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contractlawsuitpleafiduciarycorporation
contractplaintiffappealpleacorporation

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Grimes v. Donald, 673 A.2d 1207, 64 USLW 2691

Facts

C.L. Grimes, a stockholder of DSC Communications Corporation, filed a lawsuit against the board and CEO James L. Donald, seeking to declare the employment agreements invalid. The agreements allowed Donald to unilaterally terminate his contract if he believed the board was interfering with his management, potentially costing the company up to $20 million in severance benefits. Grimes alleged that the board breached its fiduciary duties by abdicating its authority and failing to exercise due care, and he made a pre-suit demand for the board to abrogate the agreements, which the board refused.

The Company is a Delaware corporation headquartered in Plano, Texas, a suburb of Dallas. The Company, whose shares are traded on the Nasdaq National Market System, designs, manufactures, markets and services telecommunication systems.

Issue

The main legal issues included whether the board had abdicated its management responsibilities by entering into the employment agreements with the CEO, whether the stockholder's demand to abrogate the agreements was excused, and the distinction between direct and derivative claims.

In this appeal we address the following issues: (1) the distinction between a direct claim of a stockholder and a derivative claim; (2) a direct claim of alleged abdication by a board of directors of its statutory duty; (3) when a pre-suit demand in a derivative suit is required or excused; and (4) the consequences of demand by a stockholder and the refusal by the board to act on such a demand.

Rule

The court held that a stockholder can assert a direct claim of abdication by the board, but the complaint must state a claim upon which relief can be granted. Additionally, if a stockholder makes a demand on the board regarding a claim belonging to the corporation and that demand is refused, the stockholder cannot later argue that the demand was excused for other legal theories related to the same claim.

We hold that the Court of Chancery correctly dismissed this stockholder action for the failure to state a claim upon which relief can be granted where the plaintiff stockholder: (a) asserted a direct claim that the directors abdicated their statutory duty to manage or direct the management of the business and affairs of the corporation by entering various employment contracts (the “Agreements”) with the chief executive officer (“CEO”) providing that the CEO “shall be responsible for the general management of the affairs of the company” and further providing that the CEO can declare a constructive termination of the Employment Agreement for “unreasonable interference” by the Board with the CEO; (b) made a pre-suit demand on the Board to abrogate the Agreements, the demand was refused, and the stockholder thereafter sought to assert other legal theories relating to the Agreements, arguing that demand was excused.

Analysis

The court analyzed the employment agreements and determined that they did not constitute an abdication of the board's responsibilities. It found that the agreements allowed the CEO to manage the company but did not prevent the board from exercising its statutory powers. The court concluded that Grimes failed to provide well-pleaded allegations that would establish a de facto abdication of the board's authority, and thus the board's refusal to act on the demand was valid under the business judgment rule.

The Chancellor found, in light of the financial size of DSC reflected in the exhibits to the complaint, that this amount would not constitute a de facto abdication. Grimes contends, however, that the payments could amount to a de facto abdication in possible future circumstances. Such a set of facts has not been pleaded, is not before this Court, is based on speculation, and is not ripe for adjudication.

Conclusion

The Supreme Court affirmed the dismissal of Grimes' action, concluding that the board had not abdicated its responsibilities and that Grimes had not sufficiently pleaded his claims.

Accordingly, on the state of this record, we AFFIRM the dismissal of this action by the Court of Chancery.

Who won?

The prevailing party was the board of DSC Communications Corporation, as the court found that the board acted within its rights and did not abdicate its responsibilities.

The Board of DSC retains the ultimate freedom to direct the strategy and affairs of the Company. If Donald disagrees with the Board, the Company may or may not (depending on the circumstances) be required to pay him a substantial sum of money in order to pursue its chosen course of action.

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