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Calma v. Templeton

Court of Chancery of Delaware, Wilmington

April 30, 2015

JOHN CALMA, Derivatively on Behalf of CITRIX SYSTEMS, INC., Plaintiff,
v.
MARK B. TEMPLETON, THOMAS F. BOGAN, GARY E. MORIN, NANCI E. CALDWELL, STEPHEN M. DOW, MURRAY J. DEMO, GODFREY R. SULLIVAN, ASIFF S. HIRJI, and ROBERT D. DALEO, Defendants, and CITRIX SYSTEMS, INC., a Delaware corporation, Nominal Defendant

Submitted, February 2, 2015

Page 564

[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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Nicholas J. Rohrer of YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; Brian J. Robbins, Felipe J. Arroyo and Jenny L. Dixon of ROBBINS ARROYO LLP, San Diego, California; Attorneys for Plaintiff.

Thomas A. Beck and Susan M. Hannigan of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Brian E. Pastuszenski and Daniel Roeser of GOODWIN PROCTER LLP, New York, New York; Attorneys for Defendants.

Kenneth J. Nachbar of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Attorneys for Nominal Defendant.

OPINION

Page 568

BOUCHARD, C.

I. INTRODUCTION

Over the past six decades, Delaware courts have issued numerous decisions concerning ratification of compensation paid to non-employee directors. This Opinion surveys that jurisprudence to determine whether stockholder approval of a compensation plan subjects the self-interested payment of compensation to non-employee directors under such a plan to judicial review under a waste standard instead of an entire fairness standard.

In this derivative action, a stockholder challenges awards of restricted stock units (RSUs) that were granted to eight non-employee directors of Citrix Systems, Inc. (" Citrix" or the " Company" ) in 2011, 2012, and 2013 (the " RSU Awards" ). The majority of the directors' compensation consisted of these RSU Awards, which the board's compensation committee granted under the Company's 2005 Equity Incentive Plan (the " Plan" ). That Plan, along with subsequent amendments thereto, was approved by a majority of Citrix's disinterested stockholders in informed and uncoerced votes.

Citrix's directors, officers, employees, consultants, and advisors were all beneficiaries under the Plan. The only limit on compensation the Plan imposed is that no beneficiary could receive more than one million shares (or RSUs) per calendar year. There were no sub-limits based on the beneficiary's position at Citrix. Based on Citrix's stock price when this action was filed, one million RSUs were worth over $55 million.

The plaintiff contends that the RSU Awards were, when combined with the cash payments that Citrix's non-employee directors received, " excessive" in comparison

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with the compensation received by directors at certain of Citrix's " peers." The plaintiff seeks to recover against the defendants, the members of Citrix's board, under three theories of liability: (i) breach of fiduciary duty (Count I); (ii) waste of corporate assets (Count II); and (iii) unjust enrichment (Count III).

The plaintiff does not contend that Citrix stockholders failed to approve the Plan; that Citrix stockholders were not fully informed when they approved the Plan; or that the RSU Awards violated the Plan. Rather, he asserts that the defendants must establish the entire fairness of the RSU Awards as conflicted compensation decisions because the Plan does not have any " meaningful limits" on the annual stock-based compensation that Citrix directors can receive from the Company.

The defendants moved to dismiss the complaint in its entirety under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief may be granted, and under Court of Chancery Rule 23.[1] for failure to make a pre-suit demand upon Citrix's board or to plead facts excusing such a demand. The defendants' primary argument is a ratification defense, but they concede that Citrix stockholders were not asked to ratify the specific RSU Awards at issue here.1 Instead, the defendants contend that Citrix stockholders ratified the Plan so that any award of RSUs to the directors under the generic one million RSU limit in the Plan must be reviewed under a waste standard. They further contend that it is not reasonably conceivable that the RSU Awards constituted waste.

In this opinion, I conclude that the plaintiff has established that demand is futile because a majority of the Citrix board in office when the complaint was filed were interested by virtue of receiving the RSU Awards. Thus, the defendants' Rule 23.1 motion is denied.

I further conclude that the defendants have not established that Citrix stockholders ratified the RSU Awards because, in obtaining omnibus approval of a Plan covering multiple and varied classes of beneficiaries, the Company did not seek or obtain stockholder approval of any action bearing specifically on the magnitude of compensation to be paid to its non-employee directors. Accordingly, because the RSU Awards were self-dealing decisions, the operative standard of review is entire fairness, and it is reasonably conceivable that the total compensation received by the non-employee directors was not entirely fair to the Company. I also conclude that it is reasonably conceivable that the defendants were unjustly enriched by the RSU Awards, but not that the RSU Awards constituted waste. Therefore, the defendants' Rule 12(b)(6) motion is granted as to Count II and denied as to Counts I and III.

II. BACKGROUND[2]

A. The Parties

Nominal Defendant Citrix, a Delaware corporation based in Fort Lauderdale, Florida, provides virtualization, networking, and cloud infrastructure services to businesses and consumers. It is well known for its GoToMeeting product, which is a video conferencing service.

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Defendants Mark B. Templeton, Thomas F. Bogan, Gary E. Morin, Nanci E. Caldwell, Stephen M. Dow, Murray J. Demo, Godfrey R. Sullivan, Asiff S. Hirji, and Robert D. Daleo (collectively, the " Board" or the " Defendants" ) were the nine members of Citrix's board of directors when the Complaint was filed. They all have been directors of Citrix since July 2008, with the exception of Daleo, who became a director in May 2013. Templeton, as the Company's Chief Executive Officer and President, is the only employee director.[3] Since at least April 2010, Bogan, Morin (as chair), and Caldwell have constituted the Board's Compensation Committee.

Plaintiff John Calma (" Plaintiff" ) has been a Citrix stockholder at all relevant times.

B. Citrix's 2005 Equity Incentive Plan

On May 25, 2005, a majority of Citrix's stockholders approved the Plan. The Plan was adopted in part " to advance the interests of Citrix Systems, Inc. . . . by encouraging ownership of Stock by employees, directors, officers, consultants or advisors of the Company" and by " attracting and retaining the best available individuals for service as directors of the Company." [4]

The Plan initially encompassed 10.1 million total shares, of which 500,000 shares could be awarded as RSUs.[5] Those terms have since been amended several times. The Plan currently encompasses 48.6 million total shares, of which 16 million shares can be awarded as RSUs. As of the filing of the Complaint, there were over 16 million shares available under the Plan, with 11 million shares available to be granted as RSUs.[6]

Under Section 6.1(a) of the Plan, the persons eligible to receive an equity award include Citrix's directors, officers, employees, consultants, and advisors.[7] Subject to adjustments not relevant here, Section 6.1(b) of the Plan limits the total number of shares covered by an award that any beneficiary can receive under the Plan in a calendar year to 1 million shares.[8] The Plan does not specify the compensation that the Company's non-employee directors will receive annually. There are no sub-limits varied by position with the Company, such as a limit for non-employee directors and a different limit for officers. The only limit on annual compensation under the Plan is the generic 1 million share limit set forth in Section 6.1(b) applicable to all beneficiaries.

The Compensation Committee is authorized to administer the Plan, although the

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Board " may itself exercise any of the powers and responsibilities assigned [to] the Committee under the Plan." [9] The Plan empowers the Compensation Committee with broad discretion to determine the amount and form of the awards to be granted under the Plan. Specifically, Section 5 of the Plan provides:

Subject to the provisions of the Plan, the Committee shall have complete authority, in its discretion, to make or to select the manner of making all determinations with respect to each Award to be granted by the Company under the Plan including the employee, director, officer, consultant or advisor to receive the Award and the form of Award. In making such determinations, the Committee may take into account the nature of the services rendered by the respective employees, directors, officers, consultants, and advisors, their present and potential contributions to the success of the Company and its Affiliates, and such other factors as the Committee in its discretion shall deem relevant.[10]

Section 5 thus grants to the Compensation Committee (or the Board) the " authority to decide how many awards it can grant to its members and other directors, subject only to the amount of stock limitations." [11] In Plaintiff's view, the one-million-share limit on awards per person per calendar year is " specious" because, based on the Company's stock price in July 2014 when the Complaint was filed, a grant of one million shares to a single person would have been worth over $55 million.[12]

C. Compensation Received by Non-Employee Directors in 2010

In 2010, consistent with the Board's previously-announced director compensation practice,[13] the Compensation Committee granted 3,333 RSUs, with a grant date fair value of $143,852, and 10,000 options, with a grant date fair value of $101,116, to the Company's non-employee directors. The directors also received cash compensation between $43,750 and $67,072, bringing their total 2010 compensation to between $288,718 and $312,040.

Table 1 below reflects the total value of the RSUs, options, and cash compensation the Company's non-employee directors received in 2010.

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Table 1

Non-Employee Director Compensation in 2010[14]

Director

RSU Awards

Options

Cash

Total

Bogan

$143,852

$101,116

$62,187

$307,155

Morin

$143,852

$101,116

$47,500

$292,468

Caldwell

$143,852

$101,116

$43,750

$288,718

Dow

$143,852

$101,116

$67,072

$312,040

Demo

$143,852

$101,116

$60,938

$305,906

Sullivan

$143,852

$101,116

$47,500

$292,468

Hirji

$143,852

$101,116

$47,500

$292,468

D. Compensation Received by Non-Employee Directors in 2011-2013

In 2011, the Compensation Committee recommended, and the Board approved, a change to the Company's director compensation practices. The Board approved this change without obtaining stockholder approval, which, as Plaintiff acknowledges, was not required under Delaware law or under the Plan.[15]

Starting in 2011, the equity compensation for non-employee directors was an annual grant of 4,000 RSUs for returning directors and a one-time grant of 10,000 RSUs for new directors.[16] The RSUs for returning directors would be awarded in June after the Company's annual meeting and would vest equally in monthly installments over one year. The RSUs for new directors likewise would be awarded in June and would vest equally in annual installments over three years. The non-employee directors also would receive cash compensation, but they would no longer receive any options.[17]

In June 2011, the Compensation Committee awarded 4,000 RSUs, with a grant date fair value of $339,320, to each of the Company's non-employee directors. Those directors also received cash compensation between $47,396 and $86,250, bringing their total 2011 compensation to between $386,716 and $425,570. This reflected an average increase of approximately $100,000 from their total compensation in 2010.

In June 2012, the Compensation Committee awarded another 4,000 RSUs, with a grant date fair value of $283,160, to each of the Company's non-employee directors. Those directors also received cash compensation between $50,000 and $105,000, bringing their total 2012 compensation to between $333,160 and $388,160.

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In June 2013, the Compensation Committee again awarded 4,000 RSUs, with a grant date fair value of $253,360, to each of the Company's returning, non-employee directors. Those directors also received cash compensation between $50,000 and $105,000, bringing their total 2013 compensation to between $303,360 and $358,360. The Compensation Committee also awarded 10,000 RSUs, with a grant date fair value of $633,400, to Daleo, a new, non-employee director. Daleo also received $29,535 in cash, bringing his total 2013 compensation to $662,935.

Table 2 below reflects the total value of the RSU Awards and cash compensation the Company's non-employee directors received in 2011-2013.

Table 2

Non-Employee Director Compensation

in 2011-2013 [18]

Director

Fiscal Year

RSU Awards

Cash

Total

2011

$339,320

$86,250

$425,570

Bogan

2012

$283,160

$105,000

$388,160

2013

$253,360

$105,000

$358,360

2011

$339,320

$54,792

$394,112

Morin

2012

$283,160

$60,000

$343,160

2013

$253,360

$60,000

$313,360

2011

$339,320

$47,396

$386,716

Caldwell

2012

$283,160

$50,000

$333,160

2013

$253,360

$50,000

$303,360

2011

$339,320

$69,583

$408,903

Dow

2012

$283,160

$90,000

$373,160

2013

$253,360

$90,000

$343,360

2011

$339,320

$71,146

$41 ...


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