Ryan v. Gifford

In Ryan v. Gifford (918 A2d 341 [2007]), the Delaware Chancery Court addressed the issue of futility where the derivative suit concerned the approval by a compensation committee, consisting of one half of the directors, which approved backdated stock option grants to the corporation's chief executive officer in violation of shareholder approved stock option and stock incentive plans. The Delaware court first ruled that where one half of the board members in place at the time the complaint was filed had acted upon and approved the challenged transactions, the Aronson test applied for purposes of proving demand futility. (Id. at 353.) In that case, the stock option plans required that the exercise price be set at no less than 100% of the fair market value of the stock subject to the option on the date of the grant and the members of the board of directors sitting on the compensation committee had altered the actual date of the grant so as to affect the exercise price. (Id.) The court found that the plaintiff had raised the required reason to doubt whether the challenged transactions were a valid exercise of business judgment under Aronson agreeing, under the "unusual facts alleged" and set forth, that "knowing and intentional violations of the stock option plans . . . cannot be an exercise of business judgment." (Id. at 354.)