Sunday, November 24, 2013

Grimes v. Donald case brief

Grimes v. Donald case brief summary
673 A.2d 1207 (1996)

Appellant stockholder sought review of the judgment of the Court of Chancery, New Castle County (Delaware), which dismissed for failure to state a claim his complaint against appellees, the chief executive officer (CEO) and board of directors (board) of a telecommunications corporation, which sought a declaration of invalidity of employment agreements between the corporation and the CEO and sought money damages for breach of fiduciary duties.

The stockholder claimed that the board unlawfully abdicated its statutory duty to manage the corporation's affairs by entering into an employment agreement which provided for the payment of a large sum of money to the CEO, in the event of a constructive termination, and that the board breached its fiduciary duties by failing to exercise due care and committing waste.


  • The court held that:
  • (1) the stockholder's abdication claim was a direct claim where it alleged an injury which was separate and distinct from the injury suffered by other shareholders; 
  • (2) the stockholder's abdication claim failed as a matter of law where, in light of the corporation's financial size, the payment provided for in the employment agreement would not have constituted a de facto abdication; 
  • (3) where the stockholder had demanded that the board take action on his abdication claim, the stockholder was not entitled to assert that demand was excused with respect to his remaining claims; and 
  • (4) the stockholder did not have a remedy for the board's alleged wrongful refusal of his demand to take action on his abdication claim where he failed to plead with particularity why the board's refusal to act was wrongful.

The court affirmed the lower court's dismissal of the stockholder's action.

Recommended Supplements for Corporations and Business Associations Law

1 comment:

  1. Grimes v. Donald (Delaware 1995)

    Case Summary
    Suit was brought by a shareholder of DSC (telecommunications company), claiming that compensation agreements between DSC and CEO/Chairman Donald resulted in an abdication of board authority – violating 14a of DGCL
    Donald had 3 compensation contracts covering all aspects of his compensation known as the Donald Ks:
    Employment agreement – responsible for general management and shall report to the board
    Income continuation plan – may personally declare he was been terminated without cause – such as, if the board unreasonably interferes with this management
    Long term plan – if fired without case, Donald will be compensated for over 1 million per 6.5 years
    Thus, these unusual provisions:
    allow Donald to quit or 'fire himself'
    if Donald unilaterally determines the board has unreasonable interfered with Donald's management of the company,
    Then Donald qualifies for large payments (golden parachute)

    141(a) DGCL
    Elected board has the ultimate duty to manager or supervise the corporation
    Duty to establish or approve strategic, financial, and organization goals
    Board, not the officers, have ultimate responsibility
    Actual Text:
    (a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.

    Do the Donald Contracts effectively prohibit any management by the board, violating the DGCL?

    Board has ultimate responsibility, however it may appoint officers, approve goals, and monitor performance
    DGCL allows a board to delegate managerial duties to officers of the corporation
    Board has great discretion in the creation of a managerial structure
    However, the board may not abdicate powers
    An agreement is void when it substantially limits the freedom of the director (Abercrombie v. Davis) (only 7 out of 8 vote was sufficient)
    Court voided an agreement that the board had to elect a party as successor trustee (Chapin)
    abdication can have a formal effect as in (Chapin). This formal effect is not present here.
    it cna also have a practical effect. This is the primary analysis here.
    Was the golden parachute enough to prevent BOD from interfering in Donald's actions?
    This company had revenue in 1993 of 730m and profit of 83m. The 1.63m golden parachute is probably not enough to prevent the BOD from interfering with Donald.
    Donald agreements do not foreclose the directors from exercise their business judgment
    Directors would only be illegally restricted, if the payouts to Donald were large enough to hinder the corporation
    Could have de facto abdication if the financial consequences with interfering with Donald were significant
    Here, the company made 81 million last year, no financial deterrence from interfering with Donald


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