Lewis v. Vogelstein
699 A.2d 327 (Del.Ch. 1997)
- The directors of the Mattel
corporation developed a plan to give themselves lots of stock options as
compensation. They presented this plan to the shareholders who ratified
the directors' actions.
- The proxy solicitation
materials for the plan did not estimate the present value of the stock
options to be granted.
- Some shareholders brought a derivative
lawsuit against the directors for breach
of fiduciary duty. The directors
filed a motion to dismiss.
- The shareholders argued that
the stock plan was excessive, and therefore a breach of the duty of
- The directors argued that
the plan had been ratified by the shareholders, so it must be fair.
- The Trial Court found for the
shareholders and denied the motion to dismiss.
- The Trial Court found that
the directors did not have a duty to disclose the estimated present value
of the stock options.
- The Court found that there
were two ways in which a shareholder ratification could be ineffectual to
rebut an accusation of breach of duty of loyalty:
- If the majority of those
affirming the transaction had a conflicting interest.
- If the transaction
constituted corporate waste.
- Corporate waste can only be ratified by a unanimous vote.
- The Court found that corporate
waste can be defined as "an
exchange of corporate assets for consideration so small as to lie beyond
the range at which a reasonable person might be willing to trade.
- Generally, corporate
waste would equate with the concept
of a gift in contract law;
something that you receive no substantial consideration in exchange for.
- The Court found that the
stock options were sufficiently unusual that they might be considered corporate
waste. The Court therefore denied
the motion to dismiss.