Vladimir Gusinsky Revocable Trust v. Gregory J. Hayes

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
MORGAN T. ZURN LEONARD L. WILLIAMS JUSTICE CENTER
VICE CHANCELLOR 500 N. KING STREET, SUITE 11400
WILMINGTON, DELAWARE 19801-3734
July 23, 2024
Blake A. Bennett, Esquire John L. Reed, Esquire
Cooch and Taylor, P.A. DLA Piper LLP (US)
1000 North West Street, Suite 1500 1201 North Market Street, Suite 2100
Wilmington, DE 19801 Wilmington, DE 19801
RE: Vladimir Gusinsky Revocable Trust v. Gregory J. Hayes, et al.,
Civil Action No. 2022-1124-MTZ
Dear Counsel:
A stockholder (“Plaintiff”) of nominal defendant Raytheon Technologies
Corporation (“RTX”) wants to bring a derivative action against current and former
members of RTX’s board of directors (together “Defendants”) based on violations
of compensation plans. Plaintiff asserts it can bring derivative claims without first
demanding that RTX’s board1 (the “Demand Board”) bring them because a majority
of the Demand Board faces a substantial likelihood of liability for knowingly
violating the plans. Defendants moved to dismiss the claims for failure to plead
demand futility under Court of Chancery Rule 23.1.2 Plaintiff has not pled the bad
1
When this action was filed, RTX’s board of directors had thirteen members: Gregory
Hayes, Robert (Kelly) Ortberg, Tracy Atkinson, Dinesh Paliwal, James Winnefeld, George
Oliver, Margaret O’Sullivan, Ellen Pawlikowski, Denise Ramos, Frederic Reynolds, Brian
Rogers, and Robert Work and nonparty Bernard A. Harris Jr.
2
Rule 23.1 was amended on September 25, 2023. In re: Amendments to Rules 7, 10, 17–
25, and 171 of the Court of Chancery Rules, Sections, III, IV, and XVI (Del. Ch. Sept. 25,
2023) (ORDER). No substantive revisions were made to the relevant portion of Rule
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faith required to establish a substantial likelihood of liability.3 The motion to dismiss
is granted.
I. BACKGROUND
Before April 2020, United Technologies Corporation (“UTC”) was a publicly
traded company that did business in the aerospace, HVAC, and elevator industries.
It issued equity awards to thousands of employees through two contracts: a 2014
long-term incentive plan and a 2018 long-term incentive plan (together, the
23.1. Id. at 29. Rule 23.1 was again amended on June 14, 2024, and again no substantive
revisions were made to the relevant portion. In re: Amendments to Rules 1–6, 8, 9, 11–15,
23, 23.1, 79, 79.1, 79.2 and 174 of the Court of Chancery Rules, Section I, II, III, IV, X,
and XVI (Del. Ch. May 31, 2024) (ORDER). Nevertheless, I proceed under the Rules as
they were drafted at the time this action was filed. See Lebanon Cnty. Emps’. Ret. Fund v.
Collis, 311 A.3d 773, 780 n.19 (Del. 2023).
3
For purposes of the pending motion, I draw the following facts from the verified amended
complaint and the documents attached to or integral to it, admissions on file, together with
any affidavits, discovery of record and public filings. See Ryan v. Gifford, 935 A.2d 258,
265 (Del. 2007); Himawan v. Cephalon, Inc., 2018 WL 6822708, at *2 (Del. Ch.
Dec. 28, 2018); In re Rural Metro Corp. S’holders Litig., 2013 WL 6634009, at *7 (Del.
Ch. Dec. 17, 2013) (“Applying [Delaware] Rule [of Evidence] 201, Delaware courts have
taken judicial notice of publicly available documents that are required by law to be filed,
and are actually filed, with federal or state officials.”); Ct. Ch. R. 12(b).
Citations in the form of “Am. Compl.” refer to Plaintiff’s Verified Amended
Stockholder Derivative Complaint, available at docket item (“D.I.”) 11. Citations in the
form of “DOB” refer to Defendants’ Opening Brief in Support of Their Motion to Dismiss,
available at D.I. 15; citations in the form of “PAB” refer to Plaintiff’s Answering Brief in
Opposition to Defendants’ Motion to Dismiss, available at D.I. 20; citations in the form of
“DRB” refer to Defendants’ Reply Brief in Further Support of Their Motion to Dismiss,
available at D.I. 23. Citations in the form “Reed Aff.” refer to the affidavit of John L.
Reed, available at D.I. 15.
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“LTIPs”). The awards included stock options and stock appreciation rights
(“SARs”) that were administered by the UTC board directly, “or if the [b]oard elects,
by the [c]ompensation [c]ommittee or such other committee of the [b]oard as the
[b]oard may from time to time designate.”4 Except in the case of a spinoff or other
event contemplated by the LTIPs, the SARs and stock options could be modified
only with approval from UTC’s stockholders.5
A. The Transaction And Employees Matters Agreement
In November 2018, UTC determined to spin off two of its operating
subsidiaries, Carrier Global Corporation (“Carrier”) and Otis Worldwide
Corporation (“Otis”) (the “Spinoff”).6 The Spinoff would create three publicly
traded companies: United Technologies, which would hold UTC’s aerospace and
defense business; Carrier, which would hold UTC’s HVAC business; and Otis,
which would hold UTC’s elevator business.7 The Spinoff was set to occur in 2020.
4
Reed Aff., Ex. 2 § 2(a) [hereinafter “2018 LTIP”]; see also Reed Aff., Ex. 3 §§ 3(a), 2(i)
[hereinafter “2014 LTIP”].
5
2014 LTIP §§ 5(c), 10; 2018 LTIP §§ 2(a), 5(c), 3(e).
6
Am. Compl. ¶ 73.
7
Id.
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In June 2019, UTC and Raytheon Company (“Raytheon”) announced an
all-stock merger between United Technologies and Raytheon (together with the
Spinoff, the “Transaction”) to form RTX.8 The merger was to occur immediately
after the Spinoff, closing before markets opened on April 3, 2020.9
On December 11, 2019, the UTC compensation committee met to discuss the
treatment of UTC’s equity awards following the Transaction.10 In considering
potential valuation methodologies for the awards, the committee identified that “the
goal of the valuation method is to best approximate the ‘true value’ of [Carrier’s,
Otis’s, and RTX’s] stock post-spin.”11 It assessed precedent spinoffs to determine
the most common post-spinoff valuation method.12 After discussions, the
compensation committee approved the use of a multi-day “volume-weighted
average price” (“VWAP”) methodology to calculate the conversion of the awards
post-close.13 Tracking precedent transactions, the conversion formula adjusted the
8
RTX’s amended and restated certificate of incorporation includes an exculpatory
provision. Reed Aff., Ex. 15.
9
Am. Compl. ¶¶ 1, 92.
10
Id. ¶ 87 (citing D.I. 6, Ex. 6).
11
Am. Compl. ¶ 89 (quoting D.I. 6, Ex. 6 at -0030).
12
D.I. 6, Ex. 6 at -0028.
13
Am. Compl. ¶ 87; D.I. 6, Ex. 6 at -0030 to -0033.
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number of awards employees would hold, along with the exercise prices of their
SARs and stock options, by using the VWAP of RTX, Carrier, or Otis stock on the
fourth and fifth trading days following the spinoff, which would be April 8 and April
9.14 The conversion formula was memorialized in an employees matters agreement
(the “EMA”), which UTC, Carrier, and Otis executed on April 2, 2020.15
B. Unprecedented Market Volatility
The Transaction closed before markets opened on April 3, 2020, in the early
waves of the COVID-19 pandemic, “during a period of pronounced market
volatility.”16 In the matter of a month, “[f]rom the onset of the COVID crisis through
[the] [T]ransaction close, [the price of pre-spinoff UTC] shares decreased by 43%.”17
As to RTX specifically, “[t]he conversion formula was designed to convert
the pre-spinoff UTC awards into RTX awards of approximately the same value as
of market close on April 9.”18 When the formula was set, the pre-spinoff UTC
awards converted into RTX awards were worth “almost exactly the same amount as
14
Am. Compl. ¶ 3.
15
Id. ¶ 2; Reed Aff., Ex. 4.
16
Reed Aff., Ex. 5 at -0124.
17
Id.
18
Am. Compl. ¶ 4.
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[the pre-spinoff awards] on April 2.”19 But by April 9, RTX stock had risen
significantly above UTC’s April 2 pre-spinoff price: on April 2, UTC closed “at
$50.73” and on April 3, RTX opened at $51.00; but by the VWAP calculation dates,
April 8 and April 9, RTX closed at $62.62 and $64.71 respectively.20
The equity award conversion fell victim to the market volatility and raised
concerns of negative “impacts . . . on employee retention, morale and incentives, and
[on] the treatment of retirees” for RTX.21 Within days after the conversion,
management sought feedback from outside advisors. By April 17, RTX had drafted
an accounting memo (the “Memo”) regarding the accounting consequences of a
potential EMA amendment, which it reviewed with PriceWaterhouseCoopers LLP
(“PwC”).22 PwC concurred with the Memo’s accounting conclusion as of that date.23
By April 19, RTX received an analysis by Goldman Sachs concerning the implied
impact to the equity awards following the Transaction.24 Goldman Sachs indicated
19
Id.
20
Id. ¶ 92 (“The volume-weighted average price per share for RTX stock on April 8 and 9
was $63.90.” (citing Reed Aff., Ex. 5 at -0127)).
21
Am. Compl. ¶ 93.
22
Reed Aff., Ex. 5 at -0126; Reed Aff., Ex. 11 at -0292.
23
Reed Aff., Ex. 5 at -0126.
24
Id. at -0123 to -0125.
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this spinoff was unlike precedent spinoffs because of unexpected stock volatility
upon the “onset of the COVID crisis.”25 It also identified that “in comparable [l]arge
[c]ap spin[offs] the median 5-day share price movement post separation was [less
than] 1–4%,” but the RTX price movement post-spinoff was a 28% difference.26
One day after receiving Goldman Sachs’ analysis, outside counsel from
Wachtell, Lipton, Rosen & Katz (“Wachtell”) contacted the New York Stock
Exchange (the “NYSE”), informing it that the spinoff conversion had an “unintended
outcome” of “fail[ing] to preserve the pre-separation values of the awards . . . due to
unanticipated market volatility” and needed to be “correct[ed].”27 Wachtell asked if
an EMA amendment adjusting the spinoff conversion required stockholder approval
under the NYSE listed company manual rule 303A.08.28 On April 22, NYSE
representatives orally relayed that in the NYSE’s view, no stockholder vote was
required.
25
Id. at -0124.
26
Id.
27
Id. at -0138.
28
Id.
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C. The EMA Amendment
On April 27, the RTX board (the “Board”) met to discuss the unexpected
outcome of the awards conversion.29 All fifteen directors were in attendance.30 The
Board considered retroactively amending the EMA equity award adjustment
provisions. The Board discussed the Memo and received a presentation from outside
counsel and management.31 The proposed amendment as set forth in the Memo was
for “the post-separation stock prices [to] be measured based on the opening stock
price . . . on the day of the separation (April 3), resulting in $51 for RTX, $43.76 for
Otis, and $13.75 for Carrier.”32 The Memo stated that “for accounting purposes
there is not a modification of these awards separate from the spin-off modification”
and clarified that “the grant date of the modification is the spin[off] date.”33 RTX’s
general counsel and CFO reviewed with the Board “the consequences of the
valuation inputs as [set] forth in the EMA on awards held by RTX, Otis, and Carrier
29
Am. Compl. ¶ 93; Reed Aff., Ex. 5 at -0103 to -0038.
30
Am. Compl. ¶ 93.
31
Reed Aff., Ex. 6 at -0220 to -0222; Reed Aff., Ex. 5 at -0126.
32
Reed Aff., Ex. 5 at -0127.
33
Am. Compl. ¶¶ 101, 104; Reed Aff., Ex. 5 at -0126. Plaintiff contends the amendment
to the EMA “was a second, separate modification to equity awards and was not part of the
spinoff, thus,” under the LTIPs, “the Board was required to obtain shareholder approval.”
PAB 21.
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employees and retirees.”34 The presentation demonstrated that “for tax purposes” a
potential amendment would be considered a separate modification. 35 The
presentation also indicated the spinoff conversion’s objective was an “[e]quitable
conversion that maintains value of awards pre and post-spin[off]” while
“minimiz[ing] volatility that could inadvertently decrease or increase value.”36 For
its part, Wachtell suggested a new VWAP post-spinoff benchmark set for April 3,
instead of April 8 and April 9, which would bring the post-spinoff share price
movement more in range with the other comparable spinoffs mentioned by Goldman
Sachs.37 The April 3 date would yield a 1% difference in share price movement as
opposed to the seven-day 28% difference.38
The Board discussed a potential EMA amendment but did not decide upon it.
The Board made no decision concerning whether stockholder approval would be
34
Am. Compl. ¶ 94 (quoting Reed Aff., Ex. 6 at -0221).
35
Am. Compl. ¶101; Reed Aff., Ex. 6 at -0118.
36
Reed Aff., Ex. 5 at -0105.
37
Am. Compl. ¶ 112; Reed Aff., Ex. 5 at -0120.
38
Am. Compl. ¶ 97; id. ¶ 92 (indicating UTC stock price closed the last trading day at
$50.73 and RTX stock price closed at $64.71 on April 9); Reed Aff., Ex. 5 at -0124
(indicating the median 5-day share price movement post separation for comparable spinoffs
was less than 1–4%).
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required under the LTIPs.39 Instead, the Board unanimously approved the creation
of a special committee (the “Special Committee”) comprised of three former
Raytheon directors.40 Each was determined to be “independent and disinterested
with respect to the [p]otential [a]mendment,” and each was a member of RTX’s
compensation committee, which one of them chaired.41
The Board then issued the Special Committee resolutions (the “Resolutions”),
expressly stating the committee was formed for the purposes of:
(a) reviewing, analyzing and evaluating the [p]otential [a]mendment,
(b) overseeing the negotiation of the terms and conditions of the
[p]otential [a]mendment, (c) determining whether the [p]otential
[a]mendment (and any related agreements or other documentation) is
in the best interests of the [c]orporation and its shareowners and (d)
providing final approval for the [p]otential [a]mendment (and any
related agreements or other documentation) and related matters if they
are determined to be in the best interests of the [c]orporation and its
shareowners.42
The Resolutions further authorized the Special Committee to “undertake all actions
that, in the determination of the [c]ommittee, are required to fulfill the [c]ommittee
39
See, e.g., Am. Compl. ¶¶ 13, 109, 160; PAB 38.
40
Reed Aff., Ex. 6 at -0230 to -0232 (identifying Atkinson, Paliwal, and Winnefeld); Am.
Compl. ¶ 113.
41
Reed Aff., Ex. 6 at -0230; Am. Compl. ¶¶ 20, 27, 32, 34, 113.
42
Reed Aff., Ex. 6 at -0230.
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[m]andate,” to “take such other actions, as the [c]ommittee determines necessary,
appropriate or advisable in connection with any and all aspects of the [p]otential
[a]mendment,” and to “exercise all the powers and authority of the Board” in
connection with matters at issue in the Resolutions.43
The Special Committee met three times in May to discuss whether to amend
the Transaction’s VWAP formula.44 The Special Committee’s advisors, including
Wachtell and the committee’s executive compensation consultant Frederic W. Cook
& Co., participated in each meeting.45 On May 22, the Special Committee
unanimously approved the EMA amendment (the “EMA Amendment”) on behalf of
RTX,46 citing the LTIPs for its authority to adjust the awards in the spinoff context
without a stockholder vote.47
The Special Committee formalized its approval of the EMA Amendment in
resolutions. The Special Committee’s resolutions articulated that the committee had
the authority to approve the EMA Amendment on RTX’s behalf because the Board
43
Id. at -0230 to -0231.
44
Reed Aff., Exs. 8–10.
45
Id.
46
Otis and Carrier declined to participate in the EMA Amendment.
47
Reed Aff., Ex. 10 at -0361.
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or a Board committee has authority under the LTIPs and other related compensation
plans, and the Board’s committee mandate conferred that authority on the Special
Committee.48
On May 29, 2020, RTX filed a Form 8-K with the SEC disclosing that, on
May 22, 2020, RTX had entered an amendment of the EMA that modified the
definition of “UTC Post-Separation Stock Value.”49 The EMA Amendment based
the conversion on the day one trading price rather than on a day four and five VWAP
formula.
D. Plaintiff Files This Action.
On June 16, 2020, Plaintiff made a demand under 8 Del. C. § 220 to inspect
RTX’s books and records.50 On December 6, 2022, Plaintiff filed a complaint
without making a pre-suit litigation demand.51 When Plaintiff filed its complaint,
the Demand Board had thirteen members.52
48
Id.
49
Am. Compl. ¶ 129.
50
Reed Aff., Ex. 1.
51
D.I. 1.
52
Am. Compl. ¶ 144.
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On February 27, 2023, Defendants moved to dismiss and filed an opening
brief.53 On May 18, 2023, Plaintiff responded to the Motion with an amended
complaint.54 That complaint now asserts three claims against the RTX directors who
served at the time of the EMA Amendment: (i) breach of fiduciary duty against all
director defendants; (ii) unjust enrichment against two management directors;55 and
(iii) corporate waste against all director defendants.56 Defendants moved to dismiss
the amended complaint for failure to plead demand futility.57 I heard oral argument
on March 27, 2024.
II. ANALYSIS
In evaluating whether a pre-suit demand is futile, I begin my analysis with
Delaware law’s “‘cardinal precept . . . that directors, rather than shareholders,
manage the business and affairs of the corporation.’”58 Because of this precept,
when “a stockholder seeks to displace the board’s authority over a litigation asset
53
D.I. 6.
54
See generally Am. Compl.
55
This claim is brought only against Hayes and Ortberg.
56
Id. ¶¶ 162–74.
57
See generally DOB.
58
SDF Funding LLC v. Fry, 2022 WL 1511594, at *10 (Del. Ch. May 13, 2022) (quoting
Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984), overruled on other grounds by Brehm v.
Eisner, 746 A.2d 244 (Del. 2000)).
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and assert the corporation’s claim,”59 Court of Chancery “Rule 23.1 requires that a
Plaintiff . . . allege with particularity why demand is excused.”60 It is a “heightened
pleading standard,”61 and “the demand requirement is not excused lightly.”62 Thus,
where the plaintiff has not made a pre-suit demand on the board, “the [c]omplaint
must be dismissed unless it alleges particularized facts showing that demand would
have been futile.”63 “The facts are considered ‘in their totality’ and all reasonable
inferences are drawn in the plaintiffs’ favor.”64 But the plaintiff “cannot rely on
‘conclusory allegations’ or ‘inferences that are not objectively reasonable.’”65
59
United Food & Com. Workers Union v. Zuckerberg (Zuckerberg I), 250 A.3d 862, 876
(Del. Ch. 2020) (citing Aronson, 473 A.2d at 811).
60
Ryan v. Armstrong, 2017 WL 2062902, at *10 (Del. Ch. May 15, 2017) (citing Ct. Ch.
R. 23.1).
61
City of Hialeah Empls.’ Ret. Sys. ex rel. nCino, Inc. v. Insight Venture P’rs, LLC, 2023
WL 8948218, at *5 (Del. Ch. Dec. 28, 2023) (quoting Zuckerberg I, 250 A.3d at 876, aff’d
sub nom. United Food & Com. Workers Union & Participating Food Indus. Emps.
Tri-State Pension Fund v. Zuckerberg (Zuckerberg II), 262 A.3d 1034 (Del. 2021)).
62
Zuckerberg II, 262 A.3d at 1049.
63
Ryan v. Gursahaney, 2015 WL 1915911, at *5 (Del. Ch. Apr. 28, 2015) (citation
omitted).
64
Clem v. Skinner, 2024 WL 668523, at *5 (Del. Ch. Feb. 19, 2024) (quoting Del. Cnty.
Empls. Ret. Fund v. Sanchez, 124 A.3d 1017, 1019 (Del. 2015)).
65
Clem, 2024 WL 668523, at *5 (internal quotation marks omitted) (quoting In re Go Pro,
Inc., 2020 WL 2036602, at *8 (Del. Ch. Apr. 28, 2020)).
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Here, Plaintiff seeks to establish demand futility on the familiar basis that a
majority of the Demand Board “faces a substantial likelihood of liability on any of
the claims that are the subject of the litigation demand.”66 If Plaintiff pleads facts
supporting that conclusion for a majority of the Demand Board, then demand is
excused.67 Reaching half depends on the impartiality of seven directors who did not
serve on the Special Committee (the “Seven Directors”).68 Because RTX’s
certificate of incorporation exculpates directors from monetary liability for breaches
of fiduciary duty to the fullest extent permitted by the Delaware General Corporation
Law, and because the claim on which Plaintiff seeks to establish liability requires
the directors to have knowingly exceeded their authority, Plaintiff must plead bad
faith conduct by the Seven Directors.69
66
PAB 17–18; Zuckerberg II, 262 A.3d at 1059.
67
Zuckerberg II, 262 A.3d at 1059.
68
See Compl. ¶ 14. The Seven Directors are Oliver, O’Sullivan, Pawlikowski, Ramos,
Reynolds, Rogers, and Work. Id. ¶ 144. Plaintiff did not provide a director-by-director
analysis. Plaintiff concedes demand is not excused as to director Harris, who joined the
Board in April 2021 and is not named as a defendant, and Defendants concede demand is
excused as to directors Hayes and Ortberg, who owned significant unvested equity that
were affected by the EMA Amendment and are thus not disinterested. PAB 21; DOB 12;
Am. Compl. ¶ 145. Demand as to the three Special Committee members is not dispositive
because even if demand is excused for them, two more would still need to be found
impartial.
69
Reed Aff., Ex. 15; Zuckerberg II, 262 A.3d at 1057; Garfield ex rel. ODP Corp. v. Allen,
277 A.3d 296, 320–323, 330 (Del. Ch. 2022).
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To plead bad faith, a plaintiff must show either “[(i)] an extreme set of facts
to establish that disinterested directors were intentionally disregarding their duties
or [(ii)] that the decision under attack is so far beyond the bounds of reasonable
judgment that it seems essentially inexplicable on any ground other than bad
faith.’”70 “The business judgment rule will not be rebutted, and thus demand will
not be excused, when a plaintiff alleges only that a board of directors failed to follow
the terms of a stock incentive plan.”71 A plaintiff must do more: otherwise, “finding
demand futile in these instances effectively would nullify the business judgment rule
and eviscerate the demand requirement.”72 A plaintiff can demonstrate that demand
is excused by pleading “particularized facts that indicate that the board knowingly
or deliberately failed to adhere to the terms of a stock incentive plan.”73
70
Newman v. KKR Phorm Invs., L.P., 2023 WL 5624167, at *7 (Del. Ch. Aug. 31, 2023)
(quoting In re MeadWestvaco S’holders Litig., 168 A.3d 675, 684 (Del. Ch. 2017)).
71
Pfeiffer v. Leedle, 2013 WL 5988416, at *5 (Del. Ch. Nov. 8, 2013) (citing Freedman v.
Redstone, 2013 WL 3753426, at *9 (D. Del. July 16, 2013); Weiss v. Swanson, 948 A.2d
433, 447 (Del. Ch. 2008)).
72
Pfeiffer, 2013 WL 5988416, at *5.
73
Id.; accord Garfield, 277 A.3d at 330 (“[A]llegations that the directors knowingly
exceeded their authority are sufficient to state a claim that the directors breached their duty
of loyalty.” (citing Allen v. El Paso Pipeline GP Co., 90 A.3d 1097, 1108 (Del. Ch. 2014))).
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Here, Plaintiff argues the Board acted in bad faith, with conscious disregard
for their responsibilities and intentional dereliction of duty, by (i) “determin[ing] that
stockholder approval was not necessary” in violation of the LTIPs, and by (ii)
“delegating authority for final approval of the EMA Amendment to the Special
Committee, which [is] authority the Board lacked.”74 That theory falters in two
places: that the Board made any decision at all about stockholder approval, and that
the Board did so in bad faith.
Plaintiff contends the full Board, not just the Special Committee, determined
the EMA Amendment did not require a stockholder vote. Plaintiff argues the “plain
language of the Board’s resolutions creating the Special Committee” show the Board
made a decision concerning stockholder approval.75 Plaintiff contends the
Resolutions’ language empowering the Special Committee to “provid[e] final
approval” empowers the Special Committee to approve the EMA Amendment itself,
without considering or calling for a stockholder vote.76 Plaintiff argues that narrow
mandate “is incompatible with seeking shareholder approval” and shows the Board
74
PAB 20.
75
Id. 32.
76
Id. 33–34.
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decided to forego stockholder approval.77 Defendants counter that “nothing in the
text of the [R]esolutions . . . disabled the [S]pecial [C]ommittee from considering
whether an amendment would require stockholder approval.”78 Thus, in
Defendants’ view, the plain text of the Resolutions does not show the Board decided
to forego stockholder approval.
To resolve this dispute, I must read the Resolutions “as a whole, giv[e]
meaning to each term,”79 and prefer “an interpretation which gives a reasonable,
lawful, and effective meaning to all the terms . . . [over] an interpretation which
leaves a part unreasonable, unlawful, or of no effect.”80 Further, the Court must
“‘give each provision and term effect, so as not to render any part of the contract
mere surplusage.’”81
I read the Resolutions as Defendants do. The Resolutions did not identify the
Special Committee, or anyone else, as the source of approval. Rather, they
77
Id. 34.
78
D.I. 36 at 31.
79
Sunline Com. Carriers, Inc. v. CITGO Petroleum Corp., 206 A.3d 836, 846 (Del. 2019).
80
Id. at 846 n.64 (quoting Restatement (Second) of Contracts § 203 (Am. L. Inst. 1981)).
81
Sunline, 206 A.3d at 839 (quoting Kuhn Constr., Inc. v. Diamond State Port Corp., 990
A.2d 393, 396–97 (Del. 2010)).
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established one purpose of the Special Committee was “providing final approval.”82
Further, the plain meaning of “provide” includes an act to “procure” or “to supply.”83
Thus, the Resolutions tasked the Special Committee with “procuring” final approval
and gave it flexibility “to undertake all actions that, in the determination of the
[c]ommittee, are required to fulfill the [c]ommittee [m]andate.”84 Further, the
Resolutions empowered the Special Committee “[t]o take such other actions, as the
[c]ommittee determines necessary, appropriate or advisable in connection with any
and all aspects of the [p]otential [a]mendment.”85 The Special Committee could
procure final approval by seeking stockholder approval if it so chose.86 Plaintiff has
not pled that the Board decided approval should come from the Special Committee.
82
See Reed Aff., Ex. 6 at -0230.
83
Provide, Merriam-Webster Dictionary, https://www.merriam-webster.com/dictionary/
provide (last visited July 18, 2024) (defining “provide” to mean, first, “to supply or make
available”); Provide, Black’s Law Dictionary (6th ed. 1990) (defining “provide” to mean
“to make, procure, or furnish”).
84
Reed Aff., Ex. 6 at -0230.
85
Id., at -0231.
86
This conclusion, that the Board’s delegation to the Special Committee did not compel
the Special Committee to itself approve the EMA Amendment, also dispenses with
Plaintiff’s argument that the Board violated the LTIPs in delegating approval to the Special
Committee. The Resolutions gave the Special Committee “the powers and authority of the
Board” to determine whether and how to provide approval for a potential EMA
amendment. Reed Aff., Ex. 6 at -0231.
Gusinsky Revocable Tr. v. Hayes,
C.A. No. 2022-1124-MTZ
July 23, 2024
Page 20 of 23
Even if the Board made the decision to forego stockholder approval,
Plaintiff’s pleadings fatally undercut the position that the Board did so in knowing
violation of the LTIPs. Plaintiff pleads the “Special Committee approved the
modification” and that “neither the full Board nor the Compensation Committee
even discussed the requirements of the UTC LTIPs.”87 Plaintiff states “[t]he Board
never expressly considered or decided whether the EMA Amendment would, or even
could, require shareholder approval under the LTIPs.”88 Plaintiff alleges the Board
did not “consider whether the plans required stockholder approval for the
modification,” “[n]or did they determine that stockholder approval was not
required.”89 And Plaintiff alleges “the [c]ompensation [c]ommittee and full Board
were not even aware that the details of the EMA amendment could implicate the
stockholder approval requirements in the . . . LTIPs.”90 Taking Plaintiff at its word,
the Board made no determinations concerning the EMA Amendment, and certainly
none that were deliberately and knowingly in violation of the LTIPs.
87
Am. Compl. ¶ 160.
88
PAB 38.
89
Am. Compl. ¶ 160.
90
Id.Gusinsky Revocable Tr. v. Hayes,
C.A. No. 2022-1124-MTZ
July 23, 2024
Page 21 of 23
To be sure, Delaware law contemplates the Court can infer the essential
element of knowledge from a “plain and unambiguous violation” of a compensation
plan’s “plain and unambiguous restriction on the fiduciary’s authority.”91 That
inference is unreasonable here, even at this plaintiff-friendly stage, because of
Plaintiff’s specific and insistent allegations that the Board “never expressly
considered or decided whether” a stockholder vote was required under the LTIPs.92
Plaintiff’s numerous allegations that the Board never thought about the stockholder
approval requirement or made any decision about it at all foreclose the inference that
the Seven Directors knowingly violated that requirement.93 To make that inference
despite those allegations would graft the essential knowledge element of bad faith to
91
Garfield, 277 A.3d at 331; see also Pfeiffer, 2013 WL 5988416, at *9 (“[Plaintiff] has
alleged sufficiently that the [b]oard clearly violated an unambiguous provision of the [p]lan
… a prima facie showing of such a clear violation supports an inference that the Board
either knowingly or deliberately exceeded its authority.”).
92
PAB 38.
93
Plaintiff separately argues that the Seven Directors acted in bad faith by failing to be
adequately informed. However, for unexculpated claims, “[i]t is not enough to allege that
the directors should have been better informed.” McElrath v. Kalanick, 224 A.3d 982, 993
(Del. 2020). Board minutes demonstrate the Board discussed a potential EMA Amendment
and was informed of management and PwC input, advice from Wachtell, and NYSE’s
position concerning a stockholder vote. Thus, “[t]he complaint’s allegations do not lead to
a reasonable inference that the board intentionally ignored” the EMA Amendment entirely;
instead, it shows that the Board was informed of a potential amendment and delegated
authority to the Special Committee to consider its desirability and terms. Id.Gusinsky Revocable Tr. v. Hayes,
C.A. No. 2022-1124-MTZ
July 23, 2024
Page 22 of 23
circumstances where Plaintiff has pled knowledge was wholly absent. That would
be inconsistent with at least three aspects of Delaware law: (i) that “[t]he plaintiff is
the master of the complaint;”94 (ii) that compensation plan violations do not
automatically amount to bad faith conduct that would rebut the business judgment
rule and establish demand futility;95 and (iii) that exculpated directors are dismissed
from litigation when the plaintiff has not pled the directors acted disloyally.96
Likewise, Plaintiff’s contention that the Board knowingly acted in bad faith
by “fail[ing] to act seek [sic] shareholder approval once the final terms of the EMA
Amendment became public” fails.97 Having pled the Board did not think about any
stockholder approval requirements at all, Plaintiff does not plead that the Board
made any conscious decision to refrain from action on that point.
94
NACCO Indus., Inc. v. Applica Inc., 997 A.2d 1, 23 (Del. Ch. 2009); Amalgamated Bank
v. Yahoo! Inc., 132 A.3d 752, 797 (Del. Ch. 2016) (“A plaintiff generally is master of its
complaint and can choose what it wants to plead.”), abrogated on other grounds by Tiger
v. Boast Apparel, Inc., 214 A.3d 933 (Del. 2019).
95
See Pfeiffer, 2013 WL 5988416, at *5; see also Garfield, 277 A.3d at 296.
96
In re Cornerstone Therapeutics Inc, S’holder Litig., 115 A.3d 1173, 1179–80 (Del.
2015) (“[A] plaintiff can survive a motion to dismiss by that director defendant by pleading
facts supporting a rational inference that the director harbored self-interest adverse to the
stockholders’ interests, acted to advance the self-interest of an interested party from whom
they could not be presumed to act independently, or acted in bad faith.” (citing Malpiede
v. Townson, 780 A.2d 1075, 1094 (Del. 2001); Orman v. Cullman, 794 A.2d 5 (Del. Ch.
2002))).
97
PAB 39.
Gusinsky Revocable Tr. v. Hayes,
C.A. No. 2022-1124-MTZ
July 23, 2024
Page 23 of 23
Thus, Plaintiff has failed to plead the Board knowingly exceeded its authority
by failing to seek stockholder approval.98 Plaintiff has therefore failed to plead bad
faith as to the Seven Directors and demand is not excused. I need not reach
Plaintiff’s other arguments.
Because demand is not excused as to Count I, it follows that demand is not
excused as to Count III for waste, which is predicated on the same conduct as the
Plaintiff’s breach of fiduciary duty claim.99 Finally, because the Seven Directors are
impartial as to the EMA Amendment, demand is not excused as to Count II for unjust
enrichment.
III. CONCLUSION
Defendants’ motion to dismiss is GRANTED.
Sincerely,
/s/ Morgan T. Zurn
Vice Chancellor
MTZ/ms
cc: All Counsel of Record, via File & ServeXpress
98
For the same reasons, Plaintiff’s allegations that the Board acted in bad faith by
“knowingly or recklessly” permitting public disclosures “that concealed the nature and
effect of the EMA amendment” do not establish a substantial likelihood of liability for the
Seven Directors. Am. Compl. ¶ 166.
99
Id. ¶ 174 (“As a direct and proximate result of these breaches of their fiduciary duties,
RTX has sustained and will continue to sustain significant damages, as alleged herein.”).