In In re 3Com Shareholders Litigation, C.A. No. 16721 (Del. Ch. October 25, 1999), the Delaware Court of Chancery emphasized that “when the shareholders knowingly set the parameters of the plan, approved it in advance, and directors implemented the plan according to its terms … precedent in [the Court of Chancery] clearly establishes that … director transactions made under a stock option plan approved by the corporation’s shareholders are entitled to the benefit of the business judgment rule.” Accordingly, when directors issue stock or cash awards in accordance with “definite” or “sufficiently defined” terms of an employee incentive or compensation plan approved by the shareholders, their decisions are subject to protection under the business judgment rule.
In contrast, when directors issue stock or cash awards that violate the plain or unambiguous terms of an incentive or compensation plan approved by the stockholders, their decisions are not subject to protection under the business judgment rule. For example, in the seminal case, Sanders v. Wang, C.A. No. 16640 (Del. Ch. November 8, 1999) (Steele, V.C.), the Court of Chancery held that pre-suit demand in a derivative action was excused under the second prong of the Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984), legal test to establish demand futility because the board’s alleged violation of the unambiguous terms of an employee stock ownership plan was not a valid exercise of its business judgment.
