The directors of the Mattel
corporation developed a plan to give themselves lots of stock options as
compensation. They presented this plan to the shareholders who ratified
the directors' actions.
The proxy solicitation
materials for the plan did not estimate the present value of the stock
options to be granted.
Some shareholders brought a derivative
lawsuit against the directors for breach
of fiduciary duty. The directors
filed a motion to dismiss.
The shareholders argued that
the stock plan was excessive, and therefore a breach of the duty of
loyalty.
The directors argued that
the plan had been ratified by the shareholders, so it must be fair.
The Trial Court found for the
shareholders and denied the motion to dismiss.
The Trial Court found that
the directors did not have a duty to disclose the estimated present value
of the stock options.
The Court found that there
were two ways in which a shareholder ratification could be ineffectual to
rebut an accusation of breach of duty of loyalty:
If the majority of those
affirming the transaction had a conflicting interest.
If the transaction
constituted corporate waste.
Corporate waste can only be ratified by a unanimous vote.
The Court found that corporate
waste can be defined as "an
exchange of corporate assets for consideration so small as to lie beyond
the range at which a reasonable person might be willing to trade.
Generally, corporate
waste would equate with the concept
of a gift in contract law;
something that you receive no substantial consideration in exchange for.
The Court found that the
stock options were sufficiently unusual that they might be considered corporate
waste. The Court therefore denied
the motion to dismiss.
