A board of directors approved compensation packages for the company’s CEO, who also was its controlling stockholder. The CEO was a member of the compensation committee and the board, and though he abstained from voting on his compensation, he often was part of the committee and board meetings. The approvals were based on discussions of peer companies’ compensation, not on the work of a compensation consultant. The plaintiff brought a derivative action challenging the compensation packages without first making a demand on the board. In support of his argument that demand was futile, the plaintiff asserted the seven-member board included four directors who would not have been able to consider a demand—two because they had received the challenged compensation, and two others who, though disinterested, allegedly faced a substantial likelihood of liability concerning the compensation decisions.
The Court of Chancery dismissed the action under Rule 23.1. The plaintiff did not argue that the two disinterested directors lacked independence or suffered a conflict of interest. Instead, he contended that the directors had operated in bad faith by rubber-stamping excessive compensation proposals with a “controlled mindset.” The Court examined recent Delaware case law involving the “controlled mindset” context and determined that those cases had involved allegations of extreme disloyalty or a retributive controller involved in a plainly flawed process. Here, the allegations were those of a thin process in which the controller participated and the directors should have negotiated or pushed back more. The Court, however, found these allegations involved no threatening or retributive behavior by the controller and were insufficient to plead bad faith and excuse demand.
