Grimes v. Donald

673 A.2d 1207, Supreme Court of Delaware

Facts:
• Donald executed an agreement of employment saying he “shall be responsible for the general management” of the company, and also that “he shall report to the board.”
• Grimes wrote to the board complaining that Donald’s compensation package was exorbitant.
• If there was termination without cause, Donald was entitled to incentive awards averaging to his last ten years, continued base salary for the rest of employment, medical benefits for life, and continued benefits.
• Grimes also contends the income continuation plan for grimes equals 200K “units” – which would give him the right to cash payments for his units at maximum of $60M.
• Grimes wrote to board asking to remove the provision of his contract, but was met with refusal. The board argued that they gave it careful consideration and examined relevant issues, in addition to contacting compensation consultants.
• Grimes is only seeking invalidity of the agreements for Donald’s employment.
Rule:
• “That issue must turn solely on the following questions:
1. Who suffered the alleged harm
2. Who would receive the benefit of any recovery or other remedy”
• “A stockholder filing a derivative suit must allege either that the board rejected his pre-suit demand that the board assert the corporation’s claim or allege with particularity why the stockholder was justified in not having made the effort to obtain board action.”

  • Corporations must always respond in some fashion to stockholder demands.

Issue:
1. Whether Grimes can state his claim as a derivative one or direct.
2. Whether there was an abdication of directorial duty.
Holding:
1. No.
2. No.
Reasoning:
1. The distinction between derivative and direct “depends upon the nature of the wrong alleged and the relief … which could result if plaintiff were to prevail.”

  • If the board refuses a stockholder demand and there is reason to believe they didn’t act independently or with care, the shareholder may have a wrongful refusal case. “The stockholder then has the right to bring the “underlying action with the same standing which the stockholder would have had (in the first place) if the demand had been excused as futile.”
  • In this case, P made the demand before contesting the independence or thoroughness of the board’s decision-making. Thus, he waived his right to contest it derivatively.
  • “Permitting a stockholder to demand action involving only one theory or remedy and to argue later that demand is excused as to other legal theories or remedies arising out of the same set of circumstances as set forth in the demand letter would create an undue risk of harassment.”

2. No, their delegation of the compensation package was a legitimate delegation of authority. “… an informed decision to delegate a task is as much an exercise of business judgment as any other.”

  • There are times when a corporation is scarce with time and the directors must delegate to focus on larger issues.
  • There is value in compensation security in attracting top talent to high level positions. A board that does so exercises a legitimate business judgment

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