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Breaching Fiduciary Responsibility, Corporate Stock Incentive Plan

When a corporation distributes stock options in excess of its written stock incentive plan shareholders can file a lawsuit.

Delaware Chancery Court permits shareholder to bring fiduciary claim for board’s violation of a stock incentive plan

November 22 2013, Michael S. Gordon,

On November 8, the Delaware Chancery Court denied a motion to dismiss a derivative action brought by a shareholder of Healthways, Inc. against the company’s president, Ben Leedle, Jr., and the board of directors for approving stock option grants to Mr. Leedle in excess of the amount permitted by the shareholder-approved Stock Incentive Plan (the Plan).The shareholder claimed that the board had breached its fiduciary duties of loyalty and care by granting excess stock options to Mr. Leedle and by causing Healthways to issue a materially misleading and false 2012 proxy statement. The shareholder also alleged that Mr. Leedle breached his fiduciary duties by accepting the excessive stock options, and that he was unjustly enriched. The shareholder sought, among other things, a rescission of any excessive stock options. Defendants moved to dismiss the complaint in its entirety, arguing that the shareholder improperly failed to comply with the pre-suit demand requirement, that the stock options grant was permissible under the Plan, and that even if pre-suit demand were excused, the shareholder failed to state a claim upon which relief can be granted.

Although the court disagreed with the shareholder’s argument that the Plan prohibited performance awards in the form of stock options, it nonetheless concluded that there were sufficient allegations in the complaint that the board had violated the unambiguous provisions of the Plan, and therefore pre-suit demand was excused. The court also concluded that it is reasonably conceivable that the board knowingly or intentionally caused Healthways to issue a proxy statement containing misleading assertions that Mr. Leedle’s stock option grants were in conformance with the Plan. Lastly, the court declined to dismiss the breach of fiduciary duty and unjust enrichment claims against Mr. Leedle.

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