      IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

JULIE FRIEDMAN, derivatively on behalf of    )
EXPEDIA, INC.,                               )
                                             )
            Plaintiff,                       )
                                             )
      v.                                     )
                                             )
DARA KHOSROWSHAHI, BARRY                     )     C.A. No. 9161-CB
DILLER, VICTOR A. KAUFMAN, A.                )
GEORGE BATTLE, JONATHAN L.                   )
DOLGEN, CRAIG A. JACOBSON, PETER             )
M. KERN, JOHN C. MALONE, JOSE A.             )
TAZON and WILLIAM R. FITZGERALD,             )
                                             )
            Defendants,                      )
                                             )
      and                                    )
                                             )
EXPEDIA, INC., a Delaware Corporation,       )
                                             )
            Nominal Defendant.               )


                           MEMORANDUM OPINION

                           Date Submitted: June 16, 2014
                            Date Decided: July 16, 2014


David A. Jenkins and Neal C. Belgam of Smith Katzenstein & Jenkins LLP, Wilmington,
Delaware; Eduard Korsinsky and Steven J. Purcell of Levi & Korsinsky LLP, New York,
New York, Attorneys for Plaintiff.

Gregory P. Williams, Lisa A. Schmidt and Susan M. Hannigan of Richards, Layton &
Finger, P.A., Wilmington, Delaware; Warren R. Stern and Jonathon R. LaChapelle of
Wachtell, Lipton, Rosen & Katz LLP, New York, New York, Attorneys for Defendants.

BOUCHARD, C.




                                         1
I.       INTRODUCTION

         This action involves a seemingly increasing area of litigation in this Court: claims

challenging the payment of compensation to an officer or director of a Delaware

corporation based on an alleged violation of the terms of a compensation plan. Asserting

such claims derivatively, stockholders invariably argue that demand is excused on the

theory that a violation of an unambiguous provision of a compensation plan raises a

reasonable doubt the transaction resulted from a valid exercise of business judgment and,

as the plaintiff here put it, “ipso facto establishes demand futility under the second prong

of Aronson.”1

         In this case, plaintiff Julie Friedman asserts claims for breach of fiduciary duty

(Count I) and unjust enrichment (Count II) concerning the decision of the compensation

committee of the board of directors of Expedia, Inc. (“Expedia” or the “Company”) to

accelerate the vesting of a grant of restricted stock units representing 400,000 shares of

Expedia common stock (the “RSU Award”) even though one of the original vesting

conditions of the RSU Award had not been satisfied. The RSU Award was made to

Expedia’s chief executive officer Dara Khosrowshahi under the Company’s 2005 Stock

and Annual Incentive Plan (the “Plan”).

         Defendants moved to dismiss the complaint for failure to make a pre-suit demand

upon the Expedia board of directors or to plead facts excusing such a demand and for

failure to state a claim upon which relief can be granted. For the reasons set forth below,


1
    Pl.’s Answering Br. 23.

                                              2
I conclude that this case should be dismissed under Rule 23.1 because plaintiff has failed

to plead with particularity that making a demand would have been futile. Regarding the

second prong of Aronson, I find that defendants have articulated a reasonable

construction of the plain terms of the RSU Award whereby the compensation committee

was entitled to waive the challenged vesting condition in accordance with their authority

under the Plan. At most, plaintiff has identified a potential ambiguity in the RSU Award

that the compensation committee was authorized to interpret under the terms of the Plan.

Thus, plaintiff has failed to plead particularized facts raising a reasonable doubt that the

transaction resulted from a valid exercise of business judgment.

II.    BACKGROUND2

       A.     The Parties

       Plaintiff Julie Friedman has been a stockholder of Expedia since 2005.

       Expedia, a Delaware corporation, is an online travel company that provides

business and leisure travelers with tools and information enabling them to research, plan

and book travel. Expedia became an independent publicly traded company on August 9,

2005, when it was spun-off from IAC/InterActiveCorp.

       Defendants Dara Khosrowshahi, Barry Diller, Victor A. Kaufman, A. George

Battle, Jonathan L. Dolgen, Craig A. Jacobson, Peter M. Kern, John C. Malone, Jose A.

Tazon, and William R. Fitzgerald were all members of the Expedia board of directors in


2
  Unless otherwise noted, the facts recited in this Memorandum Opinion are based on the
allegations in the complaint, documents integral to or incorporated in the complaint, or
facts of which the Court may take judicial notice.

                                             3
August 2012 when the decision was made to accelerate the vesting of the RSU Award.

Each of these individuals except Fitzgerald, who left the board in December 2012, was a

member of the board when this lawsuit was filed on December 13, 2013. Pamela L. Coe,

who is not named as a defendant, joined the Expedia board in November 2012.

          Defendants Dolgen, Kern and Fitzgerald comprised the board’s compensation

committee (the “Compensation Committee” or “Committee”) at all times relevant to this

action.

          B.    Factual Background

                1.      The 2005 Stock and Annual Incentive Plan

          On August 8, 2005, Expedia adopted its 2005 Stock and Annual Incentive Plan,

which was approved by Expedia’s then-sole stockholder shortly before the Company

went public. The Plan was subsequently amended in 2007, 2008 and 2009, each time

with the approval of the Company’s stockholders. The Plan authorizes the Company to

grant various stock-based awards to Expedia’s directors, officers, employees and

consultants.3

          The Plan is administered by the Compensation Committee, which has “plenary

authority to grant Awards pursuant to the terms of the Plan to Eligible Individuals” and

the authority, “subject to Section 12, to modify, amend or adjust the terms and conditions

of any Award, at any time or from time to time.”4 Section 12(d) of the Plan provides,

3
 Expedia, Inc., 2005 Stock and Annual Incentive Plan (Form S-8) 5 (Aug. 9, 2005) (the
“Plan”) (Defs.’ Opening Br. Ex. A § 2(a)(ii)).
4
    Plan §§ 2(a), 2(a)(v).

                                            4
with certain exceptions not relevant here, that “the Committee may unilaterally amend

the terms of any Award theretofore granted, prospectively or retroactively, but no such

amendment shall . . . cause a Qualified Performance-Based Award to cease to qualify for

the Section 162(m) Exemption.”5

         The term “Section 162(m) Exemption” is defined in the Plan to mean “the

exemption from the limitation on deductibility imposed by Section 162(m) of the

[Internal Revenue Code of 1986] that is set forth in Section 162(m)(4)(C)” thereof.6

Under Section 162(m)(1), publicly held corporations may not deduct compensation in

excess of $1 million paid to certain executive officers in a taxable year.7      Section

162(m)(4)(C) provides an exception to this limitation, if, among other things, payment of

the compensation is made contingent upon the achievement of one or more “performance

goals” established by a committee of two or more independent directors.8

                    2.   Qualified Performance-Based Awards

         When the Compensation Committee grants an award it may designate the award as

a “Qualified Performance-Based Award.”9 Under the Plan, a Qualified Performance-

Based Award is “an Award intended to qualify for the Section 162(m) Exemption.”10

5
    Id. § 12(d).
6
    Id. § 1(kk).
7
    26 U.S.C. § 162(m)(1).
8
    26 U.S.C. § 162(m)(4)(C).
9
    Plan § 7(b)(i).
10
     Id. § 1(gg).

                                            5
Therefore, to issue a Qualified Performance-Based Award, the Compensation Committee

must condition the award upon the achievement of one or more performance goals.

           The term “Performance Goals” is defined in Section 1(dd) of the Plan to mean

“the performance goals established by the Committee in connection with the grant of

Restricted Stock, Restricted Stock Units or Bonus Awards or other stock-based

awards.”11 Section 1(dd) further provides that, “[i]n the case of Qualified-Performance

Based Awards that are intended to qualify under Section 162(m)(4),” the Performance

Goals must be “based on the attainment of one or any combination” of the following

twenty-four criteria:

           specified levels of earnings per share from continuing operations, net profit
           after tax, EBITDA, EBITA, gross profit, cash generation, unit volume,
           market share, sales, asset quality, earnings per share, operating income,
           revenues, return on assets, return on operating assets, return on equity,
           profits, total shareholder return (measured in terms of stock price
           appreciation and/or dividend growth), cost saving levels, marketing-
           spending efficiency, core non-interest income, change in working capital,
           return on capital, and/or stock price, with respect to the Company or any
           subsidiary, division or department of the Company that are intended to
           qualify under Section 162(m)(4)(c) of the Code . . . .12

           Although the Compensation Committee must condition a Qualified Performance-

Based Award upon the achievement of one or more Performance Goals, nothing in the

Plan prevents the Compensation Committee from making a Qualified Performance-Based

Award subject to the achievement of other terms or conditions. Rather, Section 11(b) of

the Plan states expressly that “[e]ach Qualified Performance-Based Award (other than an

11
     Id. § 1(dd).
12
     Id.

                                                6
Option or Stock Appreciation Right) shall be earned, vested and payable (as applicable)

only upon the achievement of one or more Performance Goals, together with the

satisfaction of any other conditions, such as continued employment, as the Committee

may determine to be appropriate.” 13

           Significant to this action, with certain exceptions not relevant here, Section 11(b)

prohibits the Compensation Committee from amending a Qualified Performance-Based

Award in a way that would cause it to lose its Section 162(m) Exemption:

           [N]o Qualified Performance-Based Award may be amended, nor may the
           Committee exercise any discretionary authority it may otherwise have
           under this Plan with respect to a Qualified Performance-Based Award
           under this Plan, in any manner that would cause the Qualified Performance-
           Based Award to cease to qualify for the Section 162(m) Exemption . . . .14

A Qualified Performance-Based Award would lose its tax-deductible status by virtue of

the Section 162(m) Exemption if the Compensation Committee waived any of the

Performance Goals it established when the award was granted for the purpose of making

the award qualify as a Qualified Performance-Based Award.15

                  3.     The RSU Award

           On March 7, 2006, the Compensation Committee granted 800,000 restricted stock

units (“RSUs”) to Khosrowshahi.           An award of RSUs is denominated in shares of




13
     Id. § 11(b) (emphasis added).
14
     Id.
15
     Compl. ¶ 28.

                                                7
Expedia common stock that will settle in cash or shares upon satisfaction of whatever

vesting conditions the Compensation Committee has established.16

           The terms and conditions of the RSU Award were initially set forth in a March

2006 Restricted Stock Unit Agreement. Section 1 of that agreement sets forth certain

vesting conditions. Specifically, Section 1(b) provides that the RSU Award will vest

upon the achievement of both (1) one of two specifically defined “Performance Goals”

relating to the Company’s EBITA or stock price and (2) an additional goal defined as the

“OIBA Target.” These goals are defined collectively as the “Combined Goals:”

                  (b) Subject to the terms and conditions of this Agreement and the
           provisions of the Plan, the Restricted Stock Units shall vest and no longer
           be subject to any restriction . . . in the event both (i) one of the two
           performance goals approved by the Committee (the “Performance Goals”)
           and relating to EBITA or the Corporation’s stock price is achieved and (ii)
           the OIBA Target (as defined below) is achieved (collectively, the
           “Combined Goals”) . . . .17

The term “OIBA Target” is defined in the RSU Award as follows:

                  “OIBA Target” as used herein means that certain Corporation
           operating income before amortization (“OIBA”) target approved by the
           Committee with respect to the vesting of Restricted Stock Units awarded to
           the Eligible Individual under this Agreement.18

           On March 13, 2006, shortly after granting the RSU Award, Expedia filed a Form

8-K with the Securities and Exchange Commission summarizing Khosrowshahi’s

16
     Plan § 7(a).
17
  Expedia, Inc., Annual Report (Form-10K) Ex. 10.16 (Mar. 31, 2006) (the “RSU
Award”) (Defs.’ Reply Br. Ex. E §1(b)) (emphasis added).
18
     Id.



                                               8
compensation arrangements with Expedia.19 Parroting the language of the RSU Award,

the Form 8-K distinguishes between the “Performance Goals” and the OIBA Target in

describing the vesting conditions for the RSU Award:

                  The Committees have approved the issuance of 800,000 restricted
           stock units . . . to Mr. Khosrowshahi, 75% of which will vest . . . upon the
           Company’s achievement of (i) one of the Performance Goals, and (ii) the
           operating income before amortization (“OIBA”) targets approved by the
           Committees.20

Consistent with the text of the RSU Award, the term “Performance Goals” is defined in

the Form 8-K as “the Company’s achievement of a target increase in the price of the

Company’s common stock or the attainment of EBITA targets.”21

                   4.   Amendment of the RSU Award

           On December 20, 2011, Expedia completed the spin-off of its TripAdvisor Media

Group into a new, separately traded public company, TripAdvisor, Inc.22 When the spin-

off occurred, the EBITA/stock price goal in the RSU Award had been met but the OIBA

Target had not been met.23

           Upon consummation of the spin-off, Khosrowshahi became a director of

TripAdvisor while maintaining his positions as chief executive officer and a director of

Expedia. Expedia and TripAdvisor agreed to divide the RSU Award. Specifically,

19
     Expedia, Inc., Current Report (Form 8-K) (Mar. 13, 2006) (Defs.’ Opening Br. Ex. B).
20
     Id. § 1.01.
21
     Id.
22
     Compl. ¶ 39.
23
     Id. ¶ 40.

                                                9
Khosrowshahi entered into a restricted stock unit agreement with TripAdvisor for

400,000 shares of TripAdvisor common stock. Separately, his RSU Award with Expedia

was amended to reduce the number of restricted stock units from 800,000 shares to

400,000 shares of Expedia common stock and to reduce the OIBA Target from $1 billion

for a full year to $714.4 million.24

          The terms of the RSU Award with Expedia, as amended in 2011, are set forth in

the Second Amended and Restated Expedia, Inc. Restricted Stock Unit Agreement.

Similar to the original agreement, the vesting condition in the amended agreement uses

defined terms to explicitly distinguish between targets based on EBITA and the

Company’s stock price (defined as the “Performance Goals”) and based on OIBA

(defined as the “Expedia OIBA Target”):

                  (b) Subject to the terms and conditions of this Agreement and the
          provisions of the Plan and subject to the Eligible Individual’s continuous
          Service through the applicable vesting dates, the Restricted Stock Units
          shall vest and no longer be subject to any restriction . . . as set forth below
          in the event both (i) one of the two performance goals approved by the
          Committee (the “Performance Goals”) and relating to EBITA or the
          Corporation’s stock price is achieved and (ii) the Expedia OIBA Target (as
          defined in Exhibit A) is achieved (collectively, the “Combined Goals”) . . .
          .25




24
     Id. ¶ 43.
25
     Defs.’ Opening Br. Ex. D §1(b) (emphasis added).

                                                10
                5.       The Vesting of RSU Award and Subsequent Amendment of Plan

         On August 2, 2012, Expedia entered into a new employment agreement with

Khosrowshahi.26 As part of this new employment agreement, Expedia’s management

recommended, and the Compensation Committee approved, the acceleration and vesting

of the RSU Award even though the OIBA Target,27 as amended in connection with the

TripAdvisor spin-off, had not been met.28

         In a 2013 proxy statement, quoted (in part) in the complaint, the Company stated

that the OIBA Target was a “business goal” and that the EBITA/stock price goals

included in the definition of the term “Performance Goals” in the RSU Award were

designed to satisfy the requirements of Section 162(m):

         [M]anagement recommended, and the Compensation Committees
         approved, accelerated vesting of 400,000 restricted stock units held by Mr.
         Khosrowshahi (the “Khosrowshahi Performance RSU Award”) that had
         been subject to the achievement of a business goal tied to the operating
         income before amortization (“OIBA”) of the Company, which had not at
         that time been achieved. In addition, the vesting of the Khosrowshahi
         Performance RSU Award was separately subject to the satisfaction of either
         of two goals tied to stock price performance or growth in EBITA, which
         had been achieved, and which were designed to satisfy the requirements of
         Section 162(m) of the Code.29



26
     Compl. ¶ 44.
27
  Although the OIBA target had been redefined in the 2011 amended agreement as the
“Expedia OIBA Target,” this opinion will refer to the “OIBA Target” for the sake of
simplicity.
28
  Id. ¶ 45 (quoting Expedia, Inc., Definitive Proxy Statement (Schedule 14A) 43 (Apr.
30, 2013) (“2013 Proxy”) (Defs.’ Opening Br. Ex. C at 43)).
29
     2013 Proxy at 43.

                                             11
          On February 28, 2013, the Board adopted various amendments to the Plan.30 In

particular, the Board removed the language from Sections 11(b) and 12(d) of the Plan

stating that the Compensation Committee could not amend a Qualified Performance-

Based Award in a way that would cause the award to cease to qualify for the 162(m)

Exemption.31 Focusing on these amendments, Friedman accuses the Expedia board of

“attempting to hide its misconduct after the fact by purging the violated terms from the

Plan.”32

          The complaint alleges that the Company “has been and will be damaged” by

defendants’ actions.33 It does not allege, however, that Expedia has ever lost the ability

to take a tax deduction concerning the RSU Award.

          C.     Procedural History

          On December 13, 2013, Friedman commenced this derivative action on behalf of

Expedia asserting two claims for relief. Count I asserts that defendants breached their

fiduciary duty of loyalty by accelerating the vesting of the RSU Award in violation of the

Plan because the OIBA Target had not been met and then engaging in efforts to conceal

their misconduct by amending the Plan.           In Count II, Friedman contends that




30
     Compl. ¶ 51.
31
     2013 Proxy at A-13 to A-14; Compl. ¶ 53.
32
     Compl. ¶ 54.
33
     Id. ¶ 79.

                                            12
Khosrowshahi was unjustly enriched when vesting of his RSU Award was accelerated in

violation of the Plan.

       On January 31, 2014, defendants moved to dismiss the complaint in its entirety for

failure to make a pre-suit demand upon the Expedia board of directors or to plead facts

excusing such a demand and for failure to state a claim upon which relief can be granted.

III.   LEGAL ANALYSIS

       For the reasons explained below, I conclude that demand was not excused and that

both claims in the complaint should be dismissed for failure to make a pre-suit demand

under Rule 23.1. To analyze this question, it is important to first consider the competing

interpretations of the RSU Award that have been presented because this issue underlies

the fiduciary duty and unjust enrichment claims that have been asserted.

       A.     The Parties’ Interpretations of the RSU Award

       Under Section 162(m), a publicly held corporation can take a tax deduction for

performance-based compensation in excess of $1 million paid to certain executives in a

taxable year if the compensation is contingent upon the achievement of one or more

performance goals as defined by the Internal Revenue Code.            Specifically, under

Subsection 162(m)(4)(C), “performance-based compensation” in excess of $1 million

paid to a “covered employee” shall be tax-deductible if the compensation is “payable

solely on account of the attainment of one or more performance goals” and if, among

other things, “the performance goals are determined by a compensation committee of the

board of directors of the taxpayer which is comprised solely of 2 or more outside



                                           13
directors.”34 To qualify as a performance goal under Section 162(m), the goal must be

selected from a list of pre-established, objective, stockholder-approved business criteria.35

         As noted above, Section 1(dd) of the Plan defines “Performance Goals” to mean

“the performance goals established by the Committee in connection with the grant of” a

stock-based award.36 This section further provides that “[i]n the case of Qualified-

Performance Based Awards that are intended to qualify under Section 162(m)(4),” a

Performance Goal must be based on the attainment of one or any combination of twenty-

four specified criteria.37 In this case, as explained above, the RSU Award conditioned the

vesting of the RSUs on the attainment of (1) one of two “Performance Goals” (a defined

term) and (2) the “OIBA Target” (a separately defined term), which together comprise

the “Combined Goals” (a third defined term).38

         The term “Performance Goals” is defined in the RSU Award to mean “one of two

performance goals approved by the Committee . . . relating to EBITA or the

Corporation’s stock price.”39 It is undisputed that both of these goals fall within the




34
     26 U.S.C. § 162(m)(4)(C)(i).
35
     26 C.F.R. § 1.162-27(e)(2)(i)-(ii).
36
     Plan § 1(dd).
37
     See supra note 12 (quoting Plan § 1(dd)).
38
     RSU Award § 1(b).
39
     Id.; Defs.’ Opening Br. Ex. D § 1(b).

                                                 14
twenty-four criteria listed in Section 1(dd) of the Plan from which the Compensation

Committee may seek to satisfy the performance goal requirement of Section 162(m)(4).40

         Defendants argue that “OIBA,” which means operating income before

amortization, is not among the list of twenty-four criteria listed in Section 1(dd) and thus

cannot serve as one of the performance goals that may be selected to satisfy the Section

162(m)(4) requirement.       However, the list of twenty-four criteria in Section 1(dd)

includes “operating income” and, under Section 1(dd), a goal intended to satisfy Section

162(m)(4) need only be “based on the attainment” of a specified level of “operating

income.”41 Thus, although the terms “OIBA” and “operating income” are not identical, I

assume for purposes of this decision that the Compensation Committee could have used

the OIBA Target to satisfy the performance goal requirement of Section 162(m)(4) if it

wished to do so.

         The critical question is whether the Compensation Committee, when it granted the

RSU Award, intended to use the OIBA Target as a performance goal to satisfy the

performance goal requirement of Section 162(m)(4) or whether the Compensation

Committee intended the OIBA Target to be a separate vesting condition of the Award.

This is critical because, as discussed above, Sections 11(b) and 12(d) of the Plan prohibit

the Compensation Committee from amending a Qualified Performance-Based Award “in


40
    Among the twenty-four criteria listed in Section 1(dd) are goals “based on the
attainment of … specified levels of … EBITA … and/or stock price.” Plan § 1(dd).
41
     Id. (emphasis added).



                                            15
any manner that would cause the Qualified Performance-Based Award to cease to qualify

for the Section 162(m) Exemption.”42 Thus, once a performance goal is established for

the purpose of satisfying Rule 162(m) when an award is granted, that goal may not be

waived. By contrast, Sections 2(a) and 12(d) permit the Compensation Committee to

modify or amend any other term or condition of an award.43 Thus, if the Compensation

Committee did not intend to use the OIBA Target as a performance goal to satisfy the

requirement of Section 162(m)(4), the Compensation Committee had the authority to

waive that condition of the RSU Award.

         To make the RSU Award qualify for an exemption under Section 162(m), it was

only necessary to establish one performance goal.44 Thus, Section 162(m) could have

been satisfied just through the selection of either the EBITA or stock price target

referenced in the Award. Moreover, the Compensation Committee could have imposed

other vesting goals or conditions on the RSU Award (even ones that fall within the list of

twenty-four criteria in Section 1(dd) of the Plan) without intending such goals or

conditions to be used to satisfy Section 162(m).45 Thus, the question remains whether the


42
     See supra note 14.
43
     See supra note 4.
44
   26 U.S.C. § 162(m)(4)(C) (“The term ‘applicable employee remuneration’ shall not
include any remuneration payable solely on account of the attainment of one or more
performance goals . . . .”) (emphasis added).
45
     Plaintiff’s counsel acknowledged as much at oral argument.

         THE COURT: Okay. So now my question to you is, what if they’d done
         that, and they say, okay, now we want to put some other conditions or other
         terms on a grant. Is there anything in the plan that prohibits them from
                                             16
Compensation Committee intended to select the OIBA Target as a performance goal for

purposes of Section 162(m) when it granted the RSU Award in addition to the EBITA

and stock price targets.

       Defendants argue that the plain terms of the RSU Award make clear that the

Compensation Committee did not select the OIBA Target as a performance goal to

satisfy Section 162(m) based on the fact that the RSU Award uses separately defined

terms to describe the “Performance Goals” (i.e., the EBITA and stock price targets) and

the “OIBA Target” (i.e., the operating income before amortization target). According to

defendants, the use of these separately defined terms, the first of which tracks the

language of Section 162(m), establishes that the EBITA and stock price targets were

intended to satisfy the performance goal requirement of Section 162(m) while the OIBA

Target was intended to be a separate, additional goal that the Compensation Committee

thus had the authority to waive. In my opinion, this is a reasonable construction of the

plain language of the RSU Award.

       This construction is consistent with disclosures contained in the Company’s 2013

proxy statement describing the Compensation Committee’s decision to waive the OIBA

Target in the RSU Award. In particular, those disclosures differentiate between the


       using some of the same metrics, or even derivations of the same metrics
       that are 1(dd), to independently set up other conditions or terms but not
       make them Performance Goals, capital P, capital G?

       MR. PURCELL: Your Honor, I don’t think there’s anything in the plan
       that prohibits that per se. I think they could do that.

Oral Argument Tr. at 31:21-32:8 (June 16, 2014).

                                          17
“business goal” of the OIBA Target and the EBITA/stock performance goals “which

were designed to satisfy the requirements of Section 162(m) of the Code:”

         [I]n light of Mr. Khosrowshahi’s performance and other considerations . . .
         management recommended, and the Compensation Committees approved,
         accelerated vesting of 400,000 restricted stock units held by Mr.
         Khosrowshahi (the “Khosrowshahi Performance RSU Award”) that had
         been subject to the achievement of a business goal tied to the operating
         income before amortization (“OIBA”) of the Company, which had not at
         that time been achieved. In addition, the vesting of the Khosrowshahi
         Performance RSU Award was separately subject to the satisfaction of either
         of two goals tied to stock price performance or growth in EBITA, which
         had been achieved, and which were designed to satisfy the requirements of
         Section 162(m) of the Code.46

         For her part, Friedman argues that the OIBA Target was intended to be a

performance goal to satisfy Section 162(m)(4) because this goal satisfies one of the

twenty-four criteria within Section 1(dd) of the Plan, which delineates the type of

performance goals that can be used to make an award qualify under Section 162(m)(4).

As discussed above, I assume for purposes of this opinion that OIBA satisfies one of

these twenty-four criteria. In further support of her construction, Friedman notes that the

Company referred to the EBITA/stock price goals and the OIBA Target, collectively, as

the “RSU Performance Goals” in a 2010 proxy statement discussing the RSU Award.47




46
   2013 Proxy at 43 (emphasis added). This section of the proxy statement was quoted, in
part, in the complaint. Compl. ¶ 45. Thus, I view the foregoing passage to be integral to
the complaint and appropriate to consider in its full context on a motion to dismiss. In re
New Valley Corp. Deriv. Litig., 2001 WL 50212, at *4 (Del. Ch. Jan. 11, 2001) (“The
Court may, however, ‘consider, for certain purposes, the content of documents that are
integral to or are incorporated by reference into the complaint.’”) (citation omitted).
47
     The 2010 proxy statement states, in relevant part, as follows:

                                               18
         Regarding the disclosure in the 2013 proxy statement quoted above, Friedman

argues that this disclosure was made after defendants had violated the Plan with the

intention of concealing their violation. Friedman notes that the same proxy statement

sought stockholder approval of certain changes to the Plan, including amendments to

Section 11(b) and 12(d) to eliminate the prohibition on the Committee’s ability to amend

a Qualified Performance-Based Award in a manner that would cause the award to cease

to qualify as tax-deductible performance-based compensation under Section 162(m).

According to Friedman, defendants attempted to slip these changes by the stockholders

by characterizing them as “administrative changes.”48

         In my opinion, Friedman’s interpretation cannot logically be squared with the use

of separately-defined terms in the RSU Award differentiating between the “Performance

Goals” and the “OIBA Target.” To my mind, moreover, the disclosure in the 2010 proxy

statement characterizing the “OIBA Target” as one of the “RSU Performance Goals,”



         2006 RSU Award. On March 7, 2006, the Compensation Committee
         approved certain compensation arrangements with Mr. Khosrowshahi,
         including the grant of 800,000 RSUs pursuant to the Expedia 2005 Plan
         (the “2006 RSU Award”). As of December 31, 2009, all 800,000 of these
         RSUs remained unvested. Of these RSUs, 75% will vest . . . upon
         Expedia’s (i) achievement of OIBA of $1.0 billion for a full fiscal year,
         adjusted as described below (the “OIBA Target”), and (ii) satisfaction of
         certain other performance goals, which goals have subsequently been
         satisfied, tied to the Company’s stock price performance or growth in
         EBITA (collectively with the OIBA Target, the “RSU Performance
         Goals”).

Expedia, Inc., Definitive Proxy Statement (Schedule 14A) 42 (Apr. 27, 2010).
48
     Compl. ¶¶ 51-58.

                                            19
which was not referenced in the complaint,49 appears to be a simple mischaracterization

of the plain terms of the original RSU Award. Notably, that disclosure predated the

amendment to the RSU Award in 2011, which reiterated the distinction between the

defined terms “Performance Goals” and “OIBA Target” as those terms were used in 2006

in the original RSU Award.

         Whether or not one views Friedman’s construction of the RSU Award to be

reasonable, at most it shows there may be an ambiguity concerning whether the OIBA

Target was intended to satisfy Section 162(m) when the RSU Award was granted. In that

regard, another provision of the Plan is salient.

         Under Section 2(a)(vii), the Compensation Committee has the authority “to

interpret the terms and provisions of the Plan and any Award issued under the Plan (and

any agreement relating thereto).”50 This provision dovetails with Section 13 of the RSU

Award, which states that “[i]n the event of any ambiguity in this Agreement, or any

matters to which this Agreement is silent, the Plan shall govern.”51 Thus, assuming

arguendo that Section 1(b) of the RSU Award was ambiguous concerning whether the

OIBA Target originally was intended as a vesting condition to satisfy the requirements of

49
   Friedman first referred to the disclosure in the 2010 proxy statement in her answering
brief. Although it is not referenced in the complaint, I take judicial notice of it because
its text cannot reasonably be disputed. See Narrowstep, Inc. v. Onstream Media Corp.,
2010 WL 5422405, at *5 (Del. Ch. Dec. 22, 2010) (“For example, a court may take
judicial notice of the contents of an SEC filing, but only to the extent that the facts
contained in them are not subject to reasonable dispute.”).
50
     Plan § 2(a)(vii) (emphasis added).
51
     RSU Award § 13.

                                             20
Section 162(m) or whether it was merely intended to impose a separate vesting condition,

the Compensation Committee had the authority to interpret Section 1(b) to resolve that

ambiguity.      The disclosures in the 2013 proxy statement, quoted above, which

differentiate between the “business goal” tied to OIBA, on the one hand, and the

EBITA/stock price targets that “were designed to satisfy the requirements of Section

162(m) of the Code,” on the other hand, leave no doubt how the Compensation

Committee would resolve that ambiguity.

         Friedman makes two arguments in the alternative assuming the OIBA Target was

not a pre-established performance goal for purposes of Section 162(m). First, Friedman

argues that the OIBA Target was at least a “material term” of the RSU Award and that

Section 162(m)(4)(C)(iii) of the Internal Revenue Code would prohibit payment to

Khosrowshahi until all material terms of the RSU Award had been satisfied. Second, she

argues that if the OIBA Target was an “other condition” as that term is used in Section

11(b) of the Plan, the decision to accelerate the vesting of the RSU Award violated

Section 11(b)(i) of the Plan, which requires the satisfaction of any “other condition”

before an award may become payable.52

         Both of these arguments are unavailing for the same reason. They ignore the fact

that the Compensation Committee waived the OIBA Target. As a result, the OIBA

Target had been eliminated and was neither a “material term” nor an “other condition” of

the RSU Award when it became payable.


52
     Pl.’s Answering Br. 20-21.

                                            21
           With the foregoing discussion of the parties’ interpretations of the RSU Award in

mind, I turn now to the application of the Aronson test.

           B.       The Failure to Make a Demand Was Not Excused.

           Court of Chancery Rule 23.1 and Delaware law require that a stockholder

initiating a derivative action plead “with particularity” either that demand was made on

the corporation to initiate suit on its own, or that such demand “would have been

futile.”53 Having failed to make a pre-suit demand on Expedia’s board, plaintiff must

establish demand futility.

           Under Delaware law, there are two tests for determining whether demand is futile.

The parties agree that the two-prong test articulated in Aronson v. Lewis applies in this

case.54         Under Aronson, where a decision of a corporation’s board of directors is

challenged, demand may be excused if particularized facts have been alleged to create a

reasonable doubt either that “(1) the directors are disinterested and independent [or] (2)

the challenged transaction was otherwise the product of a valid exercise of business

judgment.”55 Absent such facts, the court will presume “that in making a business

decision the directors of a corporation acted on an informed basis, in good faith and in the

honest belief that the action taken was in the best interests of the company.”56



53
     Wood v. Baum, 953 A.2d 136, 140 (Del. 2008).
54
     Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984).
55
     Id.
56
     Id. at 812.

                                              22
       Here, Friedman asserts that demand would be futile under either prong of

Aronson. I disagree for the reasons stated below.

              1.     Demand is Not Excused Under the First Prong of Aronson

       When this action was filed, the Expedia board had ten members, consisting of

defendants Khosrowshahi, Diller, Kaufman, Battle, Dolgen, Jacobson, Kern, Malone,

Tazon and non-party Coe.       Thus, to prevail under the first prong of Aronson, the

particularized facts of the complaint must create a reasonable inference that at least five

of these individuals would be incapable of considering a demand because they are either

interested or lack independence.57

       Friedman does not challenge the independence or disinterestedness of directors

Battle, Jacobson or Tazon. For purposes of my analysis, I assume Khosrowshahi had a

material financial interest in the challenged transaction because he received a significant

payment as a result of the Compensation Committee’s decision to waive the OIBA Target

and accelerate the vesting of the RSU Award.           Therefore, Friedman must plead

particularized facts from which the Court can infer that at least four of the remaining six

directors are interested or lacks independence. Plaintiff has failed to make this showing.




57
   In re The Limited, Inc. S’holders Litig., 2002 WL 537692, at *7 (Del. Ch. Mar. 27,
2002) (“[W]here the challenged actions are those of a board consisting of an even number
of directors, plaintiffs meet their burden of demonstrating the futility of making demand
on the board by showing that half of the board was either interested or not
independent.”).

                                            23
                       a.      Defendants Dolgen and Kern

         Friedman argues that directors Dolgen and Kern, as members of the Compensation

Committee that approved accelerating the vesting of the RSU Award, are interested

because they face a substantial likelihood of liability.           The standard for pleading a

substantial likelihood of liability is difficult to meet.58 Under Aronson, “the mere threat

of personal liability for approving a questioned transaction, standing alone, is insufficient

to challenge . . . the disinterestedness of directors.”59 “Rather, the plaintiff must plead

facts sufficient to show that approval of the transaction was ‘so egregious on its face that

. . . a substantial likelihood of director liability exists.’”60

         Friedman relies on this Court’s decisions in Conrad v. Blank61 and Ryan v.

Gifford62 for the proposition that “allegations that a director approved compensation in

violation of a stockholder-approved plan establishes a substantial likelihood of liability

with respect to that director.”63 In both Conrad and Ryan, however, the Court found that

the allegations were sufficient to excuse demand because they raised an inference that




58
     In re INFOUSA, Inc. S’holders Litig., 953 A.2d 963, 990 (Del. Ch. 2007).
59
     Aronson, 473 A.2d at 815.
60
  MCG Capital Corp. v. Maginn, 2010 WL 1782271, at *18 (Del. Ch. May 5, 2010)
(quoting Aronson, 473 A.2d at 815).
61
     Conrad v. Blank, 940 A.2d 28 (Del. Ch. 2007).
62
     Ryan v. Gifford, 918 A.2d 341 (Del. Ch. 2007).
63
     Pl.’s Answering Br. 34.

                                                 24
members of the committee acted knowingly in violating a stockholder-approved plan.64

Plaintiff’s allegations do not support such an inference in this case.

       To the contrary, for the reasons discussed above, I am of the opinion that the

members of the Compensation Committee were permitted to waive the OIBA Target in

accordance with the terms of the Plan based on a reasonable construction of the terms of

the RSU Award. At most, Section 1(b) of the RSU Award was ambiguous, which would

negate any inference of a “knowing” violation of the Plan, particularly since the

Compensation Committee was authorized under the Plan to interpret the terms of an

award in the case of ambiguity.         Therefore, I conclude that the members of the

Compensation Committee do not face a substantial likelihood of liability and that

Friedman has failed to allege particularized facts creating a reasonable doubt concerning

disinterestedness or independence of directors Dolgen or Kern.

                     b.     Defendants Malone and Coe

       Friedman argues that directors Malone and Coe will not be able to consider

impartially a demand to institute an action against Fitzgerald, who left the Expedia board

before this action was filed, based on their “long-standing relationship” with him and

64
   Conrad, 940 A.2d at 40 (“Suffice it to say that . . . the court concludes that the
allegations of the complaint are sufficient to excuse demand on the members of the
compensation committee, since they raise . . . a reasonable inference that the
compensation committee members acted knowingly in awarding options priced at dates
other than the actual dates of the grant.”) (emphasis added); Ryan v. Gifford, 918 A.2d
341, 355 n.35 (Del. Ch. 2007) (“Defendants also object that plaintiff’s allegations are not
particularized for purposes of Rule 23.1 because they do not directly allege knowledge on
behalf of the directors. Yet, it is difficult to understand how a plaintiff can allege that
directors backdated options without simultaneously alleging that such directors knew that
the options were being backdated.”).

                                             25
because Fitzgerald faces a substantial likelihood of liability as a member of the

Compensation Committee that approved the waiver of the OIBA Target.65

          Regarding Malone, the complaint alleges that Fitzgerald held various positions at

Tele-Communications, Inc. from 1996 to 2000 when Malone was either the Chief

Executive Officer or Chairman of the Board, and that Fitzgerald was a Senior Vice

President at Liberty from 2000 to 2011, which was controlled by Malone, and at Starz

from 2011 to 2012, where Malone served as Chairman of the Board.66 The complaint

also alleges that Fitzgerald and Malone served as directors together on the Expedia board

from 2006 to 2012 and on the Ascent Capital Group board from 2010 to 2012.67

          Regarding Coe, the complaint alleges she provided legal services to Liberty on a

consulting basis for at least three years and later served as Liberty’s Deputy General

Counsel while Fitzgerald was a Senior Vice President of Liberty, and that she, like

Fitzgerald, joined Expedia’s board as a nominee of Liberty.68

          I conclude that Friedman has failed to allege particularized facts creating a

reasonable doubt concerning the disinterestedness or independence of either Malone or

Coe for two inter-related reasons. First, for the reasons discussed above regarding the

other members of the Compensation Committee, Friedman has failed to allege

65
     Compl. ¶ 70.
66
     Id. ¶¶ 70-72.
67
     Id. ¶¶ 72-73.
68
     Id. ¶ 74.



                                             26
particularized facts establishing that Fitzgerald faces a substantial likelihood of liability

for approving the waiver of the OIBA Target as a member of the Compensation

Committee. Second, as this Court has held, the “naked assertion of a previous business

relationship is not enough to overcome the presumption of a director’s independence.”69

The allegations of the complaint are of this ilk. The allegations concerning the business

relationship between Coe and Fitzgerald merely show that their paths crossed at Liberty.

Although Malone’s alleged business relationship with Fitzgerald is more extensive, it is

difficult to fathom how Fitzgerald reasonably could be said to have any leverage over

Malone who is alleged to be “one of the richest men in the world” and to have been in

superior positions to Fitzgerald at TCI, Liberty and Starz.70


                                         *****

         For the foregoing reasons, I conclude that Friedman has failed to allege

particularized facts to create a reasonable doubt concerning the disinterestedness or

independence of at least seven (Battle, Jacobson, Tazon, Dolgen, Kern, Malone and Coe)




69
   Orman v. Cullman, 794 A.2d 5, 27 (Del. Ch. 2002); see also In re MFW S’holders
Litig., 67 A.3d 496, 509 (Del. Ch. 2013) (“Our law is clear that mere allegations that
directors are friendly with, travel in the same social circles, or have past business
relationships with the proponent of a transaction or the person they are investigating, are
not enough to rebut the presumption of independence.”).
70
     Compl. ¶¶ 70-73.



                                             27
of the ten members of Expedia’s board when this action was filed.71 Thus Friedman has

failed to carry her burden to establish demand futility under the first prong of Aronson.

                2.     Demand is Not Excused Under the Second Prong of Aronson

         Plaintiff has a “heavy burden” to establish that the second prong of Aronson has

been satisfied.72 To do so, she “must plead particularized facts sufficient to raise (1) a

reason to doubt that the action was taken honestly and in good faith or (2) a reason to

doubt that the board was adequately informed in making the decision.”73

         Friedman does not allege that the Expedia board was inadequately informed, but

instead contends that accelerating the vesting of the RSU Award was a clear violation of

the Plan that could not have been a valid exercise of business judgment.74 In support of

this argument, Friedman relies on a line of cases emanating from this Court’s decision in

Sanders v. Wang,75 where, according to Friedman, the “Court held that a board’s

violation of an unambiguous provision of such a plan ipso facto establishes demand

futility under the second prong of Aronson.”76



71
   Having considered the allegations pertaining to these seven directors, I need not
analyze the allegations concerning directors Diller or Kaufman and reach no conclusions
concerning their disinterestedness or independence.
72
     White v. Panic, 783 A.2d 543, 551 (Del. 2001).
73
     In re Walt Disney Co. Deriv. Litig., 825 A.2d 275, 286 (Del. Ch. 2003).
74
     Pl.’s Answering Br. 23-29.
75
     Sanders v. Wang, 1999 WL 1044880 (Del. Ch. Nov. 10, 1999).
76
     Pl.’s Answering Br. 23.

                                              28
          In Sanders, plaintiffs alleged that the members of the board of directors of

Computer Associates International, Inc. breached their fiduciary duties of loyalty and

care by awarding certain executives millions of shares more than the board was

authorized to award under the company’s 1995 Key Employee Stock Ownership Plan

(KESOP).77 Applying the second prong of Aronson, the Court found “that the facts

alleged raise[d] a reasonable doubt that the share transaction resulted from a valid

exercise of business judgment” and that demand was excused because “plaintiffs have

sufficiently alleged facts which, taken as true, show that the CA board violated an express

KESOP provision.”78

          Friedman cites three other cases decided after Sanders in which this Court

similarly found demand to be excused under the second prong of Aronson where the

board allegedly had violated a compensation plan.79 In each of these cases, the Court

determined that demand was excused because plaintiff had sufficiently alleged a clear or

intentional violation of a compensation plan.80

77
     Sanders, 1999 WL 1044880, at *2.
78
     Id. at *5.
79
  Cal. Pub. Emps.’ Ret. Sys. v. Coulter, 2002 WL 31888343 (Del. Ch. Dec. 18, 2002);
Weiss v. Swanson, 948 A.2d 433 (Del. Ch. 2008); Pfeiffer v. Leedle, 2013 WL 5988416
(Del. Ch. Nov. 8, 2013).
80
   Coulter, 2002 WL 31888343, at *11 (“Thus, plaintiff alleges with particularity that
repricing of directors’ options in 1997 and 1999 was ultra vires.”); Weiss, 948 A.2d at
447 (“[T]he allegations support an inference that the Director Defendants did not disclose
the practices challenged in this case, and therefore the complaint must be read as giving
rise to a reasonable inference that the directors intended to circumvent the restrictions of
the plans.”); Pfeiffer, 2013 WL 5988416, at *8 (“Pfeiffer has pled facts sufficient to
support a reasonable inference that the Board clearly violated the unambiguous Stock
                                            29
       In contrast to Sanders and its progeny, Friedman has not alleged with particularity

a clear or intentional violation of a compensation plan in this case. To the contrary, for

the reasons explained above, it is my opinion that the Compensation Committee was

authorized under the Plan to waive the OIBA Target because, based on a reasonable

construction of the RSU Award, the OIBA Target was not intended to satisfy the

performance goal requirement of Section 162(m). At most, Friedman’s interpretation of

the RSU Award raises a potential ambiguity that the Compensation Committee was

entitled to interpret and resolve under the Plan. Thus, demand is not excused under the

second prong of Aronson because Friedman has failed to allege particularized facts to

support an inference of bad faith on the part of any of the defendant directors sufficient to

raise a reasonable doubt that the decision to waive the OIBA Target was anything other

than the product of a valid business judgment.81

       Friedman argues, alternatively, that demand is excused under the second prong of

Aronson because defendants adopted and asked the stockholders to approve an



Option limitations prescribed in Section 4 in each of those years. Therefore, based on the
logic of Sanders, demand is excused under the second prong of the Aronson test.”).
81
   This case more closely resembles three recent decisions of the United States District
Court of the District of Delaware. See Abrams v. Wainscott, 2012 WL 3614638, at *3
(D. Del. Aug. 21, 2012) (demand not excused under Aronson’s second prong because
plaintiff’s allegations did not support an inference that the compensation plan was
knowingly or intentionally violated); Freedman v. Redstone, 2013 WL 3753426, at *9
(D. Del. July 16, 2013) (“Plaintiff at bar has not alleged that the Committee made a
knowing and intentional decision to violate the terms of the 2007 Plan.”); Freedman v.
Mulva, 2014 WL 975308, at *4 (D. Del. Mar. 12, 2014) (“Freedman has not alleged that
the Directors made a knowing and intentional decision to violate the terms of the 2011
Plan.”).

                                             30
amendment to Sections 11(b) and 12(d) of the Plan in 2013 to remove the prohibition on

amending a Qualified Performance-Based Award in a way that would cause the award to

cease to qualify for an exemption under 162(m). According to Friedman, “[d]efendants

sought to hide the violation from Expedia’s shareholders and thereby breached their duty

of loyalty.”82 The defect in this argument is that Friedman has failed to allege a clear or

knowing violation of the Plan in the first place for the reasons discussed above and, thus,

there is no basis to infer a breach of the duty of loyalty in effectuating the amendment to

Sections 11(b) and 12(d) of the Plan as part of some alleged “cover-up.”             Thus,

Friedman’s alternative theory also fails to establish demand futility under the second

prong of Aronson.

         C.     Unjust Enrichment

         In Count II, Friedman alleges that Khosrowshahi was unjustly enriched when he

“received unauthorized personal financial benefits by accepting the improperly vested

RSU Award in violation of the Plan’s express terms.”83 This claim is derivative of the

fiduciary duty claim discussed above. Applying the same logic, Friedman has failed to

allege particularized facts creating a reasonable doubt concerning the capacity of the

Expedia board to consider impartially a demand to pursue the unjust enrichment claim

under either prong of Aronson.




82
     Pl.’s Answering Br. 29.
83
     Compl. ¶ 82.

                                            31
IV.   CONCLUSION

      For the foregoing reasons, defendants’ motion to dismiss both claims in the

complaint under Court of Chancery Rule 23.1 for failure to adequately plead demand

futility is GRANTED. The complaint is dismissed in its entirety with prejudice.

      IT IS SO ORDERED.




                                           32
