IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ROBIN KNIGHT, derivatively on behalf )
of Nominal Defendant UNIVERSAL )
HEALTH SERVICES, INC., )
)
Plaintiff, )
v. ) C.A. No. 2021-0581-SG
)
ALAN B. MILLER, MARC D. MILLER, )
STEVE G. FILTON, LAWRENCE S. )
GIBBS, EILEEN C. McDONNELL, )
WARREN J. NIMETZ, MARVIN G. )
PEMBER, MATTHEW J. PETERSON, )
MARIA SINGER, and ELLIOT J. )
SUSSMAN, )
Defendants, )
and )
)
UNIVERSAL HEALTH SERVICES, INC., )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: January 24, 2022
Date Decided: April 27, 2022
Stephen E. Jenkins and Tiffany Geyer Lydon, of ASHBY & GEDDES, P.A.,
Wilmington, Delaware; OF COUNSEL: Gregory Mark Nespole, Daniel Tepper,
Correy A. Kamin, and Ryan C. Messina, of LEVI & KORSINSKY, LLP, New York,
New York, Attorneys for Plaintiff Robin Knight.
Francis G.X. Pileggi and Cheneise V. Wright, of LEWIS BRISBOIS BISGAARD &
SMITH LLP, Wilmington, Delaware; OF COUNSEL: Gary A. Orseck, Matthew M.
Madden, and Jason A. Shaffer, of KRAMER LEVIN ROBBINS RUSSELL,
Washington, D.C., Attorneys for Defendants Alan Miller, Marc Miller, Steve Filton,
Lawrence Gibbs, Eileen McDonnell, Warren Nimetz, Marvin Pember, Matthew
Peterson, Maria Singer, and Elliot Sussman, and Nominal Defendant Universal
Health Services, Inc.
GLASSCOCK, Vice Chancellor
1
The oft-noted fact that corporate actions are “twice-tested” 1—first in light of
compliance with the DGCL, second for compliance with fiduciary duties—is neatly
illustrated by directors’ actions to set their own compensation. Those actions are
clearly authorized by statute, and just as clearly an act of self-dealing, subject to
entire fairness review. This case is another bloom on the hardy perennial of director
compensation litigation. The Plaintiff is a stockholder, challenging option awards
granted by certain Defendant corporate directors. The matter is before me on a
motion to dismiss.
Here, among the Defendants are directors serving on a compensation
committee, who awarded themselves stock options based on a market price
determined as of what the Plaintiff stockholder characterizes as an obvious dip in
the market. Why this dip would have been “obvious” to the Defendant directors, but
not to the market itself, is not entirely clear in the complaint. Nonetheless, the
standard is entire fairness, and the Plaintiff has cleared the low hurdle of pleading
sufficient facts to make it plausible2 that the price and process of the option awards
transaction were not entirely fair. The Plaintiff pleads unjust enrichment against the
option recipients in light of the allegations of breach of the duty of loyalty; this claim
also survives.
1
In re Investors Bancorp, Inc. S’holder Litig., 177 A.3d 1208, 1222 (Del. 2017) (citation omitted).
2
By which term I mean “reasonably conceivable.” See Cent. Mortg. Co. v. Morgan Stanley Mortg.
Cap. Holdings LLC, 27 A.3d 431 (Del. 2011).
2
The Plaintiff also contends that the recipients of the awards, including non-
compensation committee directors and corporate officers, breached fiduciary duties
in accepting the awards, and that the awards themselves amount to corporate waste.
These allegations, I find, do not state a claim. My reasoning is set out below.
I. BACKGROUND
The instant action deals with grants of equity compensation made to directors
and officers of Universal Health Services, Inc. (“UHS” or the “Company”) during
the market volatility taking place in March 2020. As a sentient reader may
remember, the novel coronavirus, or COVID-19, became a worldwide concern in
March 2020. The market reacted to the emergence of the pandemic and to proposed
government relief packages in quick succession. At the same time, UHS prepared
to make its yearly equity compensation grants to its directors and officers at a pre-
planned meeting, aided by the assistance of its compensation consultant. The grants
were made—and the strike price set—on the same day that UHS stock hit its lowest
point during the pandemic.
The Plaintiff, a UHS stockholder, challenges the grants, pleading two breach
of fiduciary duty claims, an unjust enrichment claim, and a corporate waste claim.
The Defendants—which comprise nominal defendant UHS and various UHS
directors and officers—move to dismiss, largely on basis of a fair process and a fair
price. I address the motion following a recitation of the pertinent facts, below.
3
A. Factual Overview3
1. The Parties
Plaintiff Robin Knight (the “Plaintiff”) is a common stockholder in the
Company.4
Nominal Defendant UHS is a Delaware corporation in the healthcare
industry. 5
The defendants in this action have made a singular motion to dismiss (the
“Motion to Dismiss”),6 though the defendants can be categorized into officer
defendants and director defendants generally. The officer defendants include Steve
Filton, the Company’s CFO; Marvin Pember, President of the Company’s acute care
division; and Matthew Peterson, President of the Company’s behavioral health
division (together, the “Officer Defendants”). 7 The director defendants include Alan
Miller, a director and the Chairman of the Company’s board of directors (the
“Board”);8 Marc Miller, a director, the CEO, and the Company’s overall President;9
3
Unless otherwise specified, the facts in this section are drawn from the verified stockholder
derivative complaint or its incorporated documents (the “Complaint”). Verified Stockholder
Derivative Compl., Dkt. No. 1 [hereinafter “Compl.”]. The Complaint expressly incorporated
documents produced by the Company in response to the Plaintiff’s Section 220 inspection demand.
Compl. at 2. I consider the facts to be true as pled in the Complaint, in accordance with the
applicable standard on a motion to dismiss. This section therefore does not constitute formal
findings of fact.
4
Id. ¶ 6.
5
Id. ¶¶ 7, 1.
6
See Defs.’ Mot. to Dismiss the Verified Stockholder Derivative Compl., Dkt. No. 19.
7
Compl. ¶¶ 23–26.
8
Id. ¶ 13.
9
See id. ¶¶ 14, 16.
4
Lawrence Gibbs; Eileen McDonnell; Warren Nimetz; Maria Singer; and Elliot
Sussman (the “Director Defendants,” and, together with the Officer Defendants, the
“Defendants”).10
This Memorandum Opinion refers to defendants Gibbs, McDonnell, Nimetz,
Singer, and Sussman as the “Outside Director Defendants” at times.
Alan and Marc Miller are also the Company’s controllers, together holding
87.6% of the Company’s voting power per the Company’s 2021 proxy statement.11
This Memorandum Opinion refers to Alan and Marc Miller in certain instances as
the “Controller Defendants.”
Alan Miller is also affiliated with the Federation of American Hospitals
(“FAH”), a lobbying group of for-profit hospitals and health systems.12 FAH
lobbied Congress to pass relief bills associated with the novel coronavirus in the first
quarter of 2020. 13
Finally, the Board’s compensation committee (the “Compensation
Committee”) consists of Gibbs, McDonnell, and Sussman (together, the
“Compensation Committee Defendants”). 14
The Compensation Committee is
governed by its charter, which outlines among other things the duty of its members
10
Id. ¶¶ 17–21.
11
Id. ¶ 15.
12
Id. ¶ 56.
13
Id.
14
Id. ¶¶ 17, 18, 21.
5
to determine the form and amount of compensation of the non-management
members of the Board. 15
2. COVID-19 and its Effects on the Market and the Company
The occurrence of the COVID-19 pandemic in March 2020 is integral to the
allegations at bar. COVID-19 had wide-ranging effects on the market, particularly
in March 2020, when it first emerged on a global scale.16 UHS was no exception.17
From December 2019 to February 2020, the Company’s stock price was fairly
stable; it traded between $123.74 and $147.78 per share.18 From February to March
2020, however, UHS saw its stock price drop by over 50%. 19 UHS stock reached its
lowest point on March 18, 2020, closing at $67.69 per share.20 This was the lowest
closing price for UHS stock since September 2013. 21
On March 6, 2020, the federal government enacted its first-phase coronavirus
relief legislation.22 This “Phase 1” provided over $8 billion for vaccine development
and public health funding. 23 Phase 2 followed shortly after on March 18.24 While
Phase 2 was being considered in Congress, the media began reporting on an
15
Id. ¶ 89.
16
See id. ¶¶ 29–37.
17
See id.
18
Id. ¶ 28.
19
See id. ¶ 2.
20
Id. ¶ 35.
21
See id.
22
Id. ¶ 39.
23
Id.
24
Id. ¶ 52.
6
anticipated third round of legislation.25 Phase 3 of federal coronavirus relief was
signed into law on March 27.26
By March 30, 2020, the Company’s stock price had rebounded to a closing
price of $100.13 per share.27
On March 12, 2020 28—after Phase 1 of federal coronavirus relief, but before
Phase 2 of federal coronavirus relief—the Company’s CFO, Filton, attended a
healthcare conference and answered questions from analysts. 29 When asked whether
the Company would continue its share repurchase plan in 2020, Filton noted that the
planned buyback program had been established before the rise of COVID-19, which
had “changed [things] dramatically,” but that the Company still had a “point of view
right now that the earnings power of our business has changed very little in the last
month or 6 weeks,” even though the market valuation had declined precipitously.30
Filton went on to say that the Company
certainly view[ed] the current situation as a buying
opportunity. But also, we acknowledge that this is a pretty
uncertain period. So we’ll continue to evaluate how this
25
See, e.g., id. ¶¶ 41, 45–50.
26
Id. ¶ 53.
27
Id. ¶ 75.
28
The Plaintiff has not pled what time of day Filton spoke with analysts, though she references the
closing price of the Company’s stock on March 12, 2020 ($99.80 per share). See id. ¶ 64. If the
speech were given during the day on March 12, the more appropriate closing price would have
likely been that of March 11, 2020. I assume, given the procedural posture before me, that the
named stock price is at least informative of Filton’s statements, despite the tumult of the stock
market in March 2020.
29
Id. ¶ 63.
30
Id.
7
plays out . . . . But I think in our minds, if anything, it has
created more of a buying opportunity for us. 31
On that same day, March 12, at least one independent analyst following UHS
set a year-end 2020 price target for UHS of $127, using a model that purportedly
incorporated the effects of COVID-19. 32 How such a model was possible (or
accurate) this early in the development of the pandemic is not explained in the
Plaintiff’s complaint (the “Complaint”).
3. The Equity Award Grants
a. Background to the March 2020 Compensation Committee
Meeting
The Complaint is silent on the historical practice with respect to UHS’s equity
compensation grants. The Complaint does state that books and records obtained
from the Company in response to a Section 220 demand “are expressly incorporated
into this Complaint.”33 The Defendants attach a number of exhibits to their opening
brief in support of the Motion to Dismiss which are identified as Section 220 books
and records.34 Of the Section 220 exhibits, only one provides information pertinent
to the scheduling of the March 2020 meeting—Exhibit D, an email sent September
4, 2019 identifying the UHS Board Meeting Dates for 2020. 35 From this one can
31
Id. ¶ 64.
32
Id. ¶ 65.
33
Id. at 2.
34
See Opening Br. Supp. Defs.’ Mot. to Dismiss the Verified Stockholder Derivative Compl. 5
n.1, Dkt. No. 20 [hereinafter “OB”].
35
OB, at Ex. D.
8
glean that the March 18, 2020 Board meeting date was set at least six months in
advance; that is, as the Defendants point out, the timing was likely not driven by the
effect of the pandemic on stock price.
The Defendants attached a number of public Securities & Exchange
Commission (“SEC”) filings as exhibits as well.36 I can “take judicial notice of the
contents of an SEC filing, but only to the extent that the facts contained in them are
not subject to reasonable dispute.”37 One of the SEC filings contains the Company’s
stock incentive plan (the “Stock Incentive Plan”).38 This fact, and facts regarding
the contents of the Stock Incentive Plan, are not subject to reasonable dispute, and
at any rate, the Plaintiff has not disputed them in filing her answering brief. As such,
I take judicial notice of the Stock Incentive Plan and its contents for the purposes of
this Memorandum Opinion.
One other fact pertinent but not pled in the Complaint is the history of dates
on which the Compensation Committee met to grant equity awards. The Defendants
stated in their opening brief that the Company’s stock option grants, since 2014,
have almost always been made at a meeting held in March, except for one meeting
held in April. 39 The Plaintiff did not dispute this fact in answering the Motion to
36
See, e.g., OB 5 n.1; see also id. at Exs. A, B, C, H, I, J, and K.
37
MicroStrategy Inc. v. Acacia Rsch. Corp., 2010 WL 5550455, at *4 (Del. Ch. Dec. 30, 2010).
38
OB, at Ex. C [such exhibit hereinafter “SIP”]. I note that the exhibit produced to the Court
appears to have some typographical errors (missing punctuation, extra spacing, missing numbers).
Luckily, the exhibit is publicly available for review.
39
OB 8–9, 9 n.3.
9
Dismiss—in fact, she quoted the language in her answering brief for the proposition
that the Compensation Committee treated the option grant process as though 2020
“were any other normal year when it manifestly was not.” 40 Thus, although not pled
in the Complaint, the Plaintiff has conceded the pertinent meetings were generally
held in March or April.
With this historical context established, I turn to the challenged March 2020
grants.
b. March 2020
The Compensation Committee met on March 18, 2020, prior to market open,
to make equity compensation grants.41 The Compensation Committee was joined
by director Nimetz, a non-independent director, at the Compensation Committee’s
invitation. 42 The Company’s compensation consultants also attended the meeting
and delivered a presentation, including a final recommendation with respect to the
equity grants and comparisons to the Company’s “peer group.” 43
40
Pl.’s Answering Br. Opp’n Defs.’ Mot. to Dismiss the Verified Stockholder Derivative Compl.
8, Dkt. No. 24 [hereinafter “AB”].
41
Compl. ¶¶ 68, 71. The Compensation Committee meeting minutes from March 18, 2020 were
part of the exhibits furnished by the Defendants as Section 220 books and records. See OB 5 n.1.
Because the Complaint expressly incorporated these documents, I consider the meeting minutes in
the following discussion.
42
Compl. ¶ 69; OB, at Ex. F (Compensation Committee meeting minutes from March 18, 2020).
43
See Compl. ¶¶ 70, 77; OB, at Ex. F.
10
Defendants Alan Miller and Filton then entered the meeting, and the members
discussed proposed performance bonuses for executive officers. 44 The
Compensation Committee then “decided to defer any discussion or approval of the
specific bonus formulae . . . for the Company’s executive officers [in fiscal year
2020] given the significant uncertainties created by the recent emergence of the
Covid-19 crisis.”45
The Compensation Committee then turned to discussion of recommended
options, presumably still in the presence of Nimetz and Alan Miller.46 The
Compensation Committee “reviewed the previously distributed recommendations of
management as to the grant of stock options and ‘premium priced’ stock options to
the senior executives,” among other proposed grants.47 The committee members
then adopted a resolution to grant the options (the “March 2020 Awards”).48 The
resolution adopted by the Compensation Committee purports to specify the closing
sale price of the common stock as the strike price of the stock options, though it
would not be determined until later that day. 49
44
Compl. ¶ 70; OB, at Ex. F.
45
Id.
46
This inference goes in favor of the Plaintiff, for although the meeting minutes do not specify
that Nimetz and Miller remained in the room, they also fail to specify that Nimetz and Miller left.
See Compl. ¶ 71; OB, at Ex. F. And of some note, the minutes did specify when the compensation
consultants left the meeting. Id.
47
Id.
48
Id.
49
Id. (“RESOLVED, that stock options be and hereby are granted . . . and such Stock Options shall
(i) have an exercise price per share equal to the closing sale price of UHS Class B common stock
11
The Complaint avers that by March 30, 2020, Phase 3 of the federal
coronavirus relief had been enacted, and the Company saw a dramatic improvement
in its stock price comparative to that of March 18.50 The closing price of UHS
common stock on March 30 was $100.13 per share, as opposed to the closing price
on March 18 of $67.69 per share.51
B. Procedural History
The Complaint in this action was filed on July 7, 2021. 52 The Defendants
moved to dismiss on September 3, 2021. 53 Following briefing,54 I heard oral
argument on the Motion to Dismiss on January 24, 2022.
II. ANALYSIS
The Plaintiff presses four separate causes of action: (1) a breach of fiduciary
duty claim against the Compensation Committee Defendants for granting the March
2020 Awards; (2) a breach of fiduciary duty claim against all Defendants for
accepting the March 2020 Awards; (3) a corporate waste claim against the
Compensation Committee Defendants for granting the March 2020 Awards; and (4)
on March 18, 2020 []of $67.69 for the market priced stock options . . . .”). Presumably, the
resolution was adopted sans parenthetical, which was added in later as the minutes were finalized.
This matter has some limited import, however, as the Compensation Committee Defendants argue
that the market had eight hours to react to the news of the grants. Reply Supp. Defs.’ Mot. to
Dismiss the Verified Stockholder Derivative Compl. 19 n.5, Dkt. No. 27 [hereinafter “RB”].
50
Compl. ¶ 75.
51
Id.
52
See Compl.
53
Defs.’ Mot. to Dismiss the Verified Stockholder Derivative Compl., Dkt. No. 19.
54
See OB; AB; RB.
12
an unjust enrichment claim against all Defendants for accepting the March 2020
Awards.55
The Motion to Dismiss seeks dismissal of all four causes of action for failure
to state a claim.56 The familiar standard for motions to dismiss applies. 57 Dismissal
of any of the causes of action will be inappropriate unless the Plaintiff would not be
entitled to recover under any reasonably conceivable set of circumstances
susceptible of proof. 58 The Plaintiff is entitled to all reasonable inferences in her
favor. 59
Given its implications with respect to the remaining claims, I begin my
analysis by addressing the corporate waste claim first.
A. The Corporate Waste Claim
The Plaintiff brings a corporate waste claim against the Compensation
Committee Defendants for granting the March 2020 Awards.60
A showing of corporate waste with regard to a transaction requires more than
a demonstration that the transaction was costly to the company, badly conceived, or
inefficient and improvidently entered. It requires a showing that the fiduciaries
55
See Compl. ¶¶ 114–28.
56
Defs.’ Mot. to Dismiss the Verified Stockholder Derivative Compl., Dkt. No. 19.
57
This is a derivative action; nonetheless, the Defendants have not sought dismissal under
Chancery Court Rule 23.1. The Complaint alleges demand was excused, plausibly so given the
self-interested nature of some of the transactions. See Compl. ¶¶ 104–13.
58
Stein v. Blankfein, 2019 WL 2323790, at *8 (Del. Ch. May 31, 2019).
59
Id.
60
Compl. ¶¶ 119–21.
13
knowingly entered a transaction of virtually no value to the corporation. To
withstand a motion to dismiss, it must be reasonably conceivable from the pleadings
that the directors authorized an exchange that was “so one sided that no business
person of ordinary, sound judgment” could conclude that the corporation received
sufficient consideration.61 Put differently, the corporation must have essentially
made a “gift” to the recipient of corporate assets,62 a gift that returned nothing in
terms of incentives or goodwill. A successful waste claim will lie where directors
“approve a decision that cannot be attributed to ‘any rational business purpose.’”63
In this sense, it is a close kin to a claim of bad faith.
Even according the Plaintiff the benefit of all inferences, the corporate waste
cause of action must be dismissed for failure to state a claim. As the Complaint itself
acknowledges, the March 2020 Awards formed “equity compensation” for their
recipients.64 The Compensation Committee’s charter clarifies that the
Compensation Committee is to “[r]eview and determine the form and amount of
compensation of the non-management members of the Board, including cash, equity-
based awards and other compensation” and to “review and approve the granting of
options in accordance with [performance targets.]” 65 Thus, the March 2020 Awards
61
Glazer v. Zapata Corp., 658 A.2d 176, 183 (Del. Ch. 1993).
62
See Calma ex rel. Citrix Sys., Inc. v. Templeton, 114 A.3d 563, 590 (Del. Ch. 2015).
63
Id. (quoting Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971)).
64
See Compl. ¶ 79.
65
Id. ¶ 89. The Stock Incentive Plan also supports this finding, as the “Purpose” section describes
the awards made under the plan as “equity-based compensation incentives to key personnel of the
14
were not donative in nature but part of a formula of compensation for the work of
Company officers and directors.
The Plaintiff alleges that the compensation paid to the Defendants was
“excessive on its face,” 66 but this statement is conclusory and, to my mind, inapt.
The compensation awarded, even if “excessive,” clearly had a business purpose. 67 I
note also that if the March 2020 Awards appear excessive, that view is benefitted by
hindsight. At the time of granting, as the Complaint notes, the March 2020 Awards
had a strike price equivalent to the closing price established later that day.68
In order to constitute waste, the grants must be without business purpose.
Based on the allegations, the cause of action is insufficiently pled. The claim for
corporate waste must be dismissed.
B. The Breach of Fiduciary Duty Claims
The Plaintiff has pled two distinct breach of fiduciary duty claims. The first
is aimed at the Compensation Committee Defendants for breach of fiduciary duty in
granting the March 2020 Awards. The second is directed at all Defendants and posits
a breach of fiduciary duty for accepting the March 2020 Awards.
Company and its affiliates in order to attract, motivate, reward and retain such personnel and to
further align the interests of such personnel with those of the stockholders of the Company.” See
SIP § 1.
66
Compl. ¶ 81.
67
Id.
68
See id. ¶ 72 (stating that the Compensation Committee granted awards “at strike prices of either
the closing price on that day ($67.69) or the closing price plus 10%”).
15
The organization of these causes of action requires a somewhat convoluted
analysis. The first cause of action implicates, as I discuss below, different standards
of review for different grants. The Plaintiff also appears to plead different theories
for sustaining a breach of fiduciary duty claim throughout her papers—inviting
consideration of the awards under both the garden-variety duty of loyalty, suggesting
purely a lack of entire fairness,69 and under a consideration of the Compensation
Committee Defendants’ good faith or lack thereof.70 The Plaintiff asserts that this
second theory survives “apart from whether” the March 2020 Awards are subject to
entire fairness review. 71
I first address whether the Plaintiff has stated a claim of breach of duty of
loyalty predicated upon bad faith by the Compensation Committee Defendants,
because the Plaintiff has, in my understanding, pled that the question of good or bad
faith is an independent basis for liability. I then evaluate the breach of duty of loyalty
cause of action against the Compensation Committee Defendants for granting the
March 2020 Awards more generally. The breach of duty of loyalty against all
Defendants for accepting the March 2020 Awards is addressed third.
69
AB 13–30; see Compl. ¶¶ 115–17.
70
AB 32–33; Compl. ¶ 117.
71
AB 33.
16
1. The Plaintiff Has Not Established a Breach of Fiduciary Duty
Cause of Action Predicated Upon Bad Faith
The Plaintiff makes a standalone argument that regardless of the applicable
standard of review used to assess the March 2020 Awards’ grants, a separate breach
of fiduciary duty action should lie against the Compensation Committee Defendants
due to their alleged bad faith. 72
Bad faith is among the hardest of corporate claims to maintain. It comes into
play, typically, where no other species of the breach of duty of loyalty can be
alleged—that is, where the fiduciaries approving a transaction are not themselves
interested, and where they do not lack independence from those who are. Bad faith,
under Delaware law, can be shown when the director in question engages in an
“intentional dereliction of duty” or “conscious disregard for one’s responsibilities,”
or where one acts “with the intent to violate applicable positive law.” 73 Scienter is
required; the stockholder must allege that the director acted inconsistently with his
fiduciary duties “and, most importantly, that the director knew he was so acting.”74
The Plaintiff has not made such a showing here. First, there is no pleading
(and correctly so, as it would not be supportable based on these facts) that the
72
Id. at 32–33; Compl. ¶ 117.
73
City of Birmingham Ret. & Relief Sys. v. Good, 177 A.3d 47, 55 (Del. 2017) (citations omitted).
74
Id. (citing In re Massey Energy Co., 2011 WL 2176479, at *22 (Del. Ch. May 31, 2011)
(emphasis in original)).
17
Compensation Committee Defendants acted with the intent to violate applicable
positive law.
The second standard is also not satisfied. The Plaintiff has attempted to make
a showing of scienter, but what she pleads in connection with this cause of action is
that the Compensation Committee Defendants consciously disregarded potential
circumstances arising from COVID-19.75 There is no allegation that the
Compensation Committee Defendants knowingly acted inconsistently with their
fiduciary duties. If anything, under the facts pled, the Compensation Committee
Defendants, perhaps, would have been wise to take into account external factors,
such as the macroeconomic effects of COVID-19 and the government’s reaction
thereto, in making their determination to grant awards on March 18. That is the
Plaintiff’s hindsight theory. But nothing in the pleadings indicates that the
Compensation Committee Defendants knowingly acted against the corporate
interest, or saw a duty to act or to refrain from acting, but refused.
The Plaintiff also puts forth a one-paragraph argument that the Compensation
Committee Defendants failed to disclose in the Company’s proxy statement for 2021
that the March 2020 Awards were issued without the Compensation Committee
having “considered the foregoing” (apparently the macroeconomic effects of
75
AB 32 (“[The] members of the Compensation Committee . . . granted the March 2020 Awards
in conscious disregard of matters ranging from merely material to world historic.”).
18
COVID-19, though this is unclear from the briefing). 76 The Plaintiff appears to posit
that this failure to disclose is itself another ground for a breach of the duty of loyalty.
This cause of action, if such it is, is missing from the Complaint.77 To the extent not
waived, this cause of action fails to state a claim. Directors are required to provide
stockholders with “accurate and complete information material to a transaction or
other corporate event that is being presented to them for action.”78 The Plaintiff has
not pled that the 2021 proxy statement requested stockholders to take any action in
connection with the March 2020 Awards and therefore cannot establish liability for
insufficient disclosure. 79
Altogether, the Plaintiff has not made out a standalone basis for liability based
on bad faith or inadequate disclosure.
76
Id. at 33.
77
The only reference in the Complaint close to addressing a disclosure claim is the mention of the
Compensation Committee Defendants owing “the fiduciary duties of good faith, loyalty, and
candor.” Compl. ¶ 115 (emphasis added).
78
Malone v. Brincat, 722 A.2d 5, 10 (Del. 1998).
79
The Plaintiff’s citations are also unavailing to her. She cites Weiss v. Swanson, 948 A.2d 433
(Del. Ch. Mar. 7, 2008), for the proposition that shareholders have a right to the full truth as relates
to executive compensation, and therefore directors have a duty to disclose all material information.
Id. at 442. This is true. But the context of Weiss, and Tyson Foods, upon which Weiss relies,
differs because the stockholders had been asked in both instances to approve the incentive plan by
which the equity awards were being made. See generally id. (“There is no dispute that the
challenged options were granted pursuant to stockholder-approved option plans.”); see also In re
Tyson Foods, Inc. Consol. S’holder Litig., 919 A.2d 563, 593 (Del. Ch. 2007). Here, the Plaintiff
has not pled that the stockholders had been asked to vote upon the March 2020 Awards or
otherwise ratify the Compensation Committee’s actions.
19
2. The Duty of Loyalty Cause of Action Against the Compensation
Committee Defendants for Granting the March 2020 Awards
Section 141(h) of the Delaware General Corporation Law (the “DGCL”)
authorizes the board to “fix the compensation of directors.” 80 UHS’s Stock Incentive
Plan is one method of compensating directors and officers for services to the
Company.81 The Stock Incentive Plan vests the Compensation Committee with the
authority, “acting in its discretion,” to “select the persons to whom Awards shall be
made, [and] prescribe the terms and conditions of each Award and make
amendments thereto.” 82 The Compensation Committee meeting minutes imply that
only the Compensation Committee Defendants voted to approve the awards in
question here. 83
The Compensation Committee granted the March 2020 Awards to individuals
in varying factual postures. Because of this, different standards of review will apply
to the Compensation Committee Defendants’ choices in making the grants. “As in
nearly all pleadings stage challenges to the viability of a breach of fiduciary duty
claim in the corporate context, deciding the proper standard of review . . . will be
80
8 Del. C. § 141(h).
81
See SIP § 1.
82
Id. § 4(b).
83
See, e.g., OB, at Ex. F (“The Committee discussed the proposed grants and after a review of the
value of the options and the number of options outstanding, the [sic] unanimously agreed to adopt
the following resolutions . . . .”).
20
outcome determinative.”84 I parse the varying applicable categories of defendants
below.
a. Awards Granted by the Compensation Committee to the
Outside Director Defendants
The Compensation Committee granted March 2020 Awards to each of the
Outside Director Defendants, including themselves. The applicable standard of
review here is straightforward. As Investors Bancorp 85 teaches, although the DGCL
permits directors to fix their own compensation, such an action is necessarily self-
interested, even when accomplished under a preexisting equity incentive plan.86
Self-interested compensation decisions are subject to the entire fairness standard of
review, unless a “fully informed, uncoerced, and disinterested majority of
stockholders” has approved the compensation decisions and therefore ratified
them. 87
Ratification of the underlying equity incentive plan (under which the directors
made the awards) by stockholder vote may in some circumstances cleanse the award,
but only where the actions of the directors applying the plan are, effectively,
ministerial.88 Where “directors exercised discretion and determined the amounts and
84
Tornetta v. Musk, 250 A.3d 793, 805 (Del. Ch. 2019).
85
Investors Bancorp, 177 A.3d 1208.
86
Id. at 1217.
87
See id.
88
See generally id.
21
terms of the awards after stockholder approval [of the equity incentive plan],” 89 and
where a plaintiff has properly alleged a breach of fiduciary duty claim, stockholder
approval of the equity incentive plan is insufficient to dislodge the entire fairness
standard of review. 90 Where directors lack discretion entirely in making the awards,
or where stockholders have approved the specific director awards, however, the
stockholder approval trumps the directorial conflict.91
This stringent ratification requirement strikes a balance between “a decision
by the stockholders to give the directors broad legal authority” and the stockholders’
ability to “rely upon the policing of equity to ensure that that authority would be
utilized properly.”92 The directors’ self-interested actions of granting director
compensation are therefore “twice-tested” for both legal authorization and equitable
use of that same authorization.93
The Stock Incentive Plan at issue here, like the one in Investors Bancorp,
affords the Compensation Committee considerable discretion in making awards.94
It is not self-executing as was the stockholder-approved plan in Kerbs v. California
Eastern Airways, Inc., where the equity incentive plan listed grants of unissued stock
89
Id. at 1222.
90
Id. at 1223.
91
Id. at 1222.
92
Sample v. Morgan, 914 A.2d 647, 664 (Del. Ch. 2007).
93
Investors Bancorp, 177 A.3d at 1222 (citing Sample, 914 A.2d at 672)).
94
See generally SIP.
22
in specific amounts to named executives based on a mathematical formula.95 The
Kerbs plan left no room for discretionary decisions by the directors.96 No such
formula constrained the directors here. Similarly, the Stock Incentive Plan did not
specifically enumerate the amount or total value of awards to be received by each
director.97
Rather, the UHS Stock Incentive Plan sets an aggregate share limitation for
the number of common stock shares that may be issued under the Plan, and a yearly
award limit with respect to any individual employee.98 So long as the Compensation
Committee made grants consistent with those two limitations, the remainder of the
awards-based decisions lay within the Compensation Committee’s discretion. The
stockholders, therefore, did not know “precisely what they [were] approving.”99
Accordingly, so long as the Plaintiff has pled sufficient facts to properly allege a
breach of fiduciary duty claim against the Compensation Committee Defendants, the
Outside Director Defendants’ awards, at least, will be subject to entire fairness
review.
When entire fairness is the applicable standard of review, this “conclusion
normally will preclude dismissal of a complaint on a Rule 12(b)(6) motion to
95
Investors Bancorp, 177 A.3d at 1222. (citing Kerbs v. Cal. E. Airways, Inc., 90 A.2d 653 (Del.
1952)).
96
Id. at 1218.
97
See generally SIP.
98
Id. § 3.
99
Stein, 2019 WL 2323790, at *7 (quoting Investors Bancorp, 177 A.3d at 1222).
23
dismiss.”100 At least at the pleadings stage, the reason for precluding dismissal is
that “[a] determination of whether the defendant has met [its] burden will normally
be impossible by examining only the documents the Court is free to consider on a
motion to dismiss.”101 Many other cases have followed this approach. 102 Certain
cases have granted motions to dismiss at the entire fairness stage, but generally
where plaintiffs fail to allege any evidence of unfair process or price. 103
The facts alleged in support of a lack of entire fairness here are not
overwhelming, but are sufficient. The pleading burden here is low, met so long as
“some facts” implying lack of entire fairness have been alleged.104 The Complaint
100
Orman v. Cullman, 794 A.2d 5, 21 n.36 (Del. Ch. 2002).
101
Id.
102
Berteau v. Glazek, 2021 WL 2711678, at *15 (Del. Ch. June 30, 2021) (“Even in a self-
interested transaction . . . to state a claim, a shareholder must allege some facts that tend to show
the transaction was not fair.”); In re CBS Corp. S’holder Class Action & Deriv. Litig., 2021 WL
268779, at *46 (Del. Ch. Jan. 27, 2021) (citations omitted); Salladay v. Lev, 2020 WL 954032, at
*1 (Del. Ch. Feb. 27, 2020) (“It is nearly as axiomatic that, where entire fairness is the standard of
review, a motion to dismiss is rarely granted, because review under entire fairness requires a record
to be meaningful.”); see id. at *8 (citations omitted) (“Where entire fairness is the standard of
review, and where, as here, a plaintiff alleges facts making it reasonably conceivable that the
transaction was not entirely fair to stockholders, the granting of a motion to dismiss is
inappropriate, because the burden is on the defendants to develop facts demonstrating entire
fairness.”); Klein v. H.I.G. Cap., L.L.C., 2018 WL 6719717, at *16 (Del. Ch. Dec. 19, 2018);
Hamilton Partners L.P. v. Highland Cap. Mgmt., L.P., 2014 WL 1813340, at *12 (Del. Ch. May
7, 2014); Olenik v. Lodzinski, 208 A.3d 704, 719 n.74 (Del. 2019); Calma, 114 A.3d at 589;
Sciabacucchi v. Liberty Broadband Corp., 2018 WL 3599997, at *15 (Del. Ch. July 26, 2018).
103
Solomon v. Pathe Commc’ns Corp., 1995 WL 250374, at *5 (Del. Ch. Apr. 21, 1995); Monroe
Cty. Emps.’ Ret. Sys. v. Carlson, 2010 WL 2376890, at *2 (Del. Ch. June 7, 2010); Capella
Holdings, Inc. v. Anderson, 2015 WL 4238080, at *5 (Del. Ch. July 8, 2015) (citation omitted)
(internal quotations omitted) (“Even when entire fairness scrutiny would otherwise seem to apply,
a plaintiff must first make factual allegations in its complaint that, if proved, would establish that
the challenged transactions are not entirely fair to state a claim.”).
104
Stein, 2019 WL 2323790, at *8.
24
pleads the following, implying lack of entire fairness: first, that the Compensation
Committee disregarded certain considerations related to the emergence of the
COVID-19 pandemic; 105 second, that the Company’s peers even in its self-selected
peer group received significantly less compensation; 106 third, that the Company,
speaking through its CFO, considered the Company stock a “buy” even at a price
over $20 in excess of the strike price established for the March 2020 Awards;107
fourth, that at least one analyst identified a year-end price target for the Company of
$127, using a model that purported to incorporate the effects of COVID-19; 108 and
finally, that Alan Miller was “actively lobbying” the federal government via his
activities with FAH, and therefore “knew or had reason to know of the timing and
extent of federal grants,” including relief that UHS might reasonably expect to
receive.109
These facts are sufficient to raise a reasonably conceivable inference of an
unfair transaction at the plaintiff-friendly pleading stage. This finding does not
preclude the Compensation Committee Defendants from establishing that the March
2020 Awards were in fact entirely fair. But, at this stage, with sufficient pleading
accomplished, the breach of fiduciary duty claim against the Compensation
105
Compl. ¶ 73.
106
Id. ¶¶ 77–78.
107
Id. ¶¶ 63–66.
108
Id. ¶ 65.
109
Id. ¶ 73.
25
Committee Defendants for granting the March 2020 Awards to the Outside Director
Defendants, including themselves, must go forward.
b. Awards Granted by the Compensation Committee to the
Controller Defendants
The analysis with respect to March 2020 Awards granted to the Controller
Defendants proceeds in much the same way. 110 Although neither of the Millers is a
director seated on the Compensation Committee, given their control block (which
the Defendants describe in their public filings),111 they are controlling stockholders
and entire fairness applies to transactions whereby they receive a non-ratable
benefit.112 Here, in a transaction where Marc and Alan Miller each received
compensation that was not shared equally among the stockholders—the March 2020
Awards—a non-ratable benefit exists, and therefore entire fairness is the standard of
review.
This is true even despite the fact that the Millers are not “outside” directors,113
and despite the fact that neither of Marc or Alan Miller sat on the Compensation
Committee. Ultimately, they still stood on “both sides of [the] transaction.” 114 In
110
I note that the Complaint does not allege a cause of action for breach of duty against the
Controller Defendants for influencing the March 2020 Awards, either to themselves or to others.
111
Id. ¶¶ 15–16.
112
In re Ezcorp Inc. Consulting Agreement Deriv. Litig., 2016 WL 301245, at *11 (Del. Ch. Jan.
25, 2016); Tornetta, 250 A.3d at 807.
113
See, e.g., OB 6 (referring to the directors other than Alan and Marc Miller as the Company’s
“five outside directors”).
114
Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983) (citation omitted).
26
Kahn v. Tremont Corp., our Supreme Court held that entire fairness remains
applicable in such a circumstance even when an independent committee—such as
the Compensation Committee here—is utilized, “because the underlying factors
which raise the specter of impropriety can never be completely eradicated and still
require careful judicial scrutiny.”115 The underlying risk is that the independent
committee members who pass upon the transaction in question—here the granting
of equity awards—might “perceive that disapproval may result in retaliation by the
controlling stockholder.” 116 In Tornetta v. Musk, the Court observed that “in the
CEO compensation context,” the decisionmaker “knows full well the [controller]
CEO is staying with the company whether [or not] his compensation plan is
approved,” furthering the risk of retaliation.117 In Tornetta, the decisionmaker in
question was the minority of ratifying stockholders,118 but the principle applies
equally, I think, to outside directors as decisionmakers, given the controlling
stockholder’s ability to elect directors.
The Compensation Committee Defendants’ grant of March 2020 Awards to
the Controller Defendants must be reviewed for entire fairness. As determined
115
Kahn v. Tremont Corp., 694 A.2d 422, 428 (Del. 1997) (citing Weinberger, 457 A.2d at 710).
116
Id. at 428. This axiom applies forcefully here given the inference that Alan Miller, one of the
two individuals making up the control block, appears to have sat in on the Compensation
Committee’s discussion and resolution with respect to the directors’ receipt of the March 2020
Awards. See supra notes 44–46 and accompanying text.
117
See Tornetta, 250 A.3d at 809.
118
See id.
27
above, the Plaintiff has pled sufficient facts to impugn the entire fairness of the
transaction at the pleading stage. The breach of fiduciary duty cause of action
against the Compensation Committee Defendants for granting the March 2020
Awards to the Controller Defendants therefore survives the Motion to Dismiss.
c. Awards Granted by the Compensation Committee to the
Officer Defendants
I turn finally to the grants made to the Officer Defendants. As a matter of first
priority, I note that despite Marc Miller’s position as the Company President and
CEO, he is excluded from the definition of Officer Defendants used in this
Memorandum Opinion. 119 As such, my finding here will not apply to Marc Miller.
The standard of review applicable to the Officer Defendants’ grants is the
business judgment rule, unless the Plaintiff pleads (1) facts from which it may be
reasonably inferred that the Board or Compensation Committee lacked
independence (for example, if they were dominated or controlled by the individual
receiving the compensation); or (2) facts from which it may be reasonably inferred
that the Board or Compensation Committee, while independent, nevertheless lacked
good faith in making the award.120 I have found above that the Compensation
Committee Defendants did not act in bad faith in making the awards. The Plaintiff
has not pled facts relating to the Compensation Committee’s lack of independence
119
See supra notes 7 and 9 and accompanying text.
120
See Gagliardi v. TriFoods Int’l, Inc., 683 A.2d 1049, 1051 (Del. Ch. 1996).
28
for purposes of granting the March 2020 Awards. As such, the Compensation
Committee Defendants’ grant of the March 2020 Awards to the Officer Defendants
is protected by the business judgment rule.
The business judgment rule can, of course, be dislodged by the successful
pleading of a corporate waste cause of action.121 As above, corporate waste has not
been successfully pled here.
The Motion to Dismiss should be granted with respect to the Compensation
Committee Defendants’ grant of March 2020 Awards to the Officer Defendants.
3. Breach of Duty Against All Defendants for Accepting the March
2020 Awards
Separately from the grants of the March 2020 Awards, the Plaintiff has also
pled a breach of fiduciary duty claim against all Defendants for accepting the March
2020 Awards.
In assessing the breach of fiduciary duty cause of action for acceptance of the
challenged awards, I have found it helpful to begin with a definition of the duty of
loyalty. The Delaware Supreme Court in Guth v. Loft stated that the duty of loyalty
is
a rule that demands of a corporate officer or director,
peremptorily and inexorably, the most scrupulous
observance of his duty, not only affirmatively to protect
the interests of the corporation committed to his charge,
121
In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 74–74 (Del. 2006) (citing In re J.P. Stevens
& Co. S’holders Litig., 542 A.2d 770, 780 (Del. Ch. 1988)).
29
but also to refrain from doing anything that would work
injury to the corporation, or to deprive it of profit or
advantage which his skill and ability might properly bring
to it.122
The Plaintiff asserts that each of the Defendants named in this case has
violated the duty of loyalty “by accepting the March 2020 Awards despite knowing
that the March 2020 Awards were issued at strike prices that did not reflect the real
value of the Company.” 123 Put differently, the Plaintiff believes that the Defendants
knew or should have known that the stock price of UHS on March 18, 2020 was not
reflective of the actual value of the Company, and that, freighted with this
knowledge, the Defendants should have rejected the March 2020 Awards. 124 The
Plaintiff asks me to credit this inference given the procedural posture of the case.125
The Plaintiff cites two cases for the proposition that a director or officer “can
breach fiduciary duties . . . by accepting compensation that is clearly improper,”126
but there appears to be a relative lack of caselaw fleshing out what might constitute
“clearly improper.” The Plaintiff first points to Howland v. Kumar, in which the
122
Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939).
123
Compl. ¶ 124.
124
The Complaint does not expressly plead how the Defendants accepted the March 2020 Awards,
or whether the fact that they failed to reject the awards is to the Plaintiff’s mind a sufficient basis
for liability. Given that I am being asked to make an inferential leap regarding the mental state of
the Defendants, the manner of so-called “acceptance” (whether formally enshrined in contract or
whether simply granted by resolution) might have been of some probative import.
125
AB 34 (“At this point in the proceedings, Plaintiff is entitled to the inference that the Individual
Defendants knew or should have known these facts . . . .”).
126
Howland v. Kumar, 2019 WL 2479738, at *3 (Del. Ch. June 13, 2019) (internal quotations
omitted) (citation omitted); Pfeiffer v. Leedle, 2013 WL 5988416, at *10 (Del. Ch. Nov. 8, 2013).
30
company’s compensation committee, with knowledge that a significant patent was
about to issue in favor of the company, “repriced” underwater stock options
belonging to the company directors and officers. 127 The Howland Court found it
reasonably conceivable that all of the defendants except one had breached their duty
of loyalty by “misusing corporate information and processes to benefit themselves”
rather than the company. 128 The Court treated the excluded defendant, Campisi,
separately, stating that the complaint with respect to Campisi “provide[d] no basis
from which to infer knowledge of the patent issuance prior to the Repricing,
involvement in the decision to withhold news of the patent issuance, or involvement
in the Repricing by Campisi,” and that therefore there were no facts supporting any
wrongdoing by Campisi.129 The breach of fiduciary duty cause of action as
applicable to Campisi was dismissed.130
The second case cited by the Plaintiff is Pfeiffer v. Leedle, in which Leedle
received stock options under an incentive plan.131 The pertinent plan prohibited any
individual from receiving in excess of 150,000 stock options in a single calendar
year.132 Leedle received over 400,000 options in 2011 and 285,000 options in
127
Howland, 2019 WL 2479738, at *2.
128
Id. at *4.
129
Id. at *5.
130
Id.
131
Pfeiffer, 2013 WL 5988416, at *8.
132
Id.
31
2012. 133 The Court found that, “[a]s to the breach of fiduciary duty claim, the
Complaint supports a reasonable inference that Leedle knew or should have known
that his receipt of more than 150,000 Stock Options in a year violated the Plan.”134
The Court refused to dismiss the breach of fiduciary duty claim (and an unjust
enrichment claim) against Leedle at the pleadings stage.135
The “clearly improper” standard, if standard it is, is nascent in its
development. Delaware courts have found that actions for breach of fiduciary duty
for accepting compensation can survive a motion to dismiss where (1) the
compensation awarded was ultra vires, and the recipients knew it, or (2) where
compensation was repriced advantageously in light of confidential and sensitive
business information which the recipients knew, and which they accordingly used to
the company’s detriment. It is in way of this knowledge, in both cases, that the
compensation was “clearly improper,” and accepting such was redolent of scienter.
What is the standard that must be applied to the facts when considering
whether such a breach of duty has been pled? I conclude that what is required is a
defendant’s knowingly wrongful acceptance of compensation, and that the standard
must be bad faith. That is, there must be a sufficient pleading of scienter to support
a bad faith claim, which serves as a claim based on breach of the duty of loyalty.
133
Id.
134
Id. at *10.
135
See id.
32
But, as discussed above, there is an insufficient record to sustain even a claim that
the Compensation Committee Defendants making the awards acted in bad faith,
much less that the recipients’ acceptance violated that standard. All that is alleged
is that option awards were made at what proved to be the bottom of the market.
Unlike Howard, the instant case does not plead nonpublic facts known to the
company and the Defendants that give rise to an inference of “clearly improper”
compensation in the form of the March 2020 Awards. And unlike Pfeiffer, there is
no allegation that the awards violated the Stock Incentive Plan, let alone that the
Defendants were aware of the same.
With respect to the cause of action alleging breach of fiduciary duty by all
Defendants for accepting the March 2020 Awards, the Motion to Dismiss is
granted.136
C. The Unjust Enrichment Claim
For the third time in as many months, I am asked to dismiss an unjust
enrichment claim as duplicative of another substantive claim in the action.137 Here,
unjust enrichment is pled, I note, against all award recipients. Given the fact that I
have found that the fiduciary duty claim against the Compensation Committee
136
Obviously, the claim against the Compensation Committee Defendants for accepting the self-
dealing awards merges with the breach of duty claim against the Compensation Committee
Defendants for making the awards.
137
See Lockton v. Rogers, 2022 WL 604011, at *16–17 (Del. Ch. Mar. 1, 2022); Sorenson Impact
Found. v. Cont’l Stock Transfer & Tr. Co., 2022 WL 986322, at *13 (Del. Ch. Apr. 1, 2022); see
also OB 40.
33
Defendants in part survives, and that I have dismissed the claims against the other
award recipients, I do not find the unjust enrichment claim against all Defendants
truly duplicative, at least of the remaining breach of duty claims.
The elements of unjust enrichment are: (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.138 The
case for unjust enrichment here, I think it is fair to state, is not strong. It relies upon
much inference: that the Compensation Committee set its own awards in an unfair
manner; that, to be consistent, the Compensation Committee set the other awards in
the same wrongful manner; that the Company was impoverished thereby; and that
the Defendants were thus enriched, unjustly. 139 At this stage, however, the Plaintiff
is entitled to those inferences. She has, accordingly, stated a claim for unjust
enrichment against all Defendants.
III. CONCLUSION
The Motion to Dismiss is DENIED IN PART and GRANTED IN PART. For
clarity, the Motion to Dismiss the cause of action for breach of fiduciary duty in
granting the March 2020 Awards is DENIED as to the Compensation Committee
138
Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010).
139
I note also that the Complaint does not fully specify how the awards were made, whether the
Defendants entered into any contractual arrangement to receive the awards, and how that may
affect any “enrichment” purportedly received by the Defendants. I need not decide this now, for
the claim survives the pleadings stage regardless.
34
Defendants, insofar as it applies to awards made to the Outside Director Defendants
and Controller Defendants. The Motion to Dismiss the cause of action for breach of
fiduciary duty in granting the March 2020 Awards is GRANTED as to the
Compensation Committee Defendants, insofar as it applies to awards made to the
Officer Defendants.
The Motion to Dismiss the causes of action for breach of fiduciary duty for
accepting the March 2020 Awards and for corporate waste is GRANTED.
The Motion to Dismiss the cause of action sounding in unjust enrichment is
DENIED.
The parties should submit an appropriate form of order.
35
Robin Knight v. Alan B. Miller
Combined Opinion