Director’s fiduciary duty By Amma

Outline Facts Issue Holding and decision Provisions in Chinese Company Law More analysis

Facts A stock option compensation plan for the directors of Mattel, Inc. was approved or ratified by the shareholders at their annual meeting. Lee and other shareholders alleged that in seeking ratification and in allegedly failing fully to disclose material facts, the board of directors had breached their duty of candor. Mary and the directors move to dismiss the complaint.

Issue Does informed, uncoerced, disinterested shareholder ratification of a transaction in which corporate directors have a material conflict of interest have the effect of protecting the transaction from judicial review except on the basis of waste?

Holding and decision Yes. Informed, uncoerced, disinterested shareholder ratification of a transaction on which corporate directors have a material conflict of interest has the effect of protecting the transaction from judicial review except on the basis of waste. Waste entails an exchange of corporate asset for consideration so disproportionately small as to lie beyond the range at which any reasonable person might be willing to trade.

Holding and decision There is no objective metric to gauge ex ante incentive effects of owning options by directors or officers. It is probable to conclude that a set of facts could be shown that would permit the court to find that the grant of these options constituted an exchange to which no reasonable person not acting under compulsion an in good faith could agree. One time option grants to directors of this size seem at this point sufficiently unusual to require the court to refer to evidence before making an adjudication of their validity and consistency with fiduciary duty.

Holding and decision Motion denied.

Provisions in Chinese Company Law Article 148 The directors, supervisors and senior managers shall comply with laws, administrative regulations and the articles of association. They shall bear the obligations of fidelity and diligence to the company. No director, supervisor or senior manager may take any bribe or other illegal gains by taking the advantage of his authorities, or encroach on the properties of the company.

Analysis The court discussed the judicial standard for determination of waste. In its earlier expressions, the waste standard used by the courts in treating shareholder ratification of corporate plans granting stock options to corporate officers was not a waste standard at all, but rather a form of reasonableness of proportionality review. The court of Chancery had interpreted the waste standard in the ratified option context as invoking not a proportionality or reasonableness test, but the traditional waste standard which the court applied here.

Analysis Decisions about a senior executive’s salary, bonuses, stock options or pensions may be overturned if they are clearly excessive, taking into account the nature of the executive’s services.