt Disney Co. Deriv. Litig., 825 A.2d at 286. 94 In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 755-56 (Del. Ch. 2005), aff'd, 906 A.2d 27 (Del. 2006). 95 According to the Plaintiff, the sole basis for § 162(m) plan 27 accordin Covered Officers was not awarded on the basis of meeting objective, shareholderapproved performance goals, and it was not tax-deductible. The Plaintiff argues that the Board acted in this manner because the Outside Directors were dominated by the interested Officer Directors and, therefore, were not independent. This argument is really just a reprise s that the Board Defendants breached their duty of loyalty because a majority of the Board was either interested in or not independent with regard to the decision to not adopt a § 162(m) plan. As the Plaintiff stated in her Reply Brief: Plaintiff tied her argument that the [B]oard was not working in the best interests of XTO to her allegations that the supposedly -paid employees of the executives who they compensated . . . [and] that the tremendously during the time period relevant to this action.96 s and concluded that they do not prevail. s attempt to recast these arguments as bad faith does not change this conclusion. 96 Reply B s Brief in Support, her argument that the Board acted for a reason other than the best interests of XTO largely consisted of a reference to the portion of her brief where she argues that the directors were all either interested or not independent, which further demonstrates that this bad faith argument is really just another formulation of her loyalty arguments. See Br. in Supp. 16. 28 b. Intentionally Violating Positive Law The Plaintiff next contends that the Board Defendants acted in bad faith because they acted with the intent of violating applicable positive law by deciding not to adopt a § 162(m) plan. This Court has recognized that a director acts in bad faith when he acts with the intent of violating applicable positive law. 97 In law typically consists of enacted law applied and enforced in the courts. the codes, statutes, and regulations that are 98 But, the Plaintiff does not present a straightforward argument violated a statutory provision or regulation. Instead, she argues that, when directors intentionally violate public policy, they may be considered to have acted in bad faith. First, the Plaintiff contends that a violation of public policy is essentially equivalent to a violation of positive law and, therefore, is an act committed in bad faith.99 100 Public policy is principles and standards regarded by the legislature or by the courts as being of fundamental concern to the state and the whole of society 101 A 97 In re Walt Disney Co. Deriv. Litig., 907 A.2d at 755-56. BLACK S LAW DICTIONARY (9th ed. 2009). 99 See Br. in Supp 16. See also 98 100 101 Br. in Supp 16 (quoting McLeese v. J.C. Nichols Co., 842 S.W.2d 115, 118 (Mo. App. 1992)). BLACK S LAW DICTIONARY (9th ed. 2009). 29 these phrases are by no means synonymous is a much narrower concept, confined to enacted law, which is a well-defined, discrete set. This Court rejects argument that a violation of a general public policy is equivalent to a violation of positive law for purposes of determining bad faith, as these terms are not synonyms nor is public policy a subset of positive law.102 Second, the Plaintiff seems to advance an argument that violation of public policy constitutes bad faith, without any reference to positive law being necessary.103 In support of this argument, she cites three cases, only one of which interpreted Delaware law.104 In Desimone v. Barrows,105 this Court included the following quotation from a law review article parenthetically in a footnote: Bad 102 At oral argument, in response to a question posed by the Court, the Plaintiff seemingly circumscribed her argument, recasting it as: a violation of public policy is equivalent to a violation of positive law, if the violation of public policy is easily avoided without much effort or cost. See -12 103 In the Plaintiff decision. In addition to an opinion of this Court discussed below, the Plaintiff cites Abrams v. Allen, 297 N.Y. 52 (N.Y. 1947), and Miller v. American Tel. & Tel. Co., 507 F.2d 759 (3d Cir. 1974). These cases were not decided by Delaware courts and did not interpret Delaware law. Furthermore, in Miller, the court concluded that the plaintiffs alleged that the director-defendants caused the company to violate federal statutory law and engage in criminal activity, not merely violate public policy. Miller, 507 F.2d at 761-63. Abrams mentions public policy in one, somewhat offhand sentence. See Abrams of this one sentence is correct, Abrams public policy argument. 105 924 A.2d 908 (Del. Ch. 2007). 104 30 faith may preclude application of the business judgment defense where directors knowingly violate a statute or comparable expression of public policy, even if such a violation is undertaken in the corporation's best interests Desimone 106 a violation of general public policy constitutes an action taken in bad faith. Desimone involved options backdating. The footnote ci duty of loyalty, even when the shareholder-approved options plan did not preclude backdating and backdating could, otherwise, be within the realm of business judgment. 107 As the Court explained, backdating options under these circumstances could constitute bad faith if they were not accounted for and reported correctly or were not treated properly for tax purposes.108 Doing so could constitute bad faith because it could expose the company to the regulatory consequences and civil and criminal liability that stem from knowingly issuing false earnings reports . . . [or expose the company to] additional taxes and 109 Therefore, the potential bad faith quality of these actions stemmed from intentional violations of statutory laws and regulations (i.e., positive law), not violations of general public policy. 106 Id. at 934 n.89 (quoting S. Samuel Arsht, The Business Judgment Rule Revisited, 8 HOFSTRA L. REV. 93, 129-30 (1979)). 107 Id. 108 Id. 109 Id. 31 Furthermore, the footnote cited by the Plaintiff included three other quotations from other sources, and all of them referred to violations of positive law or illegal activities. 110 Finally, the quotation itself does not support the t does not say that violating public policy constitutes bad faith; instead, properly read, it states that violating an expression of public policy comparable to a statute may constitute bad faith.111 Such expressions of public policy might include regulations and other forms of positive law. Indeed, in the law review article, the sentence following the one quoted makes it clear that the unwarranted 112 are not clearly contrary to law utes a bad faith action fails in this context. c. Failure to Act Despite a Duty to Act In her third and final bad faith argument, the Plaintiff contends that the Bo from its affirmative decisions in 2004 through 2008 to not adopt a § 162(m) plan, according to the Plaintiff. She contends that the Board had a duty to adopt a 110 Id. n.89. See id. 112 Arsht, supra, at 130 (emphasis added). 111 32 § 162(m) plan under its purported fiduciary duty to minimize taxes.113 Because the Court concludes that there is no general fiduciary duty to minimize taxes,114 this argument fails. The Plaintiff does not cite any case law of this Court or the Delaware Supreme Court directly supporting 115 the purported fiduciary duty to minimize taxes. Furthermore, the case law cited by the Plaintiff does not support such a broadly applicable duty.116 For reasons that are both numerous and obvious, this 113 The Plaintiff complains in her Reply Brief that the Defendants mischaracterize the proposed duty in their Reply Br. 24 (quotation and citation omitted). The Court does not interpret argument as suggesting such an extreme duty. 114 This is not to say that under certain circumstances overpayment of taxes or a poor tax strategy might not result from breaches of the fiduciary duties of care or loyalty or constitute waste. As explained above, the argument advanced by the Plaintiff and rejected by this Court envisions a broader, more generally applicable fiduciary duty to minimize taxes. 115 The Plaintiff cites to several authorities from other areas of law in which, purportedly, fiduciaries have a duty to minimize taxes. See Br. in Supp. 21-22. These authorities concern areas of law such as trusts and estates and guardianships; they are inapposite. 116 n the subject, four courts that have addressed derivative suits regarding corporate overpayment of taxes have held however, do not support a broad duty to minimize taxes. In Dodge v. Woolsey, 59 U.S. 331 (U.S. 1855), the United States Supreme Court held that a derivative suit could be maintained irectors for purported breaches of their fiduciary duties arising from their refusal to challenge a tax paid by the bank that they allegedly admittedly believed was unconstitutional and, therefore, the payment of which was a violation of charter, which was also allegedly admitted by the directors. See id. Thus, the key issue was that the directors allegedly caused the bank to violate its charter. In Truncale v. Universal Pictures Co., 76 F. Supp. 465 (S.D.N.Y. 1948), the plaintiff alleged that some of the directors and officers of Universal Pictures Company breached their fiduciary duties by directing the company to forgo a tax deduction related to options issued to an employee, so that the employee would not have to pay federal income taxes on the options. See id. But, the court in Truncale did not hold that there was a duty to minimize taxes. Instead, on a motion for summary judgment where the defendants argued that the claims were time-barred by the statute of limitations, the defendants conceded for purposes of the motion that there was a good cause of action. Id. at 469. In Resnick v. Woertz, 774 F. Supp.2d 614 (D. Del. 2011), the Board of Archer-Daniels-Midland 33 Court is not convinced that it should endorse this proposed new duty. Tax strategy is a complex, dynamic area of corporate decision-making that affects and is affected by many other aspects of a company. implicated in nearly every decision it makes, including decisions about its capital structure, the legal forms of the various entities that comprise the company, which jurisdictions to form these entities in, when to purchase capital goods, whether to rent or purchase real property, where to locate its operations, and so on. Minimizing taxes can also require large expenditures for legal and accounting services and may entail some level of legal risk. As such, decisions regarding a icy are not well-suited to after-the-fact review by courts and Company distributed a proxy statement that solicited votes for an incentive compensation plan that purported to comply with the requirements of § 162(m) and required a majority vote of the shareholders for approval. See id. According to the plaintiff in that action, the proxy statement contained material misrepresentations and omissions regarding the plan, and the plan did not comply with § 162(m), which could have resulted in millions of dollars in additional tax liability. See id. With little discussion, the court in Resnick claims survived a motion to dismiss. Id. at 632based upon the fact that the proxy statement used to solicit shareholder votes in favor of the plan stated that the plan complied with § 162(m), that the proxy statement allegedly contained material misstatements and omissions, and the proxy statement allegedly violated federal securities regulations. Id. Thus, the breach of fiduciary duty claims were rooted in alleged securities regulations), and not a broad duty to minimize taxes. Notably, as recognized by the Plaintiff in her Complaint, the contested proxy statements did not solicit votes for a § 162(m) plan for the cash bonuses, did not state that cash bonuses were paid under a § 162(m) plan, and, in fact, did state that compensation exceeding the maximum deductible amount was paid to the Covered Officers. See Compl. ¶ 7 (quoting the contested proxy statements). Finally, in Spirt v. Bechtel, 232 F.2d 241 (2d Cir. 1956), the plaintiff brought fiduciary duty claims against a irectors for allegedly relinquishing a tax deduction. See id. at 245-46. The lower grant of a motion to dismiss this claim was affirmed. Id. at 247a]s directors the defendants did owe the corporation fiduciary duties not to waste a waste claim, but it does not establish a fiduciary duty to minimize taxes. Id. at 246. 34 typify an area of corporate decision-making business judgment, so long as it is exercised in an appropriate fashion.117 This Court rejects the notion that there is a broadly applicable fiduciary duty to minimize taxes, and, ther minimize taxes is unavailing. 2. Waste A properly pled waste claim may excuse demand may under second prong. To excuse demand on the grounds of waste, the complaint must allege particularized facts sufficient to create a reasonable doubt that the board authorized action on the corporation's behalf on terms that no person of ordinary, sound business judgment could conclude eme test is rarely satisfied, because if a reasonable person could conclude the board's action made business sense, the inquiry ends and the complaint will be dismissed. 118 Waste disproportionately small as to lie beyond the range at which any reasonable person is often associated with a transfer of assets that serves no corporate purpose or for which no consideration at all is received, 117 One of the key rational becoming enmeshed in complex corporate decision-making, a task which courts admittedly are ill-equipped, ill-fitted and neither trained nor competent to perform. Directors are, in most cases, The Business Judgment Rule 35 (6th ed. 2009) (internal quotations and citations omitted). 118 Highland Legacy Ltd. v. Singer, 2006 WL 741939, at *7 (Del. Ch. Mar. 17, 2006) (citing Brehm, 746 A.2d at 263) (quoting Green v. Phillips, 1996 WL 342093, at *5 (Del. Ch. June 19, 1996)). 35 essentially a gift. 119 ourts are ill-fitted to attempt to weigh the adequacy of consideration under the waste standard or, ex post, to judge the appropriate degrees 120 compensation-related waste claim. She does not argue that the amount of the cash bonuses paid to the Covered Officers constituted waste, but, rather, she challenges the way in which those bonuses were structured, which she contends was XTO.121 In fact, the Plaintiff expressly disclaimed any argument that the Board [ly] when it paid [the Covered Officers] $182 122 million in cash bonuses from 2004-2008, stature as and she repeatedly extols CEOs.123 In short, the Plaintiff contends that by not adopting a § 162(m) plan for cash bonuses and, therefore, not receiving a tax deduction for those bonuses, the Board caused XTO, effectively, to make a gift to the federal government in the amount of the additional taxes paid due to the forgone tax deductions. Crucially, the Plaintiff 119 Brehm, 746 A.2d at 263. Id. 121 Br. in Supp. 29. 122 Reply Br. 25. See also [T]here's no objection to the amount of money that the [B]oard was paying these people. . . . id. Again, Bob Simpson was probably worth the $30 million bonuses they 120 123 See 36 contends that XTO could both have adopted a § 162(m) plan and have adopted a separate discretionary plan that would have given the Board (or the compensation committee) complete flexibility to pay any amount of additional non-taxdeductible bonuses, without these bonuses being tied to pre-established performance goals. In the words of the Plaintiff: A § 162(m) plan need not constrain anything. . . . In those years when executive compensation could be legitimately tied to performance, XTO could deduct for these bonuses. When the compensation allow, they could freely do so and forego the deductions.124 discretion[.] . . . [It] has told corporations that they can have their cake and eat it to 125 Thus posed interpretation of § 162(m), when a -approved § 162(m) plan performance goals, the corporation may simply substitute a nondeductible bonus.126 124 125 Br. in Supp. 30. Reply Br. 27. 126 proposed tax strategy, there is reason to question whether it would comply with § 162(m) and the related regulations. See note 161 infra. Additionally, committed waste because, essentially, she is aware of a superior tax strategy raises policy concerns. If this Court were to accept that this theory alone, in its general form, enables a claim to survive a motion to dismiss, it could open the door to a deluge of cases where shareholders challenge the tax strategies of corporations. Given the complexity of tax law, presumably many corporations would be vulnerable to an action whereby a plaintiff hires a tax expert to find an arguably superior tax strategy not employed by the company. Such a result would not be in the best interests of corporations, shareholders, or this Court, a core competency of which is not interpreting tax law. The Plaintiff argued that § 162(m) plans are commonly employed and 37 stated reason for not adopting a § 162(m) -making regarding cash bonuses.127 if the Board held a good faith belief that adopting a § 162(m) plan would constrain its decision-making, nothing the Plaintiff has alleged raises a reasonable doubt that its decision to not adopt a § 162(m) plan was one that a reasonable person could conclude made business sense.128 The Plaintiff does not challenge the amount of compensation paid to the would likely argue that this is an extreme case of not employing a well-known tax strategy. Even accepting this limitation would leave this Court with a difficult line-drawing problem, which, again, would largely concern issues (determining the prevalence of certain tax strategies) far removed from its traditional expertise. The Plaintiff, herself, lends credence to this concern regarding the potential ramifications of endorsing her superior tax strategy argument. demanded here may well set a new trend in corporate compliance by inspiring similar observed duty and waste, but merely that the traditional tests applied to such claims should be adhered to when tax-related claims are presented and that waste per se that she is aware of a superior tax strategy. 127 Compl. ¶ 5. 128 -wellreasonable director would reject millions of dollars in order to prevent the [B]oard from ever least two other flaws. First, it presumes that the Board acted in the personal interests of the Officer Directors. See id. at 30. But, this Court has already considered and rejected the t the embodied in a § 162(m) plan, beyond a conclusory allegation, the Plaintiff did not provide any factual allegations to support an inference that cash bonuses were not tied to performance at all. To be clear, the Court is not concluding that cash bonuses were tied to performance. It is merely saying that the Plaintiff did not allege particularized facts necessary to support a basic premise of her argument. 38 was probably worth the $30 million bonuses they paid him 129 She also acknowledges that Simpson was one of the most admired CEOs in America.130 Therefore, the judgment, if it believed that it needed to retain the flexibility to pay the Covered Executives whatever reasonable amount was required to retain their services. The lost tax deductions, in essence, would then be just another component of compensation expense,131 essentially an amount paid so that the Board would not be regarding ng compensation decisions key employees. ne tax deductions, constituted waste, but that XTO gave a gift to the federal government for which it received no consideration. As recognized in the Complaint, 132 the Board believed that it received consideration for forgoing the tax deductions, namely, the flexibility to set executive compensation without any constraints imposed by a § 162(m) plan. 129 130 See This component of compensation expense would have been somewhat unusual in that, while it was an expense to the company, a reciprocal benefit was not directly realized by the Covered Officers. Instead, XTO and the Covered Officers benefited from this expense because the Board was free to pay the amount of compensation it believed was necessary to reward or to retain key employees, without risk of running afoul of the tax laws and regulations. 132 Compl. ¶ 7 (quoting the contested proxy statements). 131 39 dismissing executive compensation-related waste claims and size and structure of executive compensation are inherently matters of judgmen 133 134 or absence of fraud by the Board, mere disagreement [regarding executive compensation] cannot serve as grounds for imposing liability based on alleged . . . 135 For example, in Brehm dismissal 136 of waste claims related to the size and structure of executive compensation where this Court inferred, from a reading of the complaint, that the Board had determined that an expensive compensation package was necessary to attract an executive, who, they believed, would be valuable to the company. 137 flexibility while utilizing a § 162(m) plan, the exact same inferences may be drawn 133 Brehm, 746 A.2d at 263. In re Walt Disney Co. Deriv. Litig., 731 A.2d 342, 362 (Del. Ch. 1998), part and remanded sub nom. Brehm v. Eisner, 746 A.2d 244 (Del. 2000). 135 Brehm, 746 A.2d at 266 (quoting In re Walt Disney Co. Deriv. Litig., 731 A.2d at 364). 134 136 claims was with Id. at 263. 137 Id. 40 d in In Haber v. Bell,138 this Court dismissed a waste claim related to the taxation of executive compensation. 139 In Haber, the Board altered a stock option plan so that tax deductions formerly received by the company were instead received by the optionees.140 This Court concluded that the forgone tax deductions were part of the the options fell within the discretion of the Board, as it related to employee compensation.141 Again, as explained above, the forgone tax deductions, here, may also be viewed as employee compensation expense. Under this analysis, the crucial question is whether the Complaint has alleged particularized facts sufficient to create a reasonable doubt that the Board, in good faith, believed that implementing a § 162(m) plan would constrain its discretion with regard to cash bonuses.142 If the Board, in good faith, believed that implementing a § 162(m) plan would constrain its discretion with regard to cash bonuses, then XTO received some substantial consideration (the absence of these 138 465 A.2d 353 (Del. Ch. 1983). Id. 140 Id. at 356-59. 141 Id. at 359. 142 any substantial consideration received by the corporation, and if there is a good faith judgment that in the circumstances the transaction was worthwhile, there should be no finding of waste, even if the fact finder would conclude ex post that the transaction was Brehm, 746 A.2d at 263 (emphases in original). In this case, flexibility to pay cash bonuses without the constraints imposed by a § 162(m) plan is substantial consideration, assuming that the Board made a good faith judgment that a § 162(m) plan would, indeed, impose constraints on its discretion. 139 41 constraints and the ability to pay the Covered Officers as the Board deemed appropriate to retain them) in exchange for forgoing tax deductions related to these bonuses, and this waste claim would not have survived a motion to dismiss. On the other hand, if a § 162(m) plan could have been implemented at little cost and without constraining the Board, and the Board knew this or came to the contrary conclusion in bad faith, then the forgone deductions may have constituted waste. 143 , 144 and and she quibbles with a statement made in the contested proxy ot require) XTO to use, 145 she never directly challenges the good faith nature of the Boa judgment that adopting a § 162(m) plan would constrain it. There are no particularized factual allegations in the Complaint from which this Court could reasonably infer that the Board reached its conclusion regarding the constraints of § 162(m) in bad faith. Furthermore, this Court has already addressed and rejected arguments regarding bad faith. The Plaintiff argues repeatedly that a § 162(m) plan need not constrain the Board, but, unless the Board reached its contrary conclusion in bad faith, the fact that the Plaintiff has identified a better tax strategy implicates, at best, a breach of 143 Br. in Supp. 30. Id. 145 See Reply Br. 27144 confused by Id. (emphasis added). She did not argue that the Board Defendants truly believed otherwise or came to the relevant conclusion in bad faith. 42 the duty of care. The Plaintiff did not advance any arguments alleging a breach of the duty of care.146 The Court concludes that it cannot infer that there was a breach of the duty of care from the particularized factual allegations of the Complaint.147 The Plaintiff presents two other arguments in support of its waste claim. First, the Plaintiff invites the Court to follow Resnick v. Woertz,148 as she interprets that case. In Resnick, the United States District Court for the District of Delaware, interpreting Delaware law, concluded that a waste claim survived a motion to dismiss.149 The Plaintiff describes that waste claim as being based upon ArcherDanielscomply with the statute, thereby forgoing tax deductions. The court in Resnick did waste allegations, but it also focused on allegations of potentially excessive compensation and the fact that the proxy statements used to solicit shareholder approval of the faulty § 162(m) plan contained material misstatements. 150 The compensation plan at issue in Resnick provided for incentive compensation 146 At oral argument, after the Court asked whether the Plaintiff was not really presenting a duty of care claim, the Plaintiff responded that a defense to such a claim based on an 8 Del. C. 102(b)(7) c The Plaintiff also seemed to suggest that a breach of the duty of care could satisfy the second prong of Aronson. Id. The Plaintiff did not present an argument that there had been a breach of the duty of care. 147 The relevant factual allegations, to the extent there are any, suggest that the Board understood the applicable tax law, which, in turn, suggests that the Board exercised at least some level of care in crafting its executive compensation tax strategy. See Compl. ¶¶ 6-7. 148 774 F. Supp.2d 614 (D. Del. 2011). 149 Id. 150 Id. at 633. 43 payments of up to $90,250,000 per board member, and the aggregate payments to the board members and executive officers could have potentially reached $1,263,500,000 for one fiscal year. 151 Not only are the potential lost tax deductions of a completely different magnitude in Resnick, but the compensation plan at issue there also introduced elements of excessive compensation, director interestedness, and a lack of candor not present in the instant case. For the foregoing reasons, Resnick is distinguishable on its facts. Second, citing Telxon Corp. v. Bogomolny,152 the Plaintiff contends that, if a motion to dismiss. Although the Court in Telxon mentioned the unusual nature of the challenged transaction as a reason why the waste claim survived a motion to dismiss, the standard applied by the Court was the normal waste standard, not a separate 153 decision to not adopt a § 162(m) plan under the normal waste standard and rejects For the foregoing reasons, the Court concludes that the Plaintiff failed to plead a waste claim that would have survived a motion to dismiss. 151 Id. at 624, 633. 792 A.2d 964 (Del. Ch. 2001). 153 See id. at 976. 152 44 3. Material Misstatements and Omissions Finally, the Plaintiff argues that demand was futile because the contested proxy statements contained material misstatements and omissions concerning executive compensation and § 162(m). The Plaintiff claims that disclosure claims are not subject to the demand requirement because the business judgment rule does not apply to the question of whether shareholders have been provided with appropriate information to make a decision.154 she has properly pled a disclosure claim, then demand is excused.155 154 See In re Tri-Star Pictures, Inc. Litig., 1990 WL 82734, at *8-9 (Del. Ch. June 14, 1990). See also Lewis v. Leaseway Transp. Corp., 1990 WL 67383, at *6 (Del. Ch. 1990) (stating that the the business judgment rule has no applicability to the question whether shareholders have been provided with appropriate information to make an informed choice because the underlying duty Plaintiff does not address the fact that the Court in Tri-Star did not hold that the disclosure claims were derivative claims for which demand was excused, but, instead, it held that the disclosure claims were direct claims of the class, since applying the demand requirement of Rule 23.1 would be improper where the business judgment rule was inapplicable. Tri-Star, 1990 WL 82734, at shareholders. See In re J.P. Morgan Chase & Co. S holder Litig., 906 A.2d 766, 772 (Del. 2006); Big Lots Stores, Inc. v. Bain Capital Fund VII, LLC, 2006 WL 4762843 n.41 (Del. Ch. Mar. 28, 2006); Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 2130607 (Del. Ch. Aug. 26, 2005); Tri-Star, 1990 WL 82734, at *8. Here the Plaintiff brought her action derivatively, and there might be some question as to whether her disclosure claims are actually direct claims. The Defendants do not challenge her disclosure claims on this ground, though; thus, the Court need not consider whether the disclosure claims should have been brought as direct claims and what impact that conclusion would have on her demand excusal argument. 155 , as it relates to the disclosure claims, is not entirely clear. The Plaintiff argues that second prong is satisfied because there were material established that proxy disclosure violations excuse is inapplicable. Br. in Supp. 33 (emphasis added) (citing Tri-Star, 1990 WL 82734, at *8). The primary case cited by the Plaintiff in support of this argument that disclosure violations excuse demand is Tri-Star, which actually held that Rule 23.1 was not applicable to the disclosure claims at issue because those claims were direct class claims. Tri-Star, 1990 WL 82734, at *8. As such, the Plaintiff appears to conflate the fact that disclosure claims are generally not subject 45 When soliciting shareholder action, the fiduciary duties of care and loyalty require that the directors of a Delaware corporation: tablishing materiality rests with the disclosure of the omitted fact would have been viewed by the information made av 156 Non- facts relating to a matter that has been partially disclosed.157 The Plaintiff contends that the Board committed three disclosure violations 62(m) in to the demand requirement (because they are usually direct claims) with the idea that a properly pled disclosure claim excuses demand under second prong. Furthermore, in the Complaint and in her briefs, the Plaintiff only speaks of disclosure violations in terms of excusing demand; she has not argued that any of the underlying claims for which she sought relief in the Complaint were disclosure claims, but merely that a disclosure violation would excuse demand. See Compl. ¶ 20; Br. in Supp. 33-35; Reply Br. 29-30. For ease of reference, material misstatements and omissions as argument that if she properly pled a disclosure claim, then demand would be excused. As such, the Court need not consi applicable, the Court will assess these claims under the well-known, more plaintiff-friendly Court of Chancery Rule 12(b)(6) standard. See Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 535-36 (Del. 2011). Use of this more lenient standard does motion to dismiss. In sum, the Court will apply the Rule 12(b)(6) standard when assessing the viability of the disclosure claims, but, for purpo 156 Gantler v. Stephens, 965 A.2d 695, 710 (Del. 2009) (quoting Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992)). 157 ncorp, Inc., 650 A.2d 1270, 1280 (Del. 1994). 46 the contested proxy statements. Two alleged material misstatements relate to the following sentence, which was included in each of the contested proxy statements either verbatim or with minor variations to the quoted sentence: While the Committee intends to monitor compensation paid to the Section 162(m), the Committee does not believe that compensation decisions should be constrained necessarily by how much compensation is deductible for federal income tax purposes, and the Committee is not limited to paying compensation under plans that are exempt under Section 162(m).158 First, the Plaintiff takes issue with the statement that compensation decisions by a § 162(m) plan. This argument relates to the the waste claim, tha s compensation decisions at all. The Plaintiff apparently wants this disclosure claim to turn on an interpretation of tax law. She contends that she knows of a strategy 159 XTO could have employe Understood in simple, straight-forward terms, the constraint statement is undoubtedly true: if XTO had replaced the existing cash bonus plan with a § 162(m) plan, its compensation decisions would have been constrained by the § 162(m) plan, which would have only allowed compensation to be paid under 158 2008 Proxy at 26 (with minor variations); 2007 Proxy at 23 (with minor variations); 2006 Proxy at 13 (verbatim); 2005 Proxy at 12 (verbatim); 2004 Proxy at 11 (with minor variations). 159 Reply Br. 27. 47 certain circumstances.160 Also, the Plaintiff has presented no factual allegations from which the Court could infer that the Board did not believe that a § 162(m) plan would constrain its compensation decisions. Under these circumstances, the Court cannot conclude that the Plaintiff stated a viable disclosure claim by contending that she has concocted a superior tax strategy. 161 160 See 26 U.S.C. § 162(m)(4)(C) (2011). This is particularly true where, as here, the effectiveness of the tax strategy proposed by the Plaintiff may be debated on that this disclosure claim fails does not turn on the validity of t seems to suggest that the Board could have adopted a § 162(m) plan, paid bonuses under that plan whenever possible, and, if the performance goals were ever not met, simply replaced the bonuses that would otherwise be payable under the § 162(m) plan with non-deductible bonuses 161 a performance-based bonus is earned, should not cause the performance-based bonus to fail to qualify for the Section 162(m) exemption[,] [c]are should be taken, however, to make sure that the two arrangements are independent of one another and that the discretionary bonus cannot be considered to be a substitute for performance-based compensation that is not earned P. GARTH GARTRELL & STEVEN B. LAPIDUS, EXECUTIVE COMPENSATION FOR EMERGING GROWTH COMPANIES § 2:82 (3d ed. 2011) (emphasis added). A company that creates a § 162(m) plan but intends to pay a substitute bonus whenever the terms of the § 162(m) plan are not met apparently incurs some risk of undermining the tax-deductibility of compensation paid under the § 162(m) plan, even when its terms are met. See Rev. Rul. 2008-13, 2008-10 I.R.B. 518, 2008 ]f the facts and circumstances indicate that the employee would receive all or part of the compensation regardless of whether the performance goal is attained . . . none of the compensation payable under the grant or award will be considered performance-ba Compensation not considered performance-based is not deductible under § 162(m)(4)(C), the exception to the $1 million deductibility limit at the heart of a § 162(m) plan.). In fact, the Private Letter Ruling that the Plaintiff contends supports her position only states that having a discretionary bonus plan does not automatically render § 162(m) plan bonuses taxable, but it recites the language from Revenue Ruling 2008-13 quoted above and states that it is a question of fact whether specific discretionary bonuses would render § 162(m) plan bonuses taxable. See I.R.S. Priv. Ltr. Rul. 06-17-018, 2006 WL 1126274 (Jan. 18, 2006). The Plaintiff relies on this Private Letter Ruling to support her argument that, with a § 162(m) plan, XTO would be complete plan. See Reply Br. 27. Furthermore, that very same Private Letter Ruling was cited by the tax treatise cited above for the proposition that a company should take care not to use discretionary bonuses as substitutes for unearned § 162(m) plan bonuses. GARTRELL & LAPIDUS, EXECUTIVE COMPENSATION FOR EMERGING GROWTH COMPANIES § 2:82 n.6. 48 Second, the Plaintiff contends t monitor provisions of Section 162(m) 162 wa suggest[ed] that the [B]oard had in place a § 162(m) plan, which it could use at any time to deduct amounts tied to compensation. . . . [T]he [B]oard could not truly 163 In the context of the contested proxy statements, a reasonable investor would not interpret this statement as the Plaintiff contends. In the contested proxy statements, immediately before the sentence quoted above, XTO explained the tax-deductibility limitations imposed by § 162(m) and that stock options issued u option plans qualified as performance-based compensation under § 162(m) and, therefore, did not count against the $1 million limit. 164 Then, immediately following the quoted sentence, XTO explained that compensation paid to executives subject to § 162(m) exceeded the maximum deductible amount. 165 Simply put, in the context described above, a reasonable investor would not executive compensation in light of § 162(m) to imply that there was already a 162 2007 Proxy at 23 (verbatim); 2006 Proxy at 13 (verbatim); 2005 Proxy at 12 (verbatim); 2004 Proxy at 11 (verbatim). 163 Br. in Supp. 34. 164 2008 Proxy at 26; 2007 Proxy at 23; 2006 Proxy at 13; 2005 Proxy at 12; 2004 Proxy at 11. 165 2008 Proxy at 26; 2007 Proxy at 23; 2006 Proxy at 13; 2005 Proxy at 12; 2004 Proxy at 11. 49 § 162(m) plan in place for cash bonuses. A reasonable shareholder would not need 166 statement did not imply that there was a § 162(m) plan in place for cash bonuses. On the contrary, to reach this conclusion, a shareholder would need to read more into the challenged statement than a reasonable shareholder normally would, given the context in which the statement was made. Third and finally, the Plaintiff argues that the failure to quantify the amount of the potential tax deduction eschewed each year as a result of not paying cash bonuses under a § 162(m) plan was a material omission. This is nothing more than s. The Plaintiff has the burden of establishing that an omission is material, meaning that a reasonable investor would have viewed the information as having significantly altered the , XTO disclosed: (1) the $1 million limitation on the tax-deductibility of executive compensation for the Covered Officers, unless such compensation is paid under a qualified plan; (2) that the stock option plan was a qualified plan and option awards did not count towards the $1 million limit; (3) that the compensation committee did not want its compensation decisions to be constrained by limits on its tax-deductibility; (4) that XTO paid executive compensation exceeding the 166 Reply Br. 30 (quoting , 742 A.2d 845, 851 (Del. 1999)). 50 maximum deductible amount; and (5) a table of the salary, cash bonus, and option and equity awards earned by the officers subject to § 162(m) over the preceding three years.167 Given this information, the magnitude of the forgone tax deductions is readily apparent.168 A challenged omission must be material, not just merely helpful. 169 Thus, the Plaintiff has not carried her burden of pleading factual allegations from which the Court can conclude that the omission of a more precise calculation of the forgone tax deduction would be considered material by a reasonable shareholder. V. CONCLUSION As set forth above, because the Complaint would not have survived a motion to dismiss, motion for an award of denied. An Order will be entered in accordance with this Memorandum Opinion. 167 2008 Proxy at 26, 27; 2007 Proxy at 23, 24; 2006 Proxy at 13, 16; 2005 Proxy at 12, 15; 2004 Proxy at 11, 14. 168 maximum tax rate could be. 169 Gaines v. Narachi, 2011 WL 4822551, at *2 n.13 (Del. Ch. Oct. 6, 2011). 51