JULIE FRIEDMAN, derivatively on behalf of EXPEDIA, INC., Plaintiff,
DARA KHOSROWSHAHI, BARRY DILLER, VICTOR A. KAUFMAN, A. GEORGE BATTLE, JONATHAN L. DOLGEN, CRAIG A. JACOBSON, PETER M. KERN, JOHN C. MALONE, JOSE A. TAZON and WILLIAM R. FITZGERALD, Defendants, and EXPEDIA, INC., a Delaware Corporation, Nominal Defendant.
Submitted: June 16, 2014
David A. Jenkins and Neal C. Belgam of Smith Katzenstein & Jenkins LLP, Wilmington, Delaware; Eduard Korsinky and Steven J. Purcell of Levi & Korsinsky LLP, New York, New York, Attorneys for Plaintiff.
Gregory P. Williams, Lisa A. Schmidt and Susan M. Hannigan of Richards, Layton & Finger, P.A., Wilmington, Delaware; Warren R. Stern and Jonathon R. LaChapelle of Wachtell, Lipton, Rosen & Katz LLP, New York, New York, Attorneys for Defendants.
This action involves a seemingly increasing area of litigation in this Court: claims challenging the payment of compensation to an officer or director of a Delaware corporation based on an alleged violation of the terms of a compensation plan. Asserting such claims derivatively, stockholders invariably argue that demand is excused on the theory that a violation of an unambiguous provision of a compensation plan raises a reasonable doubt the transaction resulted from a valid exercise of business judgment and, as the plaintiff here put it, "ipso facto establishes demand futility under the second prong of Aronson."
In this case, plaintiff Julie Friedman asserts claims for breach of fiduciary duty (Count I) and unjust enrichment (Count II) concerning the decision of the compensation committee of the board of directors of Expedia, Inc. ("Expedia" or the "Company") to accelerate the vesting of a grant of restricted stock units representing 400, 000 shares of Expedia common stock (the "RSU Award") even though one of the original vesting conditions of the RSU Award had not been satisfied. The RSU Award was made to Expedia's chief executive officer Dara Khosrowshahi under the Company's 2005 Stock and Annual Incentive Plan (the "Plan").
Defendants moved to dismiss the complaint for failure to make a pre-suit demand upon the Expedia board of directors or to plead facts excusing such a demand and for failure to state a claim upon which relief can be granted. For the reasons set forth below, I conclude that this case should be dismissed under Rule 23.1 because plaintiff has failed to plead with particularity that making a demand would have been futile. Regarding the second prong of Aronson, I find that defendants have articulated a reasonable construction of the plain terms of the RSU Award whereby the compensation committee was entitled to waive the challenged vesting condition in accordance with their authority under the Plan. At most, plaintiff has identified a potential ambiguity in the RSU Award that the compensation committee was authorized to interpret under the terms of the Plan. Thus, plaintiff has failed to plead particularized facts raising a reasonable doubt that the transaction resulted from a valid exercise of business judgment.
A. The Parties
Plaintiff Julie Friedman has been a stockholder of Expedia since 2005.
Expedia, a Delaware corporation, is an online travel company that provides business and leisure travelers with tools and information enabling them to research, plan and book travel. Expedia became an independent publicly traded company on August 9, 2005, when it was spun-off from IAC/InterActiveCorp.
Defendants Dara Khosrowshahi, Barry Diller, Victor A. Kaufman, A. George Battle, Jonathan L. Dolgen, Craig A. Jacobson, Peter M. Kern, John C. Malone, Jose A. Tazon, and William R. Fitzgerald were all members of the Expedia board of directors in August 2012 when the decision was made to accelerate the vesting of the RSU Award. Each of these individuals except Fitzgerald, who left the board in December 2012, was a member of the board when this lawsuit was filed on December 13, 2013. Pamela L. Coe, who is not named as a defendant, joined the Expedia board in November 2012.
Defendants Dolgen, Kern and Fitzgerald comprised the board's compensation committee (the "Compensation Committee" or "Committee") at all times relevant to this action.
B. Factual Background
1. The 2005 Stock and Annual Incentive Plan
On August 8, 2005, Expedia adopted its 2005 Stock and Annual Incentive Plan, which was approved by Expedia's then-sole stockholder shortly before the Company went public. The Plan was subsequently amended in 2007, 2008 and 2009, each time with the approval of the Company's stockholders. The Plan authorizes the Company to grant various stock-based awards to Expedia's directors, officers, employees and consultants.
The Plan is administered by the Compensation Committee, which has "plenary authority to grant Awards pursuant to the terms of the Plan to Eligible Individuals" and the authority, "subject to Section 12, to modify, amend or adjust the terms and conditions of any Award, at any time or from time to time." Section 12(d) of the Plan provides, with certain exceptions not relevant here, that "the Committee may unilaterally amend the terms of any Award theretofore granted, prospectively or retroactively, but no such amendment shall . . . cause a Qualified Performance-Based Award to cease to qualify for the Section 162(m) Exemption."
The term "Section 162(m) Exemption" is defined in the Plan to mean "the exemption from the limitation on deductibility imposed by Section 162(m) of the [Internal Revenue Code of 1986] that is set forth in Section 162(m)(4)(C)" thereof.Under Section 162(m)(1), publicly held corporations may not deduct compensation in excess of $1 million paid to certain executive officers in a taxable year. Section 162(m)(4)(C) provides an exception to this limitation, if, among other things, payment of the compensation is made contingent upon the achievement of one or more "performance goals" established by a committee of two or more independent directors.
2. Qualified Performance-Based Awards
When the Compensation Committee grants an award it may designate the award as a "Qualified Performance-Based Award." Under the Plan, a Qualified Performance-Based Award is "an Award intended to qualify for the Section 162(m) Exemption." Therefore, to issue a Qualified Performance-Based Award, the Compensation Committee must condition the award upon the achievement of one or more performance goals.
The term "Performance Goals" is defined in Section 1(dd) of the Plan to mean "the performance goals established by the Committee in connection with the grant of Restricted Stock, Restricted Stock Units or Bonus Awards or other stock-based awards." Section 1(dd) further provides that, "[i]n the case of Qualified-Performance Based Awards that are intended to qualify under Section 162(m)(4), " the Performance Goals must be "based on the attainment of one or any combination" of the following twenty-four criteria:
specified levels of earnings per share from continuing operations, net profit after tax, EBITDA, EBITA, gross profit, cash generation, unit volume, market share, sales, asset quality, earnings per share, operating income, revenues, return on assets, return on operating assets, return on equity, profits, total shareholder return (measured in terms of stock price appreciation and/or dividend growth), cost saving levels, marketing-spending efficiency, core non-interest income, change in working capital, return on capital, and/or stock price, with respect to the Company or any subsidiary, division or department of the Company that are intended to qualify under Section 162(m)(4)(c) of the Code . . . .
Although the Compensation Committee must condition a Qualified Performance-Based Award upon the achievement of one or more Performance Goals, nothing in the Plan prevents the Compensation Committee from making a Qualified Performance-Based Award subject to the achievement of other terms or conditions. Rather, Section 11(b) of the Plan states expressly that "[e]ach Qualified Performance-Based Award (other than an Option or Stock Appreciation Right) shall be earned, vested and payable (as applicable) only upon the achievement of one or more Performance Goals, together with the satisfaction of any other conditions, such as continued employment, as the Committee may determine to be appropriate." 
Significant to this action, with certain exceptions not relevant here, Section 11(b) prohibits the Compensation Committee from amending a Qualified Performance-Based Award in a way that would cause it to lose its Section 162(m) Exemption:
[N]o Qualified Performance-Based Award may be amended, nor may the Committee exercise any discretionary authority it may otherwise have under this Plan with respect to a Qualified Performance-Based Award under this Plan, in any manner that would cause the Qualified Performance-Based Award to cease to qualify for the Section 162(m) Exemption . . . .
A Qualified Performance-Based Award would lose its tax-deductible status by virtue of the Section 162(m) Exemption if the Compensation Committee waived any of the Performance Goals it established when the award was granted for the purpose of making the award qualify as a Qualified Performance-Based Award.
3. The RSU Award
On March 7, 2006, the Compensation Committee granted 800, 000 restricted stock units ("RSUs") to Khosrowshahi. An award of RSUs is denominated in shares of Expedia common stock that will settle in cash or shares upon satisfaction of whatever vesting ...