The Delaware Court of Chancery in Sanders v. Wang, 1999 Del. Ch. LEXIS 203, 1999 WL 1044880 (Del. Ch. Nov. 8, 1999), granted judgment on the pleadings in favor of shareholders of Computer Associates, Inc. ("CA") on a breach of fiduciary duty claim in a case involving a shareholder approved key employee stock ownership plan permitting a board compensation committee to grant up to 6,000,000 shares of common stock to plan participants, and the committee increased the 6,000,000 number to more than 20,000,000 in order to reflect stock splits. The court held that the 6,000,000 share ceiling was clear and unambiguous and that the award of more than 6,000,000 shares was a "clear violation" of the plan "without any legal justification."
Under these circumstances, the court stated, "as a matter of law . . . the Board exceeded its authority" and as a result "plaintiffs are entitled to judgment on the pleadings that the directors wrongfully authorized the award and that the director executives who received the award must disgorge the benefit received in order to avoid being unjustly enriched." The court accordingly ordered that the shares be returned to the corporation, that a constructive trust be imposed on the plan participants who received the shares, and that an accounting be rendered for any economic benefit derived from the shares.
The court left open for further proceedings, a ruling with respect to "the nature of the breach of fiduciary duty giving rise to the imposition of a constructive trust in order to redress the unjust enrichment" - i.e., whether the wrongful acts "were breaches of the duty of care or duty of loyalty or whether they resulted from negligent or grossly negligent conduct." The court explained that a provision in the corporation's certificate of incorporation adopted pursuant to Section 102(b)(7) of the Delaware General Corporation Law shielded outside directors from liability for money damages for breaches of the duty of care but not for breaches of the duty of loyalty. Accordingly, the court concluded, "the management executives/directors who received the improper share grants . . . may face personal liability for monetary damages if they are necessary to make the shareholders whole," and "[t]he directors authorizing the share grants face damage claims, yet to be proved, for which they may be liable or from which, depending upon the proof of the nature of their conduct, they may be exculpated" under a provision in the corporation's charter shielding directors from personal liability "for any damage claims brought against them for violations of their duty of care."
The court noted that the three plan participants still would keep a total of almost $320 million. The court stated that "$320 million is no mere bagatelle," and "I find it remarkable that defendants would have me believe that CA's shareholders would consider that $320 million for three individuals failed to 'encourage, recognize, and reward sustained outstanding individual performance by certain key employees'" (quoting ' 1.1 of the Key Employee Stock Ownership Plan). The court acknowledged that "[i]t is certainly the province of shareholders, by way of their franchise, to compensate their executives as lavishly as they deem necessary to ensure the growth and prosperity of their company," but concluded that "it is critical as a matter of governance policy that this Court ensure that these compensation plans when approved by shareholders are administered in strict accordance with the terms of the Plan and as the shareholders had the right to anticipate."
The decision was written by Delaware Vice Chancellor Myron T. Steele.