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July 16 --The Delaware Chancery Court July 16 dismissed with prejudice a shareholder derivative suit challenging a compensation award to Expedia Inc. Chief Executive Officer Dara Khosrowshahi under the company's stock and annual incentive plan.
Chancellor Andre G. Bouchard held that plaintiff Julie Friedman failed to allege particularized facts creating a reasonable doubt that the challenged compensation was a result of a valid exercise of business judgment, and failed to show that a demand on the Expedia board would have been futile.
Expedia is a Delaware-based online travel company that became a publicly traded company in 2005. Under its 2005 Stock and Annual Incentive Plan, which was amended in 2007, 2008 and 2009, Expedia may grant stock-based awards to the company's directors, officers, employees and consultants.
When Expedia's Compensation Committee grants an award, the court said, it may designate the award as a Qualified Performance-Based Award, which must be conditioned on the achievement of one or more performance goals, as enumerated in the plan. However, the court explained, nothing in the plan prevents the Compensation Committee from making a Qualified Performance-Based Award, based on the achievement of other conditions or terms.
In March 2006, the Compensation Committee awarded Khosrowshahi 800,000 restricted stock units (RSUs) that vested upon the satisfaction of certain conditions established by the committee. Khosrowshahi's RSU award was conditioned on the achievement of both: (1) one of two specific “performance goals” relating to Expedia's stock price or EBITDA--earnings before the deduction of interest, tax and amortization expenses--; and (2) an additional goal defined as OIBA--operating income before amortization.
In 2012, as a part of a new employment agreement, Expedia's Compensation Committee approved the acceleration and vesting of Khosrowshahi's RSU award, even though the OIBA target had not been met. Friedman sued at the end of 2013, alleging that: (1) the defendants breached their fiduciary duty of loyalty by accelerating the vesting of Khosrowshahi's award despite not meeting the OIBA target; and (2) Khosrowshahi was unjustly enriched. The defendants moved to dismiss.
The court explained that the“critical question” is whether Expedia's Compensation Committee, when granting the award, used the OIBA target as a performance goal or as a separate vesting condition.
If the OIBA target was intended to be a performance goal, the court said, that goal may not be waived; however, if the OIBA target was not intended to be a performance goal, the Compensation Committee had the “plenary authority” to waive that condition.
The court agreed with the defendants that the Compensation Committee did not select the OIBA target as a performance goal, but as a “separate, additional goal” that the committee had the authority to waive.
As such, the court addressed whether Friedman's failure to make a pre-suit demand on the Expedia board was excused for demand futility. Finding that she failed to create a reasonable doubt that at least seven of the 10 members on the Expedia board were disinterested, the court held that she failed to establish demand futility.
The plaintiff was represented by Smith Katzenstein & Jenkins LLP, Wilmington, Del.; and Levi & Korsinsky LLP, New York.
The defendants were represented by Richards, Layton & Finger PA, Wilmington, Del.; and Wachtell, Lipton, Rosen & Katz LLP, New York.
To see the opinion, go to http://courts.delaware.gov/opinions/download.aspx?ID=208740.
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