John Calma v. Mark B. Templeton

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

JOHN CALMA, Derivatively on Behalf of CITRIX )
SYSTEMS, INC., )
)
Plaintiff, )
)
v. ) C.A. No. 9579-CB
)
MARK B. TEMPLETON, THOMAS F. BOGAN, )
GARY E. MORIN, NANCI E. CALDWELL, )
STEPHEN M. DOW, MURRAY J. DEMO, )
GODFREY R. SULLIVAN, ASIFF S. HIRJI, and )
ROBERT D. DALEO, )
)
Defendants, )
)
and )
)
CITRIX SYSTEMS, INC., a Delaware corporation, )
)
Nominal Defendant. )

OPINION

Date Submitted: February 2, 2015
Date Decided: April 30, 2015

Nicholas J. Rohrer of YOUNG CONAWAY STARGATT & TAYLOR, LLP,
Wilmington, Delaware; Brian J. Robbins, Felipe J. Arroyo and Jenny L. Dixon of
ROBBINS ARROYO LLP, San Diego, California; Attorneys for Plaintiff.

Thomas A. Beck and Susan M. Hannigan of RICHARDS, LAYTON & FINGER, P.A.,
Wilmington, Delaware; Brian E. Pastuszenski and Daniel Roeser of GOODWIN
PROCTER LLP, New York, New York; Attorneys for Defendants.

Kenneth J. Nachbar of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington,
Delaware; Attorneys for Nominal Defendant.

BOUCHARD, C.
I. INTRODUCTION

Over the past six decades, Delaware courts have issued numerous decisions

concerning ratification of compensation paid to non-employee directors. This Opinion

surveys that jurisprudence to determine whether stockholder approval of a compensation

plan subjects the self-interested payment of compensation to non-employee directors

under such a plan to judicial review under a waste standard instead of an entire fairness

standard.

In this derivative action, a stockholder challenges awards of restricted stock units

(RSUs) that were granted to eight non-employee directors of Citrix Systems, Inc.

(“Citrix” or the “Company”) in 2011, 2012, and 2013 (the “RSU Awards”). The majority

of the directors’ compensation consisted of these RSU Awards, which the board’s

compensation committee granted under the Company’s 2005 Equity Incentive Plan (the

“Plan”). That Plan, along with subsequent amendments thereto, was approved by a

majority of Citrix’s disinterested stockholders in informed and uncoerced votes.

Citrix’s directors, officers, employees, consultants, and advisors were all

beneficiaries under the Plan. The only limit on compensation the Plan imposed is that no

beneficiary could receive more than one million shares (or RSUs) per calendar year.

There were no sub-limits based on the beneficiary’s position at Citrix. Based on Citrix’s

stock price when this action was filed, one million RSUs were worth over $55 million.

The plaintiff contends that the RSU Awards were, when combined with the cash

payments that Citrix’s non-employee directors received, “excessive” in comparison with

the compensation received by directors at certain of Citrix’s “peers.” The plaintiff seeks

1
to recover against the defendants, the members of Citrix’s board, under three theories of

liability: (i) breach of fiduciary duty (Count I); (ii) waste of corporate assets (Count II);

and (iii) unjust enrichment (Count III).

The plaintiff does not contend that Citrix stockholders failed to approve the Plan;

that Citrix stockholders were not fully informed when they approved the Plan; or that the

RSU Awards violated the Plan. Rather, he asserts that the defendants must establish the

entire fairness of the RSU Awards as conflicted compensation decisions because the Plan

does not have any “meaningful limits” on the annual stock-based compensation that

Citrix directors can receive from the Company.

The defendants moved to dismiss the complaint in its entirety under Court of

Chancery Rule 12(b)(6) for failure to state a claim upon which relief may be granted, and

under Court of Chancery Rule 23.1 for failure to make a pre-suit demand upon Citrix’s

board or to plead facts excusing such a demand. The defendants’ primary argument is a

ratification defense, but they concede that Citrix stockholders were not asked to ratify the

specific RSU Awards at issue here. 1 Instead, the defendants contend that Citrix

stockholders ratified the Plan so that any award of RSUs to the directors under the

generic one million RSU limit in the Plan must be reviewed under a waste standard.

They further contend that it is not reasonably conceivable that the RSU Awards

constituted waste.

1
Tr. of Oral Arg. 7.

2
 In this opinion, I conclude that the plaintiff has established that demand is futile

because a majority of the Citrix board in office when the complaint was filed were

interested by virtue of receiving the RSU Awards. Thus, the defendants’ Rule 23.1

motion is denied.

I further conclude that the defendants have not established that Citrix stockholders

ratified the RSU Awards because, in obtaining omnibus approval of a Plan covering

multiple and varied classes of beneficiaries, the Company did not seek or obtain

stockholder approval of any action bearing specifically on the magnitude of

compensation to be paid to its non-employee directors. Accordingly, because the RSU

Awards were self-dealing decisions, the operative standard of review is entire fairness,

and it is reasonably conceivable that the total compensation received by the non-

employee directors was not entirely fair to the Company. I also conclude that it is

reasonably conceivable that the defendants were unjustly enriched by the RSU Awards,

but not that the RSU Awards constituted waste. Therefore, the defendants’ Rule 12(b)(6)

motion is granted as to Count II and denied as to Counts I and III.

II. BACKGROUND 2

A. The Parties

Nominal Defendant Citrix, a Delaware corporation based in Fort Lauderdale,

Florida, provides virtualization, networking, and cloud infrastructure services to

2
Unless noted otherwise, the facts recited in this opinion are based on the allegations of
the Verified Shareholder Derivative Complaint for Breach of Fiduciary Duty, Waste of
Corporate Assets, and Unjust Enrichment (the “Complaint”).

3
businesses and consumers. It is well known for its GoToMeeting product, which is a

video conferencing service.

Defendants Mark B. Templeton, Thomas F. Bogan, Gary E. Morin, Nanci E.

Caldwell, Stephen M. Dow, Murray J. Demo, Godfrey R. Sullivan, Asiff S. Hirji, and

Robert D. Daleo (collectively, the “Board” or the “Defendants”) were the nine members

of Citrix’s board of directors when the Complaint was filed. They all have been directors

of Citrix since July 2008, with the exception of Daleo, who became a director in May

2013. Templeton, as the Company’s Chief Executive Officer and President, is the only

employee director. 3 Since at least April 2010, Bogan, Morin (as chair), and Caldwell

have constituted the Board’s Compensation Committee.

Plaintiff John Calma (“Plaintiff”) has been a Citrix stockholder at all relevant

times.

B. Citrix’s 2005 Equity Incentive Plan

On May 25, 2005, a majority of Citrix’s stockholders approved the Plan. The Plan

was adopted in part “to advance the interests of Citrix Systems, Inc. . . . by encouraging

ownership of Stock by employees, directors, officers, consultants or advisors of the

Company” and by “attracting and retaining the best available individuals for service as

directors of the Company.” 4

3
Templeton’s compensation from Citrix is not at issue in this action.
4
Defs.’ Ex. B (Plan) § 1; Compl. ¶ 16. Because the Plan is integral to Plaintiff’s claims
and incorporated by reference into the Complaint, it is properly before the Court on
Defendants’ motion to dismiss. See In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d
59, 69-70 (Del. 1995).

4
 The Plan initially encompassed 10.1 million total shares, of which 500,000 shares

could be awarded as RSUs. 5 Those terms have since been amended several times. The

Plan currently encompasses 48.6 million total shares, of which 16 million shares can be

awarded as RSUs. As of the filing of the Complaint, there were over 16 million shares

available under the Plan, with 11 million shares available to be granted as RSUs. 6

Under Section 6.1(a) of the Plan, the persons eligible to receive an equity award

include Citrix’s directors, officers, employees, consultants, and advisors. 7 Subject to

adjustments not relevant here, Section 6.1(b) of the Plan limits the total number of shares

covered by an award that any beneficiary can receive under the Plan in a calendar year to

1 million shares. 8 The Plan does not specify the compensation that the Company’s non-

employee directors will receive annually. There are no sub-limits varied by position with

the Company, such as a limit for non-employee directors and a different limit for officers.

The only limit on annual compensation under the Plan is the generic 1 million share limit

set forth in Section 6.1(b) applicable to all beneficiaries.

5
Plan § 4.
6
Compl. ¶ 17.
7
Plan § 6.1(a) (“The Committee may grant from time to time and at any time prior to the
termination of the Plan one or more Awards . . . to any employee of, officer of, consultant
to or advisor to . . . the Company . . . or to [any] non-employee member of the Board[.]”).
8
Id. § 6.1(b) (“[I]n no event shall the number of shares of Stock covered by Options or
other Awards granted to any one person in any one calendar year exceed 1,000,000
shares of Stock.”). The Plan defines “Award” as “any grant or sale pursuant to the Plan
of Options, Stock Appreciation Rights, Performance Units, Restricted Stock, Restricted
Stock Units, or Stock Grants.” Id. § 2.4.

5
 The Compensation Committee is authorized to administer the Plan, although the

Board “may itself exercise any of the powers and responsibilities assigned [to] the

Committee under the Plan.” 9 The Plan empowers the Compensation Committee with

broad discretion to determine the amount and form of the awards to be granted under the

Plan. Specifically, Section 5 of the Plan provides:

Subject to the provisions of the Plan, the Committee shall have complete
authority, in its discretion, to make or to select the manner of making all
determinations with respect to each Award to be granted by the Company
under the Plan including the employee, director, officer, consultant or
advisor to receive the Award and the form of Award. In making such
determinations, the Committee may take into account the nature of the
services rendered by the respective employees, directors, officers,
consultants, and advisors, their present and potential contributions to the
success of the Company and its Affiliates, and such other factors as the
Committee in its discretion shall deem relevant. 10

Section 5 thus grants to the Compensation Committee (or the Board) the “authority to

decide how many awards it can grant to its members and other directors, subject only to

the amount of stock limitations.” 11 In Plaintiff’s view, the one-million-share limit on

awards per person per calendar year is “specious” because, based on the Company’s

stock price in July 2014 when the Complaint was filed, a grant of one million shares to a

single person would have been worth over $55 million. 12

9
Id. § 5; Compl. ¶ 18.
10
Plan § 5 (emphasis added).
11
Compl. ¶ 20.
12
Id.

6
 C. Compensation Received by Non-Employee Directors in 2010

In 2010, consistent with the Board’s previously-announced director compensation

practice, 13 the Compensation Committee granted 3,333 RSUs, with a grant date fair value

of $143,852, and 10,000 options, with a grant date fair value of $101,116, to the

Company’s non-employee directors. The directors also received cash compensation

between $43,750 and $67,072, bringing their total 2010 compensation to between

$288,718 and $312,040.

Table 1 below reflects the total value of the RSUs, options, and cash compensation

the Company’s non-employee directors received in 2010.

Table 1
Non-Employee Director Compensation in 2010 14
Director RSU Awards Options Cash Total
Bogan $143,852 $101,116 $62,187 $307,155
Morin $143,852 $101,116 $47,500 $292,468
Caldwell $143,852 $101,116 $43,750 $288,718
Dow $143,852 $101,116 $67,072 $312,040
Demo $143,852 $101,116 $60,938 $305,906
Sullivan $143,852 $101,116 $47,500 $292,468
Hirji $143,852 $101,116 $47,500 $292,468

13
See Defs.’ Ex. H at 5-6 (Citrix Systems, Inc. Proxy Statement (Schedule 14A), at 30-31
(Apr. 14, 2006)) (“Annually, beginning in 2006, each non-employee director will be
eligible to receive an option to purchase 10,000 shares of the Company’s Common Stock
and a restricted stock award of 3,333 shares of the Company’s Common Stock.”). I rely
upon this source solely to provide additional background for the RSU Awards.
14
Compl. ¶ 24.

7
 D. Compensation Received by Non-Employee Directors in 2011-2013

In 2011, the Compensation Committee recommended, and the Board approved, a

change to the Company’s director compensation practices. The Board approved this

change without obtaining stockholder approval, which, as Plaintiff acknowledges, was

not required under Delaware law or under the Plan. 15

Starting in 2011, the equity compensation for non-employee directors was an

annual grant of 4,000 RSUs for returning directors and a one-time grant of 10,000 RSUs

for new directors. 16 The RSUs for returning directors would be awarded in June after the

Company’s annual meeting and would vest equally in monthly installments over one

year. The RSUs for new directors likewise would be awarded in June and would vest

equally in annual installments over three years. The non-employee directors also would

receive cash compensation, but they would no longer receive any options. 17

In June 2011, the Compensation Committee awarded 4,000 RSUs, with a grant

date fair value of $339,320, to each of the Company’s non-employee directors. Those

directors also received cash compensation between $47,396 and $86,250, bringing their

15
Id. ¶ 22.
16
Id.
17
Plaintiff alleges that the change in director compensation from 2010 to 2011 is “all the
more drastic” because “the Company’s stock price dropped almost immediately after the
equity stock awards grant in 2011,” meaning that any options issued to the Company’s
non-employee directors in 2011 “would have been worthless.” Id. But, Plaintiff does not
allege that the Board knew at the time that the Company’s stock price would drop, nor
does Plaintiff assert any breach of fiduciary duty claim under Brophy v. Cities Serv. Co.,
70 A.2d 5 (Del. Ch. 1949).

8
total 2011 compensation to between $386,716 and $425,570. This reflected an average

increase of approximately $100,000 from their total compensation in 2010.

In June 2012, the Compensation Committee awarded another 4,000 RSUs, with a

grant date fair value of $283,160, to each of the Company’s non-employee directors.

Those directors also received cash compensation between $50,000 and $105,000,

bringing their total 2012 compensation to between $333,160 and $388,160.

In June 2013, the Compensation Committee again awarded 4,000 RSUs, with a

grant date fair value of $253,360, to each of the Company’s returning, non-employee

directors. Those directors also received cash compensation between $50,000 and

$105,000, bringing their total 2013 compensation to between $303,360 and $358,360.

The Compensation Committee also awarded 10,000 RSUs, with a grant date fair value of

$633,400, to Daleo, a new, non-employee director. Daleo also received $29,535 in cash,

bringing his total 2013 compensation to $662,935.

Table 2 below reflects the total value of the RSU Awards and cash compensation

the Company’s non-employee directors received in 2011-2013.

9
 Table 2
Non-Employee Director Compensation in 2011-2013 18
Director Fiscal Year RSU Awards Cash Total
2011 $339,320 $86,250 $425,570
Bogan 2012 $283,160 $105,000 $388,160
2013 $253,360 $105,000 $358,360
2011 $339,320 $54,792 $394,112
Morin 2012 $283,160 $60,000 $343,160
2013 $253,360 $60,000 $313,360
2011 $339,320 $47,396 $386,716
Caldwell 2012 $283,160 $50,000 $333,160
2013 $253,360 $50,000 $303,360
2011 $339,320 $69,583 $408,903
Dow 2012 $283,160 $90,000 $373,160
2013 $253,360 $90,000 $343,360
2011 $339,320 $71,146 $410,466
Demo 2012 $283,160 $80,000 $363,160
2013 $253,360 $80,000 $333,360
2011 $339,320 $54,792 $394,112
Sullivan 2012 $283,160 $70,000 $353,160
2013 $253,360 $70,000 $323,360
2011 $339,320 $54,792 $394,112
Hirji 2012 $283,160 $60,000 $343,160
2013 $253,360 $60,000 $313,360
Daleo 2013 $633,400 $29,535 $662,935

E. Procedural History

On April 28, 2014, Plaintiff filed this action derivatively on behalf of Citrix.19

The Complaint asserts three claims against Defendants for approving and/or receiving the

18
Compl. ¶¶ 7-14.
19
On May 6, 2014, Plaintiff filed a corrected complaint that included an inadvertently
deleted graphic.

10
RSU Awards in 2011, 2012, and 2013: (i) breach of fiduciary duty (Count I); (ii) waste of

corporate assets (Count II); and (iii) unjust enrichment (Count III).

On July 21, 2014, Defendants moved to dismiss the Complaint in its entirety under

Court of Chancery Rules 12(b)(6) and 23.1. On January 6, 2015, I heard oral argument

on Defendants’ motion, at which time I requested supplemental briefing on the

Company’s treatment of abstentions and broker “non-votes” in its vote calculations. On

February 2, 2015, the parties completed this supplemental briefing.

III. LEGAL ANALYSIS

A. Demand is Excused as to Counts I-III

“Because the shareholders’ ability to institute an action on behalf of the

corporation inherently impinges upon the directors’ power to manage the affairs of the

corporation the law imposes certain prerequisites on a stockholder’s right to sue

derivatively.” 20 Under Court of Chancery Rule 23.1, because Plaintiff did not make a

demand on the Board prior to filing the Complaint, 21 he must allege with particularity

that his failure to make a demand should be excused. 22 Plaintiff alleges that demand is

excused for two related reasons: (i) a majority of the Board stood “on both sides” of the

decision in 2011 to change the Company’s director compensation practices to what

became the RSU Awards; and (ii) a majority of the Board “lack disinterest” because they

20
Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d 726, 730 (Del. 1988).
21
Compl. ¶ 33.
22
See, e.g., Wood v. Baum, 953 A.2d 136, 140 (Del. 2008).

11
“derived a personal financial benefit from and had a direct interest in” receiving the RSU

Awards. 23

There are two tests for demand futility under Delaware law: (i) the test articulated

in Aronson v. Lewis, 24 which applies when a plaintiff challenges “a decision of the board

upon which plaintiff must seek demand”; 25 and (ii) the test set forth in Rales v.

Blasband, 26 which applies when a plaintiff does not challenge “a decision of the board in

place at the time the complaint is filed.” 27 To establish demand futility, Plaintiff must

impugn the ability of at least half of the directors in office when the Complaint was filed

to have considered a demand impartially. 28 The focus is on the entire board in office,

rather than only the directors who approved any decision(s) at issue, because the core

purpose of the demand futility test is to determine whether “the impartial directors . . .

have the power unilaterally to cause the corporation to act on the demand.” 29

The parties assert that the Aronson test should govern, but, in my view, the Rales

test applies to the facts alleged here. The Complaint ostensibly challenges the Board’s

decision in 2011 to change its director compensation practices, but that was simply a

23
Compl. ¶ 34.
24
473 A.2d 805 (Del. 1984).
25
Ryan v. Gifford, 918 A.2d 341, 353 (Del. Ch. 2007).
26
634 A.2d 927 (Del. 1993).
27
Ryan, 918 A.2d at 352.
28
See Beneville v. York, 769 A.2d 80, 82 (Del. Ch. 2000).
29
Id. at 86.

12
change in board policy. The actual business decisions at issue in this case, in my opinion,

were those that the three members of the Compensation Committee made to grant the

RSU Awards in 2011, 2012, and 2013.

The entire Board did not approve the RSU Awards; only the Compensation

Committee did. There is no dispute that the Compensation Committee had the authority

to issue the RSU Awards under Section 5 of the Plan and under Delaware law as a

committee of the Board. 30 At all relevant times, the Citrix board of directors had at least

eight members, meaning that at no point in time did the three members of the

Compensation Committee constitute a majority (or even half) of the Board. Unlike in

Ryan v. Gifford, 31 where Chancellor Chandler applied Aronson because the unanimous

decisions of a three-member compensation committee could be imputed to the six

members of the board “for purposes of proving demand futility,” 32 the decisions of the

Compensation Committee here to grant the RSU Awards cannot be imputed to the Board.

Rather, this case is analogous to Conrad v. Blank, 33 where the Court applied the Rales

test to derivative claims challenging grants of backdated options approved by a

compensation committee consisting of less than half of the directors in office when the

30
8 Del. C. § 141(c) (providing that the board of directors may establish a committee
endowed with the full authority of the board).
31
918 A.2d 341 (Del. Ch. 2007).
32
Id. at 353, 353 n.29 (“Where half or more of the board has already approved a
corporate action, even acting through a committee, there is no need for a shareholder to
give the entire board a second bite at the apple.”).
33
940 A.2d 28 (Del. Ch. 2007).

13
lawsuit was initiated. 34 Thus, in my view, because the decisions to grant the RSU

Awards were made by less than half of the Citrix directors in office when Plaintiff filed

the Complaint, the Rales test applies.

Under Rales, Plaintiff’s derivative claims must be dismissed under Court of

Chancery Rule 23.1 unless, based on the particularized facts alleged, Plaintiff creates “a

reasonable doubt that, as of the time the complaint is filed, the board of directors could

have properly exercised its independent and disinterested business judgment in

responding to a demand.” 35 In this analysis, all particularized allegations in the

Complaint are accepted as true, and all reasonable inferences logically flowing from

those particularized allegations are drawn in Plaintiff’s favor. 36 Most relevant here, a

director is not disinterested if he or she “appear[s] on both sides of a transaction [or]

expect[s] to derive any personal financial benefit from it in the sense of self-dealing.” 37

Defendants argue that a director is not deemed interested simply because he or she

received compensation from the corporation unless Plaintiff is able to show that the

compensation received was material to that individual, which they contend Plaintiff has

34
See id. at 37 (“Since the challenged transaction was not made by the board, or even
half of its members, the test articulated in Rales is the proper standard.”); see also
Desimone v. Barrows, 924 A.2d 908, 947 (Del. Ch. 2007) (applying the Rales test to
derivative claims challenging the options granted to a majority of the board by operation
of a stockholder-approved plan).
35
Rales, 634 A.2d at 934.
36
See Brehm v. Eisner, 746 A.2d 244, 255 (Del. 2000).
37
Aronson, 473 A.2d at 812.

14
not done. 38 In opposition, Plaintiff contends that where, as here, there are derivative

claims challenging the compensation received by directors, those directors are interested

for demand futility purposes because they “have a personal financial interest in their

compensation for their service as directors,” regardless of whether the compensation they

received was material to them personally. 39 Accordingly, Plaintiff submits that demand

is excused here because he challenges the RSU Awards received by a majority of the

Board in office when the Complaint was filed. I agree with Plaintiff.

Under Delaware law, directors are generally not considered interested under

Aronson or Rales “simply because [they] receive compensation from the company.” 40

But, a derivative challenge to director compensation is different because the law is

skeptical that an individual can fairly and impartially consider whether to have the

corporation initiate litigation challenging his or her own compensation, regardless of

whether or not that compensation is material on a personal level.

38
Defs.’ Op. Br. 31.
39
Pl.’s Ans. Br. 8.
40
Weiss v. Swanson, 948 A.2d 433, 448 (Del. Ch. 2008) (citing A.R DeMarco Enters.,
Inc. v. Ocean Spray Cranberries, Inc., 2002 WL 31820970, at *5 (Del. Ch. Nov. 26,
2002, revised Dec. 4, 2002)).

15
 Drawing on Chancellor Allen’s analysis in Steiner v. Meyerson, 41 I concluded in

Cambridge Retirement System v. Bosnjak 42 that, in a derivative challenge to director

compensation, there is a reasonable doubt that the directors who received the

compensation at issue—regardless of whether that compensation was material to them on

a personal level—can be sufficiently disinterested to consider impartially a demand to

pursue litigation challenging the amount or form of their own compensation. 43 In my

view, this conclusion has even more force where, as here, the directors received equity

compensation from the corporation because those individuals “have a strong financial

incentive to maintain the status quo by not authorizing any corrective action that would

devalue their current holdings or cause them to disgorge improperly obtained profits.” 44

Here, eight of the nine Citrix directors in office when Plaintiff filed the Complaint

received the RSU Awards from the Company. Plaintiff alleged with sufficient

particularity that those eight directors are “interested” by identifying the amount and form

of the RSU Awards they received from the Company during 2011-2013. As in Steiner

and Bosnjak, Plaintiff need not establish that the RSU Awards were material to the

Company’s non-employee directors. Since a majority of the Board is interested, Plaintiff

41
1995 WL 441999, at *4, *11 (Del. Ch. July 19, 1995) (concluding that directors were
“interested” in the stock options they received from the company without analyzing
whether the compensation was material to them individually).
42
2014 WL 2930869 (Del. Ch. June 26, 2014).
43
See id. at *3-6; see also London v. Tyrrell, 2008 WL 2505435, at *5 (Del. Ch. June 24,
2008).
44
Conrad, 940 A.2d at 38.

16
has raised a reasonable doubt as to the ability of the Board to impartially consider

whether or not to pursue a claim challenging the RSU Awards. 45 Because each of Counts

I-III challenges the RSU Awards, demand is excused as futile for each of those Counts. 46

Defendants’ motion to dismiss the Complaint under Rule 23.1 is therefore denied.

B. Count I States a Claim for Breach of Fiduciary Duty

In Count I, Plaintiff alleges that Defendants breached their fiduciary duty of

loyalty “by awarding and/or receiving excessive and improper compensation at the

expense of the Company” in the form of the RSU Awards. 47 Defendants’ motion to

dismiss Count I under Court of Chancery Rule 12(b)(6) must be denied unless, accepting

as true all well-pled allegations of the Complaint and drawing all reasonable inferences

from those allegations in Plaintiff’s favor, there is no “reasonably conceivable set of

45
In a terse footnote in their brief, Defendants contend that 8 Del. C. § 141(h) is “a
statutory grant of Business Judgment Rule protection for director compensation
decisions” such that, because Plaintiff did not allege with particularity that the Board
acted in bad faith or did not exercise its business judgment, demand is not excused.
Defs.’ Op. Br. 32 n.14. I disagree. Section 141(h) of the Delaware General Corporation
Law is a grant of authority for directors to set their compensation, not a statutory safe
harbor mandating the business judgment standard of review for director compensation
decisions. See Bosnjak, 2014 WL 2930869, at *6. Thus, in my view, Section 141(h)
does not mean that a director cannot be “interested” in his or her compensation for
purposes of Rule 23.1.
46
Beam v. Stewart, 833 A.2d 961, 977 n.48 (Del. Ch. 2003) (“Demand futility analysis is
conducted on a claim-by-claim basis.”), aff’d, 845 A.2d 1040 (Del. 2004).
47
Compl. ¶ 37.

17
circumstances susceptible of proof” in which Plaintiff could establish that Defendants

breached their fiduciary duties. 48

1. Plaintiff Has Rebutted the Business Judgment Standard

Delaware courts examine the merits of a claim for breach of fiduciary duty

through one of (primarily) three doctrinal standards of review: business judgment,

enhanced scrutiny, and entire fairness. 49 Where a stockholder cannot rebut the

presumptive business judgment standard, the stockholder must show that the board’s

decision cannot be attributed to any rational business purpose—which, in effect, is the

standard for waste under Delaware law. 50 But, where a stockholder rebuts the business

judgment standard—for example, by establishing that at least half of the directors who

approved a business decision are not independent or disinterested 51—the Court reviews

the directors’ decision under the entire fairness standard, in which case the directors must

48
See Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 536
(Del. 2011).
49
See, e.g., In re Trados Inc. S’holder Litig., 73 A.3d 17, 35-36 (Del. Ch. 2013).
50
See In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 74 (Del. 2006) (“[The] onerous
standard for waste is a corollary of the proposition that where business judgment
presumptions are applicable, the board’s decision will be upheld unless it cannot be
‘attributed to any rational business purpose.’ ” (quoting Sinclair Oil Corp. v. Levien, 280
A.2d 717, 720 (Del. 1971)).
51
See Aronson, 473 A.2d at 812 (“[If] the transaction is not approved by a majority
consisting of the disinterested directors, then the business judgment rule has no
application[.]”); see also Lee v. Pincus, 2014 WL 6066108, at *10, *13 (Del. Ch. Nov.
14, 2014) (“[The plaintiff] has pled facts sufficient to rebut the business judgment
standard of review because the [transaction] was not approved by a majority of
disinterested and independent directors.”).

18
establish “to the court’s satisfaction that the transaction was the product of both fair

dealing and fair price.” 52

The Compensation Committee approved the RSU Awards to the Company’s non-

employee directors in 2011, 2012, and 2013. These were conflicted decisions because all

three members of the Compensation Committee received some of the RSU Awards. As

the Delaware Supreme Court observed in Telxon Corp. v. Meyerson, 53 director self-

compensation decisions are conflicted transactions that “lie outside the business judgment

rule’s presumptive protection, so that, where properly challenged, the receipt of self-

determined benefits is subject to an affirmative showing that the compensation

arrangements are fair to the corporation.” 54 This is not a case where disinterested

directors approved the compensation of other directors; 55 the Compensation Committee

52
Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993).
53
802 A.2d 257 (Del. 2002).
54
Id. at 265; see also Valeant Pharm. Int’l v. Jerney, 921 A.2d 732, 745 (Del. Ch. 2007)
(“Self-interested compensation decisions made without independent protections are
subject to the same entire fairness review as any other interested transaction.” (citing
Telxon, 802 A.2d at 265)).
55
See, e.g., Cal. Pub. Emps. Ret. Sys. v. Coulter, 2002 WL 31888343, at *10 n.26 (Del.
Ch. Del. 18, 2002) (“It is not alleged that any director approved or participated in the
repricing of his own options and was therefore ‘interested’ as analyzed under the first
prong of Aronson.”); Tate & Lyle PLC v. Staley Cont’l, Inc., 1988 WL 46064 (Del. Ch.
May 9, 1988), reprinted at 14 Del. J. Corp. L. 418, 431-32 (Del. Ch. 1988) (“Even when a
compensation decision directly benefits directors, if the decision is approved by a
committee of disinterested directors, it is afforded the protection of the business judgment
rule.”).

19
approved their own compensation and that of the other non-employee directors. Thus, in

my view, Plaintiff has rebutted the presumptive business judgment standard of review.

2. Stockholder Ratification Concerning Director Compensation

To avoid the entire fairness standard, Defendants raise the affirmative defense of

common law stockholder ratification and contend that the RSU Awards must be reviewed

under a waste standard. Specifically, Defendants submit that the RSU Awards “were the

result of the Board administering the shareholder-approved 2005 [Plan] and were made

pursuant to, and in full compliance with, that [P]lan.” 56 Plaintiff counters that, even

though the RSU Awards were granted under the stockholder-approved Plan, Defendants

still bear the burden to establish the entire fairness of the RSU Awards because the Plan

“has no meaningful limits” on the total equity compensation that the Company’s non-

employee directors could hypothetically receive. 57 For this proposition, Plaintiff relies

primarily on this Court’s decision in Seinfeld v. Slager. 58 Defendants challenge Slager as

“incompatible with the deference owed under settled Delaware law to the fully-informed

collective decision of disinterested shareholders to grant directors discretion within broad

parameters to exercise business judgment.” 59 In support of their position, they present in

56
Defs.’ Op. Br. 18.
57
Pl.’s Ans. Br. 11.
58
2012 WL 2501105 (Del. Ch. June 29, 2012).
59
Defs.’ Reply Br. 16.

20
detail “how shareholder approval has been treated for 60 years, both by the Supreme

Court and by the Chancery Court.” 60

The question before me is whether advance stockholder approval of a

compensation plan with multiple classes of beneficiaries and a single generic limit on the

amount of compensation that may be awarded in a given year is sufficient to establish a

ratification defense for the RSU Awards that were granted to Citrix’s non-employee

directors. Given Defendants’ contention that sixty years of precedent supports their

position, I review those decisions before applying the key principles from them to the

allegations here.

The principle of “ratification” stems from the law of agency. As a general matter,

as Chancellor Allen explained in Lewis v. Vogelstein, 61 ratification

contemplates the ex post conferring upon or confirming of the legal
authority of an agent in circumstances in which the agent had no authority
or arguably had no authority. . . . [T]he effect of informed ratification is to
validate or affirm the act of the agent as the act of the principal. 62

In the corporate law context, stockholders (as principals) can, by majority vote,

retrospectively and, at times, prospectively, 63 act to validate and affirm the acts of the

directors (as agents).

60
Tr. of Oral Arg. 37.
61
699 A.2d 327 (Del. Ch. 1997).
62
Id. at 334 (citing Restatement (Second) of Agency § 82 (1958)).
63
Because “[r]atification, in the usual sense, involves shareholders’ affirmatively
sanctioning earlier board action, the effect of which is to validate that action,” the Court
has described the notion of “advance ratification”—i.e., board action consistent with

21
 The modern doctrine of stockholder ratification under Delaware law in the director

compensation context can be traced to three cases decided in 1952 in which stockholders

challenged the adequacy of consideration the corporation received in exchange for

options awards under stockholder-approved compensation plans. To begin, in Kerbs v.

California Eastern Airways, Inc., 64 a stockholder challenged a plan that set forth the

specific options “to be granted in designated amounts to named executives of the

company.” 65 A majority of the directors who approved the plan were conflicted because

they also were beneficiaries under the plan, which would typically implicate the entire

fairness standard of review. The Supreme Court nevertheless concluded that, because the

plan set forth the specific options to be awarded, stockholder approval of the earlier-in-

time decision of the board to adopt the plan was a ratification of the consideration and

“effective for all purposes unless the action of the directors constituted a gift of corporate

assets to themselves or was ultra vires, illegal, or fraudulent.” 66 Separately, in finding

that the record on appeal was insufficient to resolve whether stockholders also had

earlier stockholder approval—as “oxymoronic.” In re 3COM Corp. S’holders Litig.,
1999 WL 1009210, at *3 (Del. Ch. Oct. 25, 1999). Nonetheless, for lack of a better
nomenclature and in the interest of simplicity, I use the term “ratification” in this opinion
to refer generally to stockholder approval of a specific board action, be it retrospective or
prospective.
64
90 A.2d 652 (Del. 1952).
65
Id. at 655.
66
Id. at 655 (citing Keenan v. Eshleman, 2 A.2d 904 (Del. 1938)). The Kerbs Court
ultimately enjoined the stock option plan on the grounds of waste “because it [was] not
reasonably calculated to insure that the defendant [corporation] will receive the
contemplated benefits.” Id. at 656.

22
validly ratified a profit-sharing plan approved by similarly conflicted directors, the Kerbs

Court observed that “the effectiveness of such ratification depends upon the type of

notice sent to the stockholders and of the explanation to them of the plan itself.” 67

Simultaneous with deciding Kerbs, the Supreme Court issued its first decision in

Gottlieb v. Heyden Chemical Corp. 68 There, a stockholder challenged a plan that

provided “for granting to seven specified officers of the company, six of whom were

members of the [nine-member] board of directors, an option to purchase various

designated amounts of the common stock of the corporation.” 69 The plan also set aside a

specified number of shares to be issued as options in amounts and to recipients selected

by a board committee. In advance of the their vote on the plan, stockholders

were furnished the names of the seven officers with whom contracts for
options under the plan had already been made, the number of shares
allocated to each, the price per share each of said officers was to pay, and
the schedule of waiting and working periods specified in all seven
contracts[.] 70

As in Kerbs, the Supreme Court in Gottlieb concluded that informed approval of the plan

by the holders of a majority of the corporation’s stock ratified the consideration received

by the company in exchange for the options issued to the seven specified officers, thereby

67
Id. at 659-60.
68
90 A.2d 660 (Del. 1952). Kerbs and Gottlieb were both decided on July 17, 1952, and
the subject of further opinions on reargument issued on August 28, 1952, and August 29,
1952, respectively.
69
Id. at 661.
70
Id. at 662.

23
reducing the standard of review for a challenge to the adequacy of the consideration

received by the corporation in exchange for the equity compensation:

Where there is stockholder ratification, . . . the burden of proof is shifted to
the objector. In such a case the objecting stockholder must convince the
court that no person of ordinarily sound business judgment would be
expected to entertain the view that the consideration furnished by the
individual directors is a fair exchange for the options conferred. 71

Notably, the Supreme Court in Gottlieb distinguished between approval of the options

specified in the plan that had been awarded, and approval of the number of options set

aside to be issued in the future, concluding that there was no ratification of the future

options because the stockholders’ approval “cannot be taken to have approved specific

bargains not yet proposed.” 72

About three months after Kerbs and Gottlieb had been decided, Chancellor Seitz

considered a challenge to the adequacy of the consideration a corporation had received

for a restricted stock option plan in Kaufman v. Shoenberg. 73 Importantly, that plan,

which did not specify the awards to be issued, was administered exclusively by a

committee of directors who were not eligible to receive options under the plan, meaning

that the committee’s compensation decisions were disinterested. 74 Although he observed

71
Gottlieb v. Heyden Chem. Corp., 91 A.2d 57, 58 (Del. 1952) (reargument decision).
The Supreme Court would affirm this proposition again in Beard v. Elster, 160 A.2d 731,
735 (Del. 1960).
72
Gottlieb, 91 A.2d at 60.
73
91 A.2d 786 (Del. Ch. 1952).
74
Id. at 789-90.

24
that the stockholders “did not ratify the issuance of the specific options . . . issued,”

Chancellor Seitz nonetheless concluded that the facts disclosed in the relevant proxy

statement—such as “the mechanics of the [p]lan including the limitations and standards

which should govern the [c]ommittee’s work”—were sufficient under the circumstances

to establish a ratification defense. 75 Accordingly, consistent with Kerbs and Gottlieb,

Chancellor Seitz held that “independent stockholder ratification of interested director

action” means that “the objecting stockholder has the burden of showing that no person

of ordinary sound business judgment would say that the consideration received for the

options was a fair exchange for the options granted.” 76

Drawing on the jurisprudence emanating from Kerbs, Chancellor Allen further

explained over forty years later the appropriate standard of review for a fiduciary

challenge to equity compensation granted to directors under stockholder-approved plans

in Steiner v. Meyerson and Lewis v. Vogelstein.

In Steiner, a stockholder attacked Telxon Corporation’s outside director stock

option plan as a breach of fiduciary duty. That plan granted each non-employee director

“an option to purchase 25,000 shares upon election to the Telxon board, and an additional

10,000 shares on the anniversary of his election while he remains on the board.” 77 The

directors claimed that Telxon’s stockholders had ratified the grants made under the plan

75
Id. at 793.
76
Id. at 791; see also Michelson v. Duncan, 407 A.2d 211, 224 (Del. 1979) (quoting
Kaufman, 91 A.2d at 791).
77
Steiner, 1995 WL 441999, at *4.

25
because the plan had been “presented to the Telxon shareholders at the Telxon 1991

annual meeting and approved by a majority of the stockholders.” 78 Chancellor Allen

concluded that the upfront stockholder vote in favor of the plan ratified the subsequent

awards specified therein. 79 Critical to the Telxon directors’ ratification defense was that

the plan was, in effect, self-executing: it set forth the specific awards to be granted to the

company’s non-employee directors upon election to the board and annually thereafter. In

other words, stockholder approval of the plan per force meant stockholder approval of the

option awards for which the directors asserted a ratification defense.

In Vogelstein, a stockholder challenged the grants of options to the directors of

Mattel, Inc. made under a stockholder-approved plan providing for two categories of

director compensation: (i) one-time grants of 15,000 options per director; and (ii) annual

grants of up to 10,000 options per director (depending on length of board service).80

Consistent with his analysis in Steiner, Chancellor Allen in Vogelstein interpreted the

Kerbs line of cases to stand for the proposition that, where a majority of stockholders

vote in favor of (and thereby “ratify”) a conflicted board decision, the standard of review

becomes functionally one of waste: “shareholder ratification of a transaction in which

corporate directors have a material conflict of interest has the effect of protecting the

78
Id. at *7.
79
See id. (citing Kerbs, 90 A.2d at 655).
80
See Vogelstein, 699 A.2d at 329-30.

26
transaction from judicial review except on the basis of waste.” 81 Chancellor Allen further

explained that the waste standard for options granted under a stockholder approved plan

had evolved from a “proportionality or reasonableness test a la Kerbs,” which entailed

examining the adequacy of consideration, to the traditional waste standard referred to in

Michelson v. Duncan. 82

Following Steiner and Vogelstein, the Court in In re 3COM Corp. Shareholders

Litigation 83 addressed a stockholder challenge to the “excessive” options granted to the

directors of 3COM Corporation under its stockholder-approved stock option plan for

directors. Significantly, that plan applied only to directors and set forth “specific ceilings

on the awarding of options each year,” which varied “based on specific categories of

service such as service on a committee, position as a lead director, and chairing the

[b]oard.” 84 Although the 3COM board had the authority to amend these “ceilings,” the

board had not changed the award ceilings from those in effect when stockholders

approved the plan. 85 Rather, the 3COM board issued options to directors in amounts

81
Id. at 336 (citing Gottlieb II, 91 A.2d at 58).
82
407 A.2d 211 (Del. 1979). See Vogelstein, 699 A.2d at 338. Although the Chancellor
assumed in Vogelstein “that the ratification was effective,” id. at 333, he ultimately
declined to dismiss the complaint because, as discussed below, he could not rule out that
the complaint stated a claim for waste. See id. at 339.
83
1999 WL 1009210 (Del. Ch. Oct. 25, 1999).
84
Id. at *3 n.9 (emphasis added).
85
See id. at *1 n.4, *3 n.9 (“The plaintiff does not allege that the [b]oard ever acted
outside the set terms of this plan, nor that the [b]oard ever exceeded limitations of the
[p]lan.”).

27
within the specific ceilings set forth in the plan as approved by 3COM stockholders—a

point critical to the Court’s analysis.

The 3COM Court held that, by operation of the initial stockholder approval of the

company’s director stock option plan and the director-specific ceilings set forth therein,

stockholders had effectively approved the subsequent grants at issue in the case:

The undisputed facts support only one rational conclusion: That valid
shareholder action instituted a stock option plan and that the Board’s
administration of the Plan within its approved limits needed no further
stockholder approval. I do not see this as a case of directors independently
or unilaterally granting themselves stock options, but instead a case where
stock options accrued to these directors under the terms of an established
option plan with sufficiently defined terms. One cannot plausibly contend
that the directors structured and implemented a self-interested transaction
inconsistent with the interests of the corporation and its shareholders when
the shareholders knowingly set the parameters of the Plan, approved it in
advance, and the directors implemented the Plan according to its terms.
Precedent in this Court clearly establishes that “self-interested” director
transactions made under a stock option plan approved by the corporation’s
shareholders are entitled to the benefit of the business judgment rule. 86

The rationale of the Court’s conclusion in 3COM is that it would have made little sense to

have required the 3COM directors to establish the entire fairness of their compensation

when the directors exercised their business judgment to grant options in amounts within

the director-specific ceilings previously approved by stockholders. A close parallel of

3COM can be seen in Criden v. Steinberg, 87 where the Court concluded that advance

86
Id. at *3 (emphasis added) (citing Kerbs, 90 A.2d at 655; Steiner, 1995 WL 441999, at
*7). Although 3COM declined to deem this earlier-in-time stockholder vote a
“ratification” of the later-in-time board action, supra note 63, the Court gave the same
standard-reducing effect to the advance stockholder vote as a ratifying stockholder vote.
87
2000 WL 354390 (Del. Ch. Mar. 23, 2000).

28
stockholder approval of a “stock option plan . . . which included [a] re-pricing option”

was functionally equivalent, in reducing the standard of review to waste, to stockholder

approval of the subsequent option re-pricings at issue in that case “because the

shareholders knowingly endorsed the parameters of the plan.” 88

Building on the Kerbs, Steiner, and 3COM line of cases, then-Vice Chancellor

Strine’s analysis in Sample v. Morgan 89 provides important guidance on the scope of

stockholder ratification for director compensation. The plaintiff in Sample alleged that

the five members of the board of Randall Bearings, Inc. breached their fiduciary duties

when the two non-employee directors on the compensation committee awarded 200,000

shares to the company’s three employee directors under a management stock incentive

plan. A disinterested majority of Randall Bearings’s stockholders had previously

approved the plan, which authorized up to 200,000 shares. But, the plan did not set forth

the specific amounts of stock to be issued to directors, and stockholders did not

specifically approve any shares granted to directors under the plan. 90

The plaintiff asserted that the defendants bore the burden to establish the entire

fairness of those awards as conflicted transactions. In opposition, the defendants asserted

a ratification defense. Specifically, similar to Defendants here, they argued that the fact

88
Id. at *3 (“The board of directors acted according to a predetermined stock option plan,
approved by the shareholders, which included the re-pricing option. The plaintiff raises
no issue that the board lacked authority to re-price the options or that they implemented
the re-pricing in a manner unintended or unexpected by the shareholders.”).
89
914 A.2d 647 (Del. Ch. 2007).
90
See id. at 655-57.

29
that disinterested stockholders had approved the plan meant that stockholders had

functionally “ratif[ied] any future action by the board” permitted under the plan, which

would include awarding all 200,000 shares to a majority of the board. 91 In other words,

the Sample directors argued that upfront stockholder approval of the general terms of an

equity compensation plan—even though the plan did not include any director-specific

limits on compensation—was a “ratification” of the subsequent grants made under that

plan.

Then-Vice Chancellor Strine squarely rejected this argument. In doing so, he

outlined the contours of stockholder ratification as follows:

[T]he Delaware doctrine of ratification does not embrace a “blank check”
theory. When uncoerced, fully informed, and disinterested stockholders
approve a specific corporate action, the doctrine of ratification, in most
situations, precludes claims for breach of fiduciary duty attacking that
action. But the mere approval by stockholders of a request by directors for
the authority to take action within broad parameters does not insulate all
future action by the directors within those parameters from attack.
Although the fact of stockholder approval might have some bearing on
consideration of a fiduciary duty claim in that context, it does not, by itself,
preclude such a claim. An essential aspect of our form of corporate law is
the balance between law (in the form of statute and contract, including the
contracts governing the internal affairs of corporations, such as charters and
bylaws) and equity (in the form of concepts of fiduciary duty).
Stockholders can entrust directors with broad legal authority precisely
because they know that that authority must be exercised consistently with
equitable principles of fiduciary duty. Therefore, the entrustment to the
[corporation’s compensation committee] of the authority to issue up to
200,000 shares to key employees under discretionary terms and conditions
cannot reasonably be interpreted as a license for the [c]ommittee and other
directors making proposals to it to do whatever they wished, unconstrained

91
See id. at 663 (“By approving . . . the Incentive Plan, the Randall Bearings stockholders
were, the directors contend, ratifying any future action by the board, however motivated
or informed, so long as that action was compliant with the literal terms of . . . the Plan.”).

30
 by equity. Rather, it is best understood as a decision by the stockholders to
give the directors broad legal authority and to rely upon the policing of
equity to ensure that that authority would be utilized properly. For this
reason alone, the directors’ ratification argument fails. 92

The key point I take away from this analysis is that because the stockholders in Sample

merely voted in favor of the broad parameters of the plan—and had not voted in favor of

any specific awards under the plan—the defendants could not show that stockholders had

ratified the decision to grant all of the 200,000 shares authorized under the plan to just the

three employee directors. Thus, the directors’ conduct would be reviewed under ordinary

principles of fiduciary duty and not limited to a waste standard. 93

The case most analogous to the facts alleged here is Seinfeld v. Slager, which

Plaintiff cites as its primary authority. In Slager, a stockholder challenged the fairness of

RSU awards that the non-employee directors of Republic Services, Inc. received under

the company’s stockholder-approved compensation plan. Those directors received RSUs

worth $743,700 in 2009 and $215,000 in 2010. Unlike the plans in Telxon and 3COM,

the only beneficiaries of which were directors, the beneficiaries under the Republic

Services plan (like the Plan in this case) included the company’s directors, officers, and

employees. Critically, the plan approved by stockholders in Slager (like the Plan in this

case) did not set forth any specific amounts (or director-specific ceilings) of

92
Id. at 663-64 (emphasis added). The Court went on to hold separately that there was
no ratification because the defendants did not establish that the initial stockholder vote in
favor of the plan was fully informed. Id. at 665-67.
93
See id. (“Each director’s motivations and actions must be assessed individually before
any finding of liability [for breach of fiduciary duty] can be made.”). The Court further
held it could not “rule out waste.” Id. at 670.

31
compensation that would or could be awarded to directors. Instead, the plan featured a

generic limit on the compensation that any one beneficiary could receive per fiscal year.

For RSUs, the generic limit was up to 1.25 million units. 94 Given that Republic

Services’s plan authorized up to 10.5 million shares, and that the company’s board had

twelve members, the Slager Court observed that each of those twelve directors could

have received 875,000 RSUs as compensation in one year—which, as of the 2009

awards, would have been worth roughly $21.7 million per recipient. 95

The Slager defendants argued that upfront stockholder approval of the plan

ratified the subsequent RSU grants, but the Court rejected this ratification defense. In

doing so, the Court emphasized that the plan had “no effective limits on the total amount

of pay that can be awarded through time-vesting restricted stock units,” meaning that,

under the plan, Republic Services directors had “the theoretical ability to award

themselves as much as tens of millions of dollars per year, with few limitations.” 96

Although Slager does not reference the analysis in Sample discussed above, the logic and

reasoning of the cases are aligned. Just as Sample rejected a “blank check” theory of

ratification, so did Slager reject a “carte blanche” theory:

The Stock Plan lacks sufficient definition to afford the Defendant Directors
protection under the business judgment rule. The sufficiency of definition
that anoints a stockholder-approved option or bonus plan with business
judgment rule protection exists on a continuum. Though the stockholders

94
See Slager, 2012 WL 2501105, at *10.
95
See id. at *11.
96
Id. at *12.

32
 approved this plan, there must be some meaningful limit imposed by the
stockholders on the Board for the plan to be consecrated by 3COM and
receive the blessing of the business judgment rule, else the “sufficiently
defined terms” language of 3COM is rendered toothless. A stockholder-
approved carte blanche to the directors is insufficient. The more definite a
plan, the more likely that a board’s compensation decision will be labeled
disinterested and qualify for protection under the business judgment rule. If
a board is free to use its absolute discretion under even a stockholder-
approved plan, with little guidance as to the total pay that can be awarded,
a board will ultimately have to show that the transaction is entirely fair. 97

Accordingly, as I read the case, because the Republic Services stockholders had not voted

in favor of the specific RSU grants at issue or to impose a limit applicable (or

“meaningful”) to directors specifically—as opposed to a generic limit applicable to a

range of beneficiaries with differing roles—there was no ratification defense. 98

Finally, last year, in Cambridge Retirement System v. Bosnjak, I considered a

stockholder ratification defense concerning director compensation. In that case, a

stockholder alleged that the directors of Unilife Corporation breached their fiduciary

duties by awarding to themselves excessive option grants under the company’s stock

incentive plan. It was undisputed in that case, however, that the Unilife directors

“conditioned [their] grant of each of the challenged equity awards on obtaining

stockholder approval, which the stockholders provided.” 99 That is, although the Unilife

plan did not set forth the specific compensation that directors would receive, the

97
Id. at *12 (emphasis added).
98
Id. (“While the Defendant Directors may be able to show that the amounts they
awarded themselves are entirely fair, their motion to dismiss must be denied with respect
to this claim.”).
99
Bosnjak, 2014 WL 2930869 at *2 (emphasis added).

33
stockholders voted in favor of the specific awards. Citing the principles set forth in

Kerbs, Steiner, and 3COM, I credited the directors’ ratification defense because

“Unilife’s stockholders approved each of the specific equity awards challenged.” 100

* * *

In my view, this case law discussed above supports two principles of common law

stockholder ratification relevant to director compensation.

One principle is that the affirmative defense of ratification is available only where

a majority of informed, uncoerced, and disinterested stockholders 101 vote in favor of a

specific decision of the board of directors. Indeed, this is the standard about the scope of

ratification pronounced by the Delaware Supreme Court in Gantler v. Stephens. 102 There,

the defendants argued that stockholders had ratified the directors’ purportedly interested

100
Id. at *8 (emphasis added). Contrary to Defendants’ interpretation, I do not find In re
Ebix, Inc. Stockholder Litigation, 2014 WL 3696655 (Del. Ch. July 24, 2014), to be in
tension with the law cited above. In Ebix, stockholders challenged the disclosures in a
proxy statement in which stockholders were asked to approve a compensation plan for
directors, officers, and employees. In a passing comment, the Court surmised that, “were
the Ebix stockholder approval (and thus ratification) of the 2010 Plan valid[,] . . . then the
grants of options . . . under the 2010 Plan would be analyzed under the deferential
business judgment standard of review.” Ebix, 2014 WL 3696655, at *26. In my view,
this statement (which Defendants themselves describe as dicta) is not a binding precedent
because the Court did not consider the absence of any director-specific limits on
compensation in the plan. See In re MFW S’holders Litig., 67 A.3d 496, 521 (Del. Ch.
2013) (“If an issue is not presented to a court with the benefit of full argument and
record, any statement on that issue by that court is not a holding with binding force.”),
aff’d sub nom. Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014).
101
See Vogelstein, 699 A.2d at 336; see also Harbor Fin. P’rs v. Huizenga, 751 A.2d
879, 899 (Del. Ch. 1999) (“The burden to prove that the [stockholder ratification] vote
was fair, uncoerced, and fully informed falls squarely on the board.”).
102
965 A.2d 695 (Del. 2009).

34
decision to recommend that stockholders approve a stock reclassification proposal.

Although Gantler ultimately rejected the ratification defense because the complaint

adequately alleged that the stockholder vote was not fully informed, the Supreme Court

held, as a matter of law, that “the only director action or conduct that can be ratified is

that which the shareholders are specifically asked to approve.” 103 As support for this

proposition, Gantler cites to In re Santa Fe Pacific Corp. Shareholder Litigation, 104

where the Supreme Court earlier had concluded that a stockholder vote in favor of a

merger did not ratify the board’s approval of any deal protection provisions in the merger

agreement because, in that case, the stockholders did not “specifically vote in favor” of

those defensive measures. 105

The primary authorities the parties have cited all reflect this standard. There was

valid stockholder ratification of the compensation awarded to directors in Kerbs,

Gottlieb, Steiner, and Vogelstein because the plans in those cases set forth the specific

compensation to be received by directors. There also was valid stockholder approval of

103
Id. at 713 (emphasis added).
104
669 A.2d 59 (Del. 1995).
105
Id. at 68 (emphasis added). Additional support for this proposition can be found in
decisions of this Court issued between Santa Fe and Gantler. See, e.g., In re Lukens Inc.
S’holders Litig., 757 A.2d 720, 737 (Del. Ch. 1999) (“Unlike the situation in Santa Fe,
the proposition voted on by the Lukens stockholders fairly framed the question whether
or not to ratify the job done by the Lukens directors in managing the bidding process.”),
aff’d sub nom. Walker v. Lukens, Inc., 757 A.2d 1278 (Del. 2000) (TABLE); Solomon v.
Armstrong, 747 A.2d 1098, 1113-14 (Del. Ch. 1999) (“[T]he Delaware Supreme Court
has made it clear that ratification of one board action does not extend to any other actions
which are not necessarily attendant to that approved action.”), aff’d, 746 A.2d 277 (Del.
2000) (TABLE).

35
the compensation awarded to directors in 3COM and Criden because the awards at issue

were within the director-specific ceilings of 3COM and within the repricing parameters of

Criden. 106 Finally, there was valid stockholder ratification in Bosnjak because, separate

from the upfront vote in favor of the plan, stockholders specifically approved the awards

at issue in that case. Conversely, there was no stockholder ratification of the

compensation that was the subject of Sample and Slager because those stockholders had

merely voted in favor of the broad parameters of plans that did not set any specific limits

on the compensation of the particular class of beneficiaries in question.

The second principle is well-established and non-controversial: valid stockholder

ratification leads to waste being the doctrinal standard of review for a breach of fiduciary

duty claim. 107 Approval by a mere majority of stockholders does not ratify waste because

106
With respect to the Steiner and 3COM cases, Defendants argue that the Telxon and
3COM directors had the authority under their respective plans to amend the terms of
those plans, meaning that, to establish ratification here, Defendants need only show that
Citrix stockholders approved the Plan in 2005. Defs.’ Reply Br. 11-13. I disagree. In
my opinion, the fact that the Telxon or 3COM boards had such authority was immaterial
to the analysis in Steiner and 3COM because in neither case was it alleged that the board
had actually exercised that authority.
107
See, e.g., Michelson, 407 A.2d at 219, 224; Vogelstein, 699 A.2d at 336; see generally
J. Travis Laster, The Effect of Stockholder Approval on Enhanced Scrutiny, 40 Wm.
Mitchell L. Rev. 1443, 1486 n.213 (2014) (“[T]he practical effect of restoring business
judgment review [where there has been stockholder ratification] is to change the standard
of review to one of waste.”); William T. Allen, Jack B. Jacobs & Leo E. Strine, Jr.,
Function over Form: A Reassessment of Standards of Review in Delaware Corporation
Law, 56 Bus. Law. 1287, 1317-18 (2001) (“Under present Delaware law, a fully informed
majority vote of the disinterested stockholders that approves a transaction (other than a
merger with a controlling stockholder) has the effect of insulating the directors from all
claims except waste.”).

36
“a waste of corporate assets is incapable of ratification without unanimous stockholder

consent.” 108

Important policy considerations support these two principles of common law

stockholder ratification in the context of director compensation. Specifying the precise

amount and form of director compensation in an equity compensation plan when it is

submitted for stockholder approval “ensure[s] integrity” in the underlying principal-agent

relationship between stockholders and directors “by making the directors suffer the ugly

and enjoy the good that comes with a consistent, non-discretionary approach” to their

compensation. 109 Likewise, obtaining stockholder approval of director compensation on

an annual or regular basis facilitates the disclosure of inherently conflicted decisions and

empowers stockholders with a meaningful role in the compensation of their fiduciaries. 110

3. Citrix’s Stockholders Did Not Ratify the RSU Awards

Turning to the present case, Citrix stockholders initially approved the Plan in

2005. Because Plaintiff does not allege otherwise, I treat the Citrix stockholder approval

of the Plan in 2005 (and of the amendments thereto) as a vote of approval by a majority

of informed, uncoerced, and disinterested stockholders.

108
Saxe v. Brady, 184 A.2d 602, 605 (Del. Ch. 1962); Vogelstein, 699 A.2d at 335-36
(“[N]o one should be forced against their will to make a gift of their property.”).
109
See Desimone, 924 A.2d at 917.
110
“ ‘Sunlight is said to be the best of disinfectants; electric light the most effective
policeman.’ ” Buckley v. Am Constitutional Law Found., 525 U.S. 182, 223 (1999)
(O’Connor, J., concurring in part and dissenting in part) (quoting Louis D. Brandeis,
OTHER PEOPLE’S MONEY 62 (1933)).

37
 The Plan specified the total shares available (Section 4), the beneficiaries under

the Plan (Section 6.1(a)), and the total number of shares that any beneficiary could

receive in a calendar year (Section 6.1(b)). But the Plan did not specify the amount or

form of compensation to be issued to the Company’s non-employee directors. Rather,

the only limit on director compensation appears in Section 6.1(b): directors, like every

other eligible recipient under the Plan, may receive up to 1 million shares (or equivalent

RSU awards) per calendar year. To repeat, based on Citrix’s stock price at the time, one

million RSUs were worth over $55 million when this action was filed.

In my view, Defendants have not carried their burden to establish a ratification

affirmative defense at this procedural stage because Citrix stockholders were never asked

to approve—and thus did not approve—any action bearing specifically on the magnitude

of compensation for the Company’s non-employee directors. Unlike in Steiner or

Vogelstein, the Plan here does not set forth the specific compensation to be granted to

non-employee directors. And, unlike in 3COM, the Plan here does not set forth any

director-specific “ceilings” on the compensation that could be granted to the Company’s

directors.

I see no meaningful difference between the allegations here and those in Slager,

which I do not read (for the reasons discussed above) as a departure from Delaware

precedent as Defendants have argued. Here, as in Slager, the Plan does not specify any

amounts (or director-specific ceilings) of equity compensation that Citrix directors would

or could receive independent of the generic annual limit applicable to all the varied

classes of beneficiaries under the Plan. Under Sample and Slager, the upfront

38
stockholder approval of the Plan was not a “blank check” or “carte blanche” ratification

of any compensation that the Compensation Committee might award to the Company’s

non-employee directors. Thus, in my opinion, upfront stockholder approval by Citrix

stockholders of the Plan’s generic limits on compensation for all beneficiaries under the

Plan does not establish a ratification defense for the RSU Awards because, when the

Board sought stockholder approval of the broad parameters of the Plan and the generic

limits specified therein, Citrix stockholders were not asked to approve any action specific

to director compensation. They were simply asked to approve, in very broad terms, the

Plan itself. For this reason, as in Sample and Slager, I cannot conclude that the

Company’s stockholders ratified the RSU Awards such that those awards would be

limited to challenge under a waste standard.

At the Company’s annual meetings in 2012 and 2013, Citrix stockholders voted in

favor of amendments to the Plan to increase the total number of shares available under

the Plan and to “ratif[y], confirm[] and approve[]” the Plan in all respects. 111 But, in

those proxy statements, Citrix stockholders were not specifically asked to ratify the RSU

Awards granted the prior year. 112 Nonetheless, Defendants argue that because the

111
See Letter from Thomas A. Beck, at 1, Ex. 3 (Jan. 16, 2015); see also Defs.’ Ex. O at
17 (Citrix Systems, Inc. Proxy Statement (Schedule 14A), at Exhibit A (Apr. 13, 2012)),
Defs.’ Ex. P at 18 (Citrix Systems, Inc. Proxy Statement (Schedule 14A), at Exhibit A
(Apr. 12, 2013)). As I understand it, the Board did not seek stockholder approval to
increase the total number of shares under the Plan or to “ratify, confirm, and approve” the
Plan at the Company’s annual meeting in 2014 because the Board sought stockholder
approval of a new 2014 Equity Incentive Plan. See Compl. ¶¶ 25-26; Defs.’ Ex. Q at 13-
21 (Citrix Systems, Inc. Proxy Statement (Schedule 14A), at 54-62 (Apr. 11, 2014)).
112
Tr. of Oral Arg. 7.

39
relevant proxy statements disclosed the specific compensation that was granted to non-

employee members of the Board during the prior years (i.e., the RSU Awards issued in

2011 and 2012), 113 the vote to “ratify, confirm, and approve” the Plan was the functional

equivalent of a vote in favor of the RSU Awards. I disagree. Unlike in Bosnjak, the

Company’s proxy statements in 2012 and 2013 did not seek stockholder approval of the

specific compensation that had been (or that would be) awarded to the non-employee

members of the Board. Instead, the Citrix stockholder approval of the Plan in 2012 and

2013 ratified only the adoption and terms of the Plan.

For these reasons, I conclude that Defendants have not carried their burden to

show that the Company’s stockholders ratified the RSU Awards. 114 Accordingly, the

operative standard of review remains entire fairness with the burden on Defendants.

4. It is Reasonably Conceivable that the RSU Awards were
Not Entirely Fair

Where, as here, the entire fairness standard of review applies, Defendants must

establish that the decision “was the product of both fair dealing and fair price.” 115 The

fact that the entire fairness standard applies “normally will preclude dismissal of a

113
See Defs.’ Ex. O at 8; Defs.’ Ex. P at 9.
114
I thus do not reach the legal issues related to abstentions and broker “non-votes”
discussed in the parties’ supplemental briefing.
115
Technicolor, 634 A.2d at 361; see also Weinberger v. UOP, Inc., 457 A.2d 701, 710
(Del. 1983) (“[A]ll aspects of the issue must be examined as a whole since the question is
one of entire fairness.”).

40
complaint on a Rule 12(b)(6) motion to dismiss.” 116 But, “[e]ven in a self-interested

transaction in order to state a claim a shareholder must allege some facts that tend to

show that the transaction was not fair.” 117

The parties frame the issue of whether the RSU Awards were entirely fair as a

matter of whether Citrix’s non-employee director compensation practices were in line

with those of the Company’s “peer” group. Defendants argue that Citrix’s peer group for

director compensation purposes is the fourteen companies identified by the Company as

its peers in its filings with the Securities and Exchange Commission. 118 Plaintiff, on the

other hand, submits that the appropriate peer group should be limited to only five of the

Company’s fourteen self-selected peers based on comparable market capitalization,

revenue, and net income metrics. 119

In my view, Plaintiff has raised meaningful questions as to whether certain

companies with considerably higher market capitalizations, revenue, and net income—

such as Amazon.com, Google, and Microsoft—should be included in the peer group used

116
Orman v. Cullman, 794 A.2d 5, 20 n.36 (Del. Ch. 2002).
117
Solomon v. Pathe Commc’ns Corp., 1995 WL 250374, at *5 (Del. Ch. Apr. 21, 1995),
aff’d, 672 A.2d 35 (Del. 1996).
118
Defs.’ Op. Br. 16-17. Defendants’ peer group includes Adobe Systems Inc.; Akamai
Technologies, Inc.; Amazon.com, Inc.; Cisco Systems, Inc.; Concur Technologies, Inc.;
F5 Networks, Inc.; Google Inc.; Intuit Inc.; Juniper Networks, Inc.; LinkedIn Corp.;
Microsoft Corp.; Rackspace Hosting, Inc.; Red Hat, Inc.; Riverbed Technology, Inc.;
SalesForce.com, Inc.; and VMware, Inc.
119
Compl. ¶ 1 n.1. Plaintiff’s peer group includes Akamai Technologies, Inc.; F5
Networks, Inc.; Juniper Networks, Inc.; Rackspace Hosting, Inc.; and Red Hat, Inc.

41
to determine the fair value of compensation for Citrix’s non-employee directors. These

factual questions about the fairness of the RSU Awards in comparison to the director

compensation practices at public companies that are comparable to Citrix, however,

cannot be resolved at the procedural stage of the present Rule 12(b)(6) motion. Thus,

Count I states a claim for breach of fiduciary duty.

C. Count II Fails to State a Claim for Waste

In Count II, Plaintiff alleges that the Company “wasted its valuable assets by

paying . . . Defendants excessive compensation” in the form of the RSU Awards. 120 He

contends that the RSU Awards, particularly those granted in 2011, were “sufficiently

large or unusual compensation” to state a claim for waste. 121 Defendants counter that

Plaintiff’s allegations “do not remotely support the inference that Citrix’s non-employee

director compensation was so one-sided that no reasonable business person could

conclude that the Company received adequate consideration.” 122 I agree with

Defendants.

As then-Vice Chancellor Strine explained in Sample, “the doctrine of waste is a

residual protection for stockholders that polices the outer boundaries of the broad field of

discretion afforded directors by the business judgment rule.” 123 Under Delaware law,

120
Id. ¶ 41.
121
Pl.’s Ans. Br. 19.
122
Defs.’ Op. Br. 28.
123
Sample, 914 A.2d at 669.

42
directors waste corporate assets when they approve a decision that cannot be attributed to

“any rational business purpose.” 124 To state a claim for waste, it must be reasonably

conceivable that the directors “authorize[d] an exchange that [was] so one sided that no

business person of ordinary, sound judgment could conclude that the corporation has

received adequate consideration,” 125 i.e., the transfer of corporate assets was a “gift.” 126

Plaintiff’s core argument is that the facts alleged in the Complaint, at least with

respect to the RSU Awards granted in 2011, are analogous to those found to state a claim

for waste in Vogelstein. I disagree. In Vogelstein, a stockholder challenged the

compensation plan of Mattel, Inc. providing for annual grants to directors of up to 10,000

options (depending on the length of board service) and a one-time grant to directors of

15,000 options. The one-time options were exercisable immediately at the market price

on the day of grant and would remain valid for ten years, and the present value of the

one-time options was alleged to be as much as $180,000 per director. 127 Given the size

and terms of the one-time grants compared to the annual grants, Chancellor Allen

concluded that the plaintiff stated a claim for waste:

I cannot conclude that no set of facts could be shown that would permit the
court to conclude that the grant of these options, particularly focusing upon
the one-time options, constituted an exchange to which no reasonable
person not acting under compulsion and in good faith could agree. In so

124
See Sinclair Oil, 280 A.2d at 720.
125
Glazer v. Zapata Corp., 658 A.2d 176, 183 (Del. Ch. 1993).
126
Vogelstein, 699 A.2d at 336.
127
See id. at 329, 330 n.2.

43
 concluding, I do not mean to suggest a view that these grants are suspect,
only that 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. 128

The facts alleged in Vogelstein are readily distinguishable from the conclusory

allegations of waste in the Complaint. The primary options at issue in Vogelstein were

the one-time grants, which were on top of—and as much as three times the size of—the

annual grants. On that basis, it was reasonable to infer that the one-time option grants

were a gift for which Mattel received no consideration. Here, by contrast, the RSU

Awards were not in addition to any annual equity grants—they were the annual equity

grants to Citrix’s non-employee directors and the primary compensation for those

directors for their service on the Board. The fact that the RSUs issued to the non-

employee directors in 2011 had a higher grant date fair value than the RSUs and stock

options issued to those individuals in 2010 does not show a complete failure of

consideration, nor does the fact that the total compensation received by Citrix’s non-

employee directors in 2011-2013 may have been higher than that received by directors at

certain of the Company’s peers.

Although Plaintiff has stated a claim that the RSU Awards were not entirely fair to

the Company in comparison to the compensation received by directors at Citrix’s peer

group, the Complaint does not plead in my view the rare type of facts from which it is

reasonably conceivable that the RSU Awards are so far beyond the bounds of what a

128
Id. at 339.

44
person of sound, ordinary business judgment would conclude is adequate consideration to

the Company. 129 Count II thus fails to state a claim.

D. Count III States a Claim for Unjust Enrichment

In Count III, Plaintiff contends that Defendants “were unjustly compensated by

engaging in the self-interested approval of RSUs well in excess of peer companies.” 130

Broadly speaking, unjust enrichment is “the unjust retention of a benefit to the loss

of another.” 131 A claim for unjust enrichment under Delaware law includes five

elements: “(1) an enrichment, (2) an impoverishment, (3) a relation between the

enrichment and impoverishment, (4) the absence of justification, and (5) the absence of a

remedy provided by law.” 132 At the pleadings stage, an unjust enrichment claim that is

entirely duplicative of a breach of fiduciary duty claim—i.e., where both claims are

premised on the same purported breach of fiduciary duty—is frequently treated “in the

same manner when resolving a motion to dismiss.” 133

129
3COM, 1999 WL 1009210, at *5 (“Bare allegations that the alleged [compensation
grants to directors] are excessive or even lavish, as pleaded here, are insufficient as a
matter of law to meet the standard required for a claim of waste.”).
130
Pl.’s Ans. Br. 21; see also Compl. ¶ 45 (“Defendants were unjustly enriched as a result
of the compensation and director remuneration they received while breaching fiduciary
duties owed to Citrix.”).
131
Fleer Corp. v. Topps Chewing Gum, Inc., 539 A.2d 1060, 1062 (Del. 1988).
132
Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010).
133
Frank v. Elgamal, 2014 WL 957550, at *31 (Del. Ch. Mar. 10, 2014); see also
Dubroff v. Wren Hldgs., LLC, 2011 WL 5137175, at *11 (Del. Ch. Oct. 28, 2011)
(denying a motion to dismiss a fiduciary duty claim and a duplicative unjust enrichment
claim); Monroe Cnty. Emps.’ Ret. Sys. v. Carlson, 2010 WL 2376890, at *1 (Del. Ch.

45
 I view Count III as duplicative of Count I because there is no alleged unjust

enrichment separate or distinct from the alleged breach of fiduciary duty: if Defendants

did not breach their fiduciary duties in receiving the RSU Awards, then Defendants could

not have been unjustly enriched by retaining the RSU Awards. Indeed, Defendants’ sole

argument on why Count III should be dismissed is that the alleged unjust enrichment is

premised on the same insufficient allegations of a breach of fiduciary duty. 134

Nevertheless, because I concluded above that Count I states a claim for breach of

fiduciary duty, I also conclude that it is reasonably conceivable that Plaintiff could

recover under Count III. Defendants’ motion to dismiss Count III is thus denied. 135

IV. CONCLUSION

For the foregoing reasons, Defendants’ motion to dismiss the Complaint under

Court of Chancery Rule 23.1 is DENIED. Defendants’ motion to dismiss the Complaint

under Court of Chancery Rule 12(b)(6) is GRANTED as to Count II, GRANTED as to

Counts I and III against Defendant Templeton, 136 and DENIED as to Counts I and III

against the other Defendants.

IT IS SO ORDERED.

June 7, 2010) (granting a motion to dismiss a fiduciary duty claim and a duplicative
unjust enrichment claim).
134
Defs.’ Reply Br. 33; Defs.’ Op. Br. 28-29.
135
Plaintiff, of course, may only recover on either Count I or Count III at trial. See MCG
Capital Corp. v. Maginn, 2010 WL 1782271, at *25 n.147 (Del. Ch. May 5, 2010).
136
Because Templeton, Citrix’s CEO, is not alleged to have approved or received any of
the RSU Awards, Plaintiff has not alleged a basis to infer that Templeton breached his
fiduciary duties or was unjustly enriched.

46