London v. Tyrrell, C. A. No. 3321-CC (June 24, 2008) (C. Chandler)

In this derivative action against six certain directors and officers of MA Federal, Inc., d/b/a/ iGov
(“iGov”), plaintiffs alleged that defendants harmed the company by issuing to themselves stock options in contravention of the Company’s equity incentive plan. Plaintiffs alleged that defendants breached their fiduciary duties by: (1) manipulating and providing incomplete and inaccurate information to the financial advisor hired to value the Company for purposes of the option grants; and (2) granting options in February and May 2007 based on a report valuing iGov as of July 2006, despite a provision in the equity incentive plan requiring the exercise price to be set with a value of at least 100% of the fair market value of the company’s stock on the date of the grant.

Defendants moved to dismiss pursuant to Rules 9(b), 12(b)(6) and 23.1. Applying the standard
articulated in Aronson v. Lewis, the court held that plaintiffs satisfied both of the Aronson prongs. In so holding, the court rejected defendants’ argument that plaintiffs were required to allege with particularity that the options constituted a material benefit to each defendant, holding that directors who received challenged options “have a strong financial incentive to maintain the status quo by not authorizing any corrective action that would devalue their current holdings or cause them to disgorge improperly obtained profits.” Because the complaint satisfied the heightened pleading requirements of Rule 23.1, it also met the standard under Rule 12(b)(6).

Finally, the court rejected defendants’ argument that, because of certain statutory presumptions
applicable to stock options, plaintiffs were required to plead fraud in accordance with Rule 9(b). The court held that, contrary to defendants’ assertions, 8 Del. C. 157(b) protects a board’s determination of the appropriate consideration for the issuance of rights or options, but does not apply to the board’s judgment in valuing the stock to be sold or the resulting exercise price. The court also held that defendants’ reliance on the presumptions of 8 Del. C. 152 was misplaced, because that statue applies only to the judgment of directors as to the value of non-cash consideration received for stock, while plaintiffs challenged the value of stock issued for cash. Based on the foregoing, the court denied defendants’ motion to dismiss.

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