There has been an emerging litigation trend in Delaware, where most U.S. public companies are incorporated, alleging that directors breached their fiduciary duties and committed waste of corporate assets in granting themselves excessive awards under the company’s equity compensation plan. [1] Because directors have a direct interest in their own pay, Delaware courts have held that board decisions on director compensation do not receive the protection of the business judgment rule without proper stockholder ratification.

When dealing with stockholder lawsuits, the often crucial issue faced by many public companies is whether they can avoid discovery. If a stockholder lawsuit can survive a motion to dismiss, the nuisance nature of discovery may significantly increase the case’s settlement value, regardless of whether the plaintiff can eventually prevail. Absent the protection of the business judgment rule, it could be difficult to dismiss stockholder complaints at the pleadings stage, and the corporate defendants may face an unpleasant choice between continued litigation with all of its risks and distractions or a costly settlement.

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