       IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

CAMBRIDGE RETIREMENT SYSTEM,                   )
derivatively on behalf of Unilife Corporation, )
                                               )
                          Plaintiff,           )
            v.                                 )   C.A. No. 9178-CB
                                               )
SLAVKO JAMES JOSEPH BOSNJAK,                   )
JEFF CARTER, JOHN LUND, WILLIAM                )
GALLE, MARY KATHERINE WOLD,                    )
MARC FIRESTONE, and ALAN                       )
SHORTALL,                                      )
                                               )
                         Defendants,           )
                                               )
       and                                     )
                                               )
UNILIFE CORPORATION,                           )
                                               )
                         Nominal Defendant. )




                            MEMORANDUM OPINION

                             Date Submitted: June 9, 2014
                             Date Decided: June 26, 2014

Christine S. Azar and Ned Weinberger of Labaton Sucharow LLP, Wilmington,
Delaware; Christopher J. Keller, Eric J. Belfi and Michael W. Stocker of Labaton
Sucharow, New York, New York, Attorneys for Plaintiff.

M. Duncan Grant and James G. McMillan, III of Pepper Hamilton LLP, Wilmington,
Delaware; Jay A. Dubow of Pepper Hamilton, Philadelphia, Pennsylvania, Attorneys for
Defendants.

BOUCHARD, C.
I.     INTRODUCTION

       This action involves derivative claims for breach of fiduciary duty (Count I) and

corporate waste (Count II) concerning compensation paid to the non-executive directors

of Unilife Corporation (“Unilife” or the “Company”) since November 2010.                 The

challenged compensation consists of two components: (1) equity awards the Unilife

directors granted to themselves subject to obtaining stockholder approval for those

awards and (2) cash compensation the directors paid to themselves without obtaining

stockholder approval.

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

upon the Unilife board of directors or to plead facts that excuse such a demand and, as to

certain claims, for failure to state a claim upon which relief may be granted. For the

reasons set forth below, I conclude that demand is excused under the first prong of

Aronson because the claims involve self-dealing transactions implicating a majority of

the members of Unilife’s board of directors at the time suit was filed. I also conclude that

the fiduciary duty claim should be dismissed for failure to state a claim for relief insofar

as it relates to the outside directors’ equity awards because each of those awards was

specifically approved by Unilife’s stockholders and that the corporate waste claim fails to

satisfy the stringent standard for stating such a claim. Defendants did not seek to dismiss

the fiduciary duty claim for failure to state a claim for relief insofar as that claim relates

to cash compensation paid to the directors for their services as directors. Thus, that claim

survives.




                                              1
II.     BACKGROUND1

        A.    The Parties

        Unilife is a manufacturer and supplier of injectable drug delivery systems,

including retractable syringes. In 2002, the Company was founded in Sydney, Australia.

In 2008, Unilife moved its operations to York, Pennsylvania.            In 2010, Unilife

redomiciled from Australia to the State of Delaware and became listed on the NASDAQ

Global Market.

        Since its formation in 2002, Unilife has failed to turn a profit or to generate

significant revenues. During its last three fiscal years,2 Unilife’s revenues declined from

$6.7 million in fiscal year 2011, to $5.5 million in fiscal year 2012, to $2.7 million in

fiscal year 2013. During this same period, the Company incurred losses of $40.7 million

in fiscal year 2011, $52.3 million in fiscal year 2012 and $63.2 million in fiscal year

2013.




1
  Unless otherwise noted, the facts recited in this Memorandum Opinion are based on the
allegations in plaintiff’s complaint, documents integral to or incorporated in the
complaint, or facts of which the Court may take judicial notice. Plaintiff acknowledges
that the Company’s 2010 to 2013 proxy statements are incorporated by reference into its
complaint. Pl.’s Answering Br. 7.
2
  Unilife’s fiscal year runs from July 1 to June 30. For example, its fiscal year 2011
ended on June 30, 2011.


                                            2
       Plaintiff Cambridge Retirement System is a Massachusetts-based retirement

system. It has held Unilife common stock continuously since November 2010, and

challenges the compensation paid to Unilife’s outside directors during this period.3

       From November 2010 until November 2012, Unilife’s board of directors had

seven members, consisting of its Chairman and Chief Executive Officer, Alan Shortall,

and six outside directors: Slavko James Joseph Bosnjak, Jeff Carter, John Lund, William

Galle, Mary Katherine Wold and Marc Firestone. Firestone left the board in November

2012. As of the date the complaint in this action was filed on December 20, 2013, the

board consisted of six directors: Shortall, Bosnjak, Carter, Lund, Galle and Wold.

       B.     Non-Management Director Compensation

       During the period at issue, Unilife compensated its outside directors through a

combination of equity awards and cash compensation. Significant to the pending motion,

the Unilife board conditioned its grant of each of the challenged equity awards on

obtaining stockholder approval, which the stockholders provided.

       On January 8, 2010, in connection with Unilife’s redomiciliation from Australia to

the State of Delaware, the Company’s stockholders approved the adoption of its 2009

Stock Incentive Plan (the “2009 Plan”).4 Thereafter, on two separate occasions, the



3
  In the face of a challenge to its standing to assert claims concerning compensation paid
to the outside directors before November 2010, Cambridge explicitly disclaimed any
intention to seek repayment of such compensation. Pl’s Answering Br. 7, n.7.
4
 Defs.’ Opening Br. Ex. F at 24, 38, 49 (Unilife Corp., Amended Registration Statement
(Form 10) (Feb. 11, 2010)).


                                             3
stockholders approved specific equity awards that the directors had granted themselves

under the 2009 Plan conditioned on the receipt of stockholder approval.

      At a stockholders’ meeting held on December 1, 2010, Unilife’s stockholders

approved grants of options to directors Wold and Firestone to purchase 100,000 shares of

common stock each under the 2009 Plan.5         These grants were the subject of two

proposals (Proposals No. 3-4) for stockholder approval described in a proxy statement

dated October 18, 2010.

      Proposal No. 3 explained that the 100,000 options for Wold would have an

exercise price of $6.83 per share based on the closing price of the Company’s shares on

May 11, 2010 (the date the Unilife board approved the grant), would be exercisable for

five years and would vest as follows: 16,667 options would vest within three business

days of the Company obtaining stockholder approval, 25,000 shares would vest on the 12

month anniversary and 24 month anniversary of the date of grant and 33,333 shares

would vest on the 36 month anniversary of the date of grant. Proposal No. 4 provided the

same information concerning the 100,000 options for Firestone except that they would

have an exercise price of $6.19 per share based on the closing price of the Company’s

shares on July 27, 2010, the date the Unilife board approved the grant.6 The proxy

statement also disclosed that the common stock underlying the options for Wold and


5
 Defs.’ Opening Br. Ex. B at 39-40 (Unilife Corp., Definitive Proxy Statement (Form
14A) (Oct. 14, 2011)).
6
 Defs.’ Opening Br. Ex. A at 15-16 (Unilife Corp., Definitive Proxy Statement (Form
14A) (Oct. 18, 2010)).


                                           4
Firestone have a “market value” of $683,000 and $619,000, respectively, based on the

closing price of the Company’s common stock on the date Unilife’s board approved each

grant.

         At a stockholders’ meeting held on December 1, 2011, Unilife’s stockholders

approved grants of 45,000 stock-based awards each to directors Bosnjak, Carter, Galle,

Lund, Wold and Firestone under the 2009 Plan.7 These grants were the subject of six

proposals (Proposals No. 5-10) for stockholder approval described in a proxy statement

dated October 14, 2011. Proposals No. 5-10 explained that each non-executive director

would receive 15,000 securities (either in the form of shares of common stock or

phantom stock units) in each of 2011, 2012 and 2013 (assuming the director remained in

service on the grant date).8 The proxy statement also disclosed that the 45,000 securities

to be granted to each of the non-executive directors have a “market value” of $189,000

based on the closing price of the Company’s common stock on September 30, 2011, the

date on which the board approved the grant.

         In addition to receiving the foregoing equity awards, the outside directors each

received cash compensation during the relevant period consisting of a mix of retainer and

meeting fees. The fee structure for the outside directors was disclosed in Unilife’s




7
 Defs.’ Opening Br. Ex. C at 11(Unilife Corp., Definitive Proxy Statement (Form 14A)
(Oct. 16, 2012)).
8
  Defs.’ Opening Br. Ex. B at 37-40 (Unilife Corp., Definitive Proxy Statement (Form
14A) (Oct. 14, 2011)). This proxy statement also included a proposal (Proposal No. 12)
to amend the 2009 Plan. See id. at 44-52.


                                              5
October 18, 2010 proxy statement,9 but stockholder approval of that fee structure was not

sought. Some directors also received other forms of cash compensation. When all of the

cash amounts are combined with the value of the equity awards, the outside directors

received a total of $1,356,040 in fiscal year 2012, or approximately 25% of the

Company’s revenues that year, and a total of $668,240 in fiscal year 2013, or

approximately 24% of the Company’s revenues that year.10

         According to the complaint, these amounts not only constitute an extraordinary

percentage of the Company’s revenues, but are excessive when compared to other

companies in Unilife’s sector. In particular, Cambridge alleges that, of eleven healthcare

companies with market capitalizations between $41 million and $718 million, nine paid

their directors, on average, less than $100,000 each in 2012 and eight paid their directors

less than $70,000 each.      By contrast, Unilife, which has had an average market

capitalization of $287.9 million over the past five years, paid its outside directors average

compensation of $226,007 in fiscal year 2012.11




9
  Defs.’ Opening Br. Ex. A at 11-12 (Unilife Corp., Definitive Proxy Statement (Form
14A) (Oct. 18, 2010)). In its proxy statement dated October 7, 2013, Unilife disclosed a
new fee structure for compensating its outside directors that increased the annual
retainers and eliminated the per meeting fees. Defs.’ Opening Br. Ex. D at 11-12 (Unilife
Corp., Definitive Proxy Statement (Form 14A) (Oct. 7, 2013)).
10
     Compl. ¶ 23.
11
     Compl. ¶ 24.


                                             6
         C.     Procedural History

         On December 20, 2013, Cambridge filed this derivative action on behalf of

Unilife. The complaint asserts two claims against the director defendants, the first for

breach of fiduciary duty and the second for waste of corporate assets. The defendants

moved to dismiss both claims for failure to make demand under Court of Chancery Rule

23.1. They also moved to dismiss for failure to state a claim upon which relief can be

granted under Rule 12(b)(6) parts of the first claim and the second claim in its entirety.

III.     ANALYSIS

         I first turn to the question whether the complaint alleges facts excusing demand

before turning to whether the claims alleged in the complaint state a claim for relief.

         A.     The Failure to Make a Demand

         Where a decision of a corporation’s board of directors is challenged, demand may

be excused under either prong of the familiar two-prong Aronson test if particularized

facts have been alleged to create a reasonable doubt that “(1) the directors are

disinterested and independent [or] (2) the challenged transaction was otherwise the

product of a valid exercise of business judgment.”12 Plaintiff alleges that demand is

excused here under the first prong of Aronson because five of the six members of the

Unilife board at the time this action was filed are personally interested in their own

compensation for their service as directors, which is the subject of the claims in this

litigation. I agree and conclude that demand is excused for this reason.


12
     Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984).


                                             7
          This conclusion is squarely supported by Chancellor Allen’s decision in Steiner v.

Meyerson.13 There, confronted with a similar challenge to outside director compensation,

Chancellor Allen found the first prong of Aronson to be satisfied in a straightforward, one

sentence analysis: “As the outside directors comprise a majority of the Telxon board and

are personally interested in their compensation levels, demand upon them to challenge or

decrease their own compensation is excused.”14

          Defendants attempt to distinguish Steiner on the theory that the loyalty of the

outside directors “was otherwise impugned” by virtue of their involvement in other

transactions with Telxon’s then chief executive officer, Robert Meyerson, which were the

subject of other claims in the case.15 This argument is inconsistent with the principle,

cited in defendants’ brief, that demand futility analysis is conducted on a claim-by-claim

basis.16 Indeed, there is no indication in Chancellor Allen’s Rule 23.1 analysis in Steiner,

quoted above, that he considered anything other than the outside directors’ personal



13
     Steiner v. Meyerson, 1995 WL 441999 (Del. Ch. July 19, 1995).
14
     Id. at *11.
15
   Defs.’ Opening Br. 29. Defendants similarly try to distinguish Seinfeld v. Slager, 2012
WL 2501105 (Del. Ch. June 29, 2012), which included claims challenging compensation
paid to certain executives and a claim challenging the payment of stock awards to the
outside directors, who made up a majority of the board. Tellingly, the defendants in
Seinfeld moved to dismiss the executive compensation claims under Rule 23.1 but did not
try to do so with respect to the outside director compensation claim. Id. at *1.
16
   Defs.’ Opening Br. 48. See Beam ex rel. Martha Stewart Living Omnimedia, Inc. v.
Stewart, 833 A.2d 961, 977 n.48 (Del. Ch. 2003) aff'd, 845 A.2d 1040 (Del. 2004) (citing
Yaw v. Talley, 1994 WL 89019, at *9 (Del. Ch. Mar. 2, 1994); Needham v. Cruver, 1993
WL 179336, at *3 (Del. Ch. May 12, 1993)).


                                              8
financial interest in their own compensation when deciding that demand was excused as

to the claim challenging that compensation.17

         Defendants press two other arguments in an effort to avoid the straightforward

application of the first prong of Aronson to this case. First, defendants argue that a

director’s interest in his own compensation should not be considered “disabling” under

Aronson unless it is alleged that the compensation is material to the particular director in

question.18 Defendants have not identified any authority applying a materiality standard

to a self-dealing transaction and I decline to do so.19 Substantial precedent supports the

opposite conclusion: where self-dealing is present, a plaintiff need not plead that a

director’s interest in a challenged transaction is material to him to establish that the

director has a disabling interest.


17
   In 2000, Chancellor Allen’s successor granted defendants’ motion for summary
judgment on the outside director compensation claim. Merchants’ Nat. Properties, Inc.
v. Meyerson, 2000 WL 1041229 (Del. Ch. July 24, 2000). On appeal, the Delaware
Supreme Court reversed and remanded noting, among other things, that “the trial court
did not consider the interplay between the Directors’ compensation and the possible
breach of fiduciary duties.” Telxon Corp. v. Meyerson, 802 A.2d 257, 266 (Del. 2002).
This comment was directed to the analysis the trial court conducted when granting
summary judgment in 2000, and did not concern Chancellor Allen’s analysis at the
motion to dismiss stage under Rule 23.1, which was not appealed.
18
     Defs.’ Opening Br. 29.
19
   See, e.g., Def.’s Opening Br. 29-32, citing Grobow v. Perot, 539 A.2d 180, 185 (Del.
1988) (receipt of director’s fees alone, without more, did not render outside directors
interested in a share repurchase from a major stockholder); In re Walt Disney Co. Deriv.
Litig., 731 A.2d 342, 359 (Del. Ch. 1998) (outside director whose “salary as a teacher is
low compared to her directors’ fees” not beholden to Disney’s chief executive officer
regarding challenge to another executive’s severance package); Orman v Cullman, 794
A.2d 5, 27 (Del. Ch. 2002) (outside director’s interest in serving as a director of a
surviving corporation did not render him interested in a merger transaction).


                                             9
         In articulating the two-prong test for determining whether demand is excused, the

Supreme Court in Aronson defined “interest” to mean “that directors can neither appear

on both sides of a transaction nor expect to derive any personal financial benefit from it

in the sense of self-dealing.”20 In Cinerama, Inc. v. Technicolor, Inc., the Supreme Court

described self-dealing to exist when “a director deals directly with the corporation, or has

a stake in or is an officer or director of a firm that deals with the corporation.”21 The

Supreme Court further explained that “[t]raditionally, the term ‘self-dealing’ describes

the ‘situation when a [corporate fiduciary] is on both sides of a transaction . . . .’”22 The

transactions at issue here, the Unilife directors’ payment of compensation to themselves,

are classic forms of self-dealing.

         In Cede & Co. v. Technicolor, Inc. (“Cede II”), the Supreme Court held that a

personal financial benefit must be “material” to a director to qualify as a disabling

interest, but in doing so, the Court distinguished self-dealing transactions.23 Specifically,

in Cede II, the Supreme Court affirmed Chancellor Allen’s holding that “[a]bsent

evidence of self-dealing, . . . evidence of any personal or special benefit accruing to a

director . . . in an otherwise arms-length transaction does not establish a lack of

independence sufficient to rebut the business judgment rule unless the director’s self-

20
     Aronson, 473 A.2d at 812.
21
   Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1169 (Del. 1995) (subsequent
history omitted) (citing 8 Del. C. § 144(a)).
22
     Id. (quoting Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971)).
23
  Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 362-63 (Del. 1993) (subsequent history
omitted).


                                              10
interest is also found to be ‘material.’”24 In so ruling, the Court noted the Chancellor’s

conclusion that a “plaintiff’s burden of proof of a director’s self-interest in an arms-

length third-party transaction should be greater than in a classic self-dealing transaction

where a director or directors stand on both sides of a transaction.”25

           The lack of a materiality standard for self-dealing transactions at common law is

consistent with § 144 of the Delaware General Corporation Law, which applies to self-

dealing transactions. Specifically, § 144 applies to any “contract or transaction [1]

between a corporation and 1 or more of its directors or officers, or [2] between a

corporation and any other corporation, partnership, association, or other organization in

which 1 or more of its directors or officers, are directors or officers, or have a financial

interest.”26     Significantly, § 144 does not contain any qualification for materiality.

Instead, by its plain terms, it applies to self-dealing contracts and transactions irrespective

of whether they are material to a director’s personal financial circumstances.

           Analyzing the Supreme Court’s decisions in Cinerama and Cede II and their

interplay with § 144, then-Vice Chancellor Strine determined that the materiality test

articulated in those decisions does not apply when a director is deemed interested by




24
     Id. at 362 (emphasis added).
25
     Id.
26
     8 Del. C. § 144(a).


                                              11
virtue of § 144. Rather, a materiality standard only applies when § 144 is inapplicable.27

Chancellor Chandler similarly explained in Orman v. Cullman, that the need to

demonstrate materiality to establish the interest of a director in a transaction applies only

“in the absence of self-dealing” and that “whenever a director stands on both sides of the

challenged transaction he is deemed interested and allegations of materiality have not

been required.”28

         Finally, it bears mention that Chancellor Allen, who articulated the materiality test

that was affirmed in Cede II, did not impose a materiality requirement in Steiner, which

was decided after Cede II. In fact, the Chancellor found that demand was excused in

Steiner despite his observation that the compensation for the directors “seem[ed] quite

within a range that could be paid in good faith by a company seeking to attract

competent, committed directors.”29

         Defendants base their second argument to avoid a straightforward application of

the first prong of Aronson on 8 Del. C. § 141(h). That provision states that “[u]nless

otherwise restricted by the certificate of incorporation or bylaws, the board of directors

shall have the authority to fix the compensation of directors.”




27
   HMG/Courtland Properties, Inc. v. Gray, 749 A.2d 94, 112-14 (Del. Ch. 1999);
Harbor Fin. P’rs. v. Huizenga, 751 A.2d 879, 887 (Del. Ch. 1999) (materiality standard
“is inapplicable when a director’s interest implicates § 144.”).
28
     Orman v. Cullman, 794 A.2d 5, 23, 25 n.50 (Del. Ch. 2002).
29
     Steiner, 1995 WL 441999, at *7.


                                              12
         According to defendants, the “only way to give effect to Section 141(h) is to

require derivative plaintiffs not only to allege that a majority of directors are interested in

their own compensation, but also to allege particularized facts” that would satisfy the

second prong of Aronson, i.e., to create a reasonable doubt that the directors’ approval of

their own compensation was the product of a valid exercise of business judgment.30

Defendants provide no authority to support this novel interpretation of § 141(h).

         Section 141(h) was enacted in 1969 in response to early Delaware cases that called

into question the ability of directors to receive compensation for their services.31 In 1922,

the Delaware Supreme Court declared in Lofland v. Cahall that directors “have no right

to compensation for services rendered within the scope of their duties as directors, unless

it is authorized by the charter, by–laws, or the stockholders of the company.”32 In 1928,

the Court of Chancery affirmed this principle in Finch v. Warrior Cement Corp.33 In a

contemporaneous analysis of the 1969 amendments to the Delaware General Corporation

Law, it was explained that § 141(h) “was intended to lay to rest a suggestion by way of

dictum . . . that directors are not empowered to vote compensation for members of the




30
     Defs.’ Reply Br. 3.
31
  57 Del. Laws ch. 148, § 6 (1969). See also 1 Edward P. Welch et al., Folk on the
Delaware General Corporate Law, §141.16, at 4-342 (6th ed. 2014).
32
     Lofland v. Cahall, 118 A. 1, 3 (Del. 1922).
33
     Finch v. Warrior Cement Corp., 141 A. 54, 63-64 (Del. Ch. 1928).


                                              13
board unless authorized by a vote of stockholders or by a specific charter or by-law

provision.”34

       On its face, § 141(h) only speaks to the authority of directors to set their own

compensation. It does not address the standard of review applicable to such a decision.

Given the plain text of § 141(h), its legislative history and the lack of any authority

supporting defendants’ novel interpretation of the statute, I reject defendants’ invitation

to rewrite the disjunctive two-prong test of Aronson to require that both prongs be

satisfied when analyzing demand futility regarding a challenge to director compensation

that plainly satisfies the first prong.

       For the foregoing reasons, I conclude that plaintiff’s failure to make a demand is

excused.

       B.       Motion to Dismiss Under Rule 12(b)(6)

       A motion to dismiss pursuant to Rule 12(b)(6) for failure to state a claim must be

denied “unless the plaintiff would not be entitled to recover under any reasonably

conceivable set of circumstances.”35 “In determining whether a pleading meets this

minimal standard, this Court draws all reasonable inferences in the plaintiff’s favor,




34
  S. Samuel Arsht and Walter K. Stapleton, Analysis of the 1969 Amendments to the
Delaware Corporation Law, 2 Corporation (P-H) at 350 (1969).
35
  Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 537
(Del. 2011); see also Winshall v. Viacom Int’l., Inc., 76 A.3d 808, 813 n.12 (Del. 2013).


                                            14
accepts all well-pleaded factual allegations as true, and even accepts ‘vague allegations in

the Complaint as ‘well pleaded’ if they provide the defendant notice of the claim.’”36

              1.     The Fiduciary Duty Claim

                     a.     Cash Compensation

       With one exception discussed below, defendants did not move to dismiss the

fiduciary duty claim for failure to state a claim for relief under Rule 12(b)(6) insofar as

that claim pertains to the cash compensation Unilife’s directors paid themselves. This

was a sensible decision. In reversing a subsequent grant of summary judgment in the

Steiner case discussed above, the Delaware Supreme Court held that, “[l]ike any other

interested transaction, directoral self-compensation decisions lie outside the business

judgment rule’s presumptive protection, so that, where properly challenged, the receipt of

self-determined benefits is subject to an affirmative showing that the compensation

arrangements are fair to the corporation.”37 Thus, because demand is excused for the

reasons stated above, this aspect of the fiduciary duty claim survives and it will be the

defendants’ burden to demonstrate the fairness of the cash compensation paid to the

outside directors.




36
 Seinfeld v. Slager, 2012 WL 2501105, at *2 (Del. Ch. June 29, 2012) (quoting Cent.
Mortg. Co., 27 A.3d at 535).
37
  Telxon Corp. v. Meyerson, 802 A.2d 257, 265 (Del. 2002) (citing Hall v. John S. Isaacs
& Sons Farms, Inc., 146 A.2d 602, 610-11 (Del. Ch. 1958), aff'd in part, 163 A.2d 288
(Del. 1960); Meiselman v. Eberstadt, 170 A.2d 720 (Del. Ch. 1961); Wilderman v.
Wilderman, 315 A.2d 610 (Del. Ch. 1974)).


                                            15
         The one aspect of cash compensation for which defendants have sought dismissal

concerns $346,392 and $216,479 that was paid to defendant Carter in fiscal years 2011

and 2012, respectively. These amounts are reported in the Company’s proxy statements

in a table entitled “Director Compensation” under             the subheading “All Other

Compensation” and are accompanied by a footnote stating that “Mr. Carter’s other

compensation includes amounts paid to a consulting entity of which Mr. Carter is the

principal.”38

         At oral argument, plaintiff’s counsel represented that plaintiff challenges only the

compensation paid to the outside directors for their service as directors and does not

challenge amounts paid to Carter for consulting services.39           The use of the word

“includes” in the footnote quoted above, however, leaves open the possibility that some

of Carter’s “other compensation” may have been paid for his services as a director and

not as a consultant.

         In a letter filed after oral argument, defendants’ counsel contends that all of the

amounts appearing in the “other compensation” line for Carter were paid for consulting

services, notwithstanding the text of the footnote, based on an extrapolation of a currency

exchange rate between Australian and United States dollars and other disclosures




38
  Defs.’ Opening Br. Ex. B at 9 & n.5 (Unilife Corp., Definitive Proxy Statement (Form
14A) (Oct. 14, 2011)) (emphasis added); Defs.’ Opening Br. Ex. C at 10 & n.8 (Unilife
Corp., Definitive Proxy Statement (Form 14A) (Oct. 16, 2012)) (emphasis added).
39
     Mot. to Dismiss Hr’g Tr. at 40, June 9, 2014.


                                              16
contained in the proxy statement.40 Although defendants’ explanation makes sense, I

cannot resolve this issue from the allegations of the complaint and the face of the proxy

statements incorporated therein. Accordingly, this aspect of the fiduciary duty claim will

not be dismissed so that plaintiff can verify in discovery whether the full amounts

reported as “other compensation” for Carter were paid solely for consulting services.

                     b.     Equity Awards

       Insofar as the fiduciary duty claim pertains to the equity awards the outside

directors received, defendants argue that they are protected by the business judgment rule

because each of those awards was approved by a disinterested majority of Unilife’s

stockholders. I agree and dismiss this aspect of the fiduciary duty claim because plaintiff

has failed to plead facts to legitimately call into question the validity of the stockholders’

approval or to rebut the presumption of the business judgment rule.

       In a series of decisions, this Court has dismissed otherwise self-interested

transactions involving director compensation because of the effect of stockholder

approval of such transactions. In Steiner, discussed above, after sustaining a claim for

breach of fiduciary duty challenging the cash payments made to the outside directors of

Telxon, Chancellor Allen dismissed that part of the claim challenging stock option grants

to them based on stockholder approval of the plan under which the options were granted.

He explained that:




40
  Letter from James G. McMillan, III to The Honorable Andre G. Bouchard (June 9,
2014).


                                             17
           Unlike the other self-interested transactions challenged by plaintiff, the
           stock option plan was presented to the Telxon shareholders at the 1991
           annual meeting and approved by a majority of the stockholders. The
           Supreme Court held in Kerbs v. California Eastern Airways, Inc., Del.
           Supr., 90 A.2d 652, 655 (1952) that “[s]tockholders’ ratification of voidable
           acts of directors is effective for all purposes unless the action of the
           directors constituted a gift of corporate assets to themselves or was ultra
           vires, illegal, or fraudulent.” 41

Chancellor Allen thus held that, in the absence of any allegation that “the option plan was

ultra vires, illegal or fraudulent, the only basis on which the plan may be successfully

attacked is that it constitutes a gift of corporate assets or waste.”42

           Several years later, in In re 3COM Corp. Shareholders Litigation, the Court cited

Steiner with approval and held that “[d]ecisions of directors who administer a stockholder

approved director stock option plan are entitled to the protection of the business judgment

rule, and, in the absence of waste, a total failure of consideration, they do not breach their

duty of loyalty by acting consistently with the terms of the stockholder approved plan.”43

More recently, in Desimone v. Barrows, then-Vice Chancellor Strine dismissed under

Rule 12(b)(6) claims challenging option grants to outside directors because “stockholders

approved the issuance of the exact number of options to be awarded annually to the

Outside Directors and the date of issuance.”44




41
     Steiner, 1995 WL 441999, at *7.
42
     Id.
43
     In re 3COM Corp., 1999 WL 1009210, at *1 (Del. Ch. Oct. 25, 1999).
44
     Desimone v. Barrows, 924 A.2d 908, 917 (Del. Ch. 2007).


                                                18
       Here, as in Desimone, Unilife’s stockholders approved each of the specific equity

awards challenged in this action. As explained above, in 2010, Unilife stockholders

approved the grant of up to 100,000 options to two of the Company’s outside directors

and, in 2011, approved the grant of up to 45,000 stock-based awards to six of the

Company’s outside directors.

       Plaintiff alleges that these stockholder approvals were not valid because the proxy

statements on which the votes were based “omitted or included materially misleading

information concerning, inter alia, whether the Unilife’s outside director compensation is

in line with director compensation paid at comparable firms, the identity of truly

comparable companies, and the average director compensation at those firms.”45

Significantly, plaintiff has not identified any Delaware authority deeming such

benchmarking information to be material. Nor has plaintiff identified any provision of

the federal securities laws requiring the disclosure of such information concerning

outside director compensation.

       Under Delaware law, “[t]o state a claim for breach by omission of any duty to

disclose, a plaintiff must plead facts identifying (1) material, (2) reasonably available (3)




45
   Compl. ¶ 25. As plaintiff acknowledges, the benchmarking information Unilife
provided in its proxy statements only concerned executive compensation and not outside
director compensation. Pl.’s Answering Br. 38. As such, the issue here is not whether
the disclosures contained in the proxy statements were misleading, but whether Unilife
omitted material information by failing to include benchmarking information relevant to
outside director compensation.


                                             19
information that (4) was omitted from the proxy materials.”46           “The burden of

establishing materiality rests with the plaintiff, who must demonstrate ‘a substantial

likelihood that the disclosure of the omitted fact would have been viewed by the

reasonable investor as having significantly altered the ‘total mix’ of information made

available.’”47

         In my opinion, the absence of benchmarking information for outside director

compensation was not a material omission from Unilife’s 2010 and 2011 proxy

statements because the proxy statements disclosed all material terms of the precise equity

awards that the stockholders were being asked to approve.

       The 2010 proxy statement disclosed the exact number of options to be awarded to

directors Wold and Firestone (100,000 each), the exercise price for those options ($6.83

per share for Wold and $6.19 per share for Firestone), the exercisability period for the

options (five years from the date of grant) and the schedule over which the options would

vest. Similarly, the 2011 proxy statement disclosed the exact number of equity awards

to be issued to directors Bosnjak, Carter, Galle, Lund, Wold and Firestone (45,000 each),

the nature of those awards (shares of common stock of phantom stock units), and the

schedule over which those awards would vest. Thus, whether or not the value of these


46
 Pfeffer v. Redstone, 965 A.2d 676, 686 (Del. 2009) (quoting O'Reilly v. Transworld
Healthcare, Inc., 745 A.2d 902, 926 (Del. Ch. 1999)).
47
  Gantler v. Stephens, 965 A.2d 695, 710 (Del. 2009) (quoting Stroud v. Grace, 606
A.2d 75, 84 (Del. 1992)).




                                           20
equity awards, viewed in isolation or together with other compensation, were in line with

the levels of compensation paid to the outside directors of Unilife’s alleged peer

companies, Unilife’s stockholders cannot legitimately claim they were not made aware of

the material terms of what they were being asked to approve.48

       Because plaintiff has failed to undermine the validity of the stockholder approvals

on which the equity awards in question were expressly conditioned, the business

judgment rule applies to the board’s decision to grant those awards in the first instance.

“[W]here business judgment presumptions are applicable, the board's decision will be

upheld unless it cannot be ‘attributed to any rational business purpose.’”49 Although

plaintiff has alleged facts suggesting that the amount of compensation paid to Unilife’s

directors may be excessive relative to its revenues and its alleged peers, it cannot be said

that the payment of such compensation had no rational business purpose.

       For the foregoing reasons, I grant defendants’ motion to dismiss the fiduciary duty

claim insofar as it relates to the equity awards that were approved by Unilife’s

stockholders.

                2.   The Waste Claim

       “[A] plaintiff faces an uphill battle in bringing a waste claim, and a plaintiff must

allege particularized facts that lead to a reasonable inference that the director defendants



48
  See 3COM, 1999 WL 1009210, at *1 (rejecting need to disclose option values under
Black-Scholes where “the plan’s material terms” were disclosed).
49
 Kahn v. M & F Worldwide Corp., 88 A.3d 635, 654 n.41 (Del. 2014) (quoting In re
Walt Disney Co. Deriv. Litig., 906 A.2d 27, 74 (Del. 2006) (citation omitted)).


                                            21
authorized an exchange that is so one sided that no business person of ordinary, sound

judgment could conclude that the corporation has received adequate consideration.”50

This Court has described the waste standard as an “extreme test, very rarely satisfied by a

shareholder plaintiff, because if under the circumstances any reasonable person might

conclude that the deal made sense, then the judicial inquiry ends.”51 “Where . . . the

corporation has received any substantial consideration and where the board has made a

good faith judgment that in the circumstances the transaction was worthwhile, a finding

of waste is inappropriate, even if hindsight proves that the transaction may have been ill-

advised.”52

          The complaint alleges that the compensation paid to Unilife’s directors since 2010

constitutes an excessive percentage of its revenues during this period (25% and 24%,

respectively, in fiscal years 2012 and 2013) and is excessive relative to eleven other

healthcare companies with market capitalizations between $41 million and $718 million.

These allegations raise questions concerning the fairness of the outside directors’

compensation, but they do not rise to the level necessary to establish a complete failure of

consideration or that the director defendants authorized an exchange that was so one-

sided that no reasonable business person could conclude that Unilife received adequate



50
   Seinfeld, 2012 WL 2501105, at *3 (Jun. 29, 2012) (internal quotation marks and
citations omitted).
51
  Zupnick v. Goizueta, 698 A.2d 384, 387 (Del. Ch. 1997) (quoting Steiner, 1995 WL
441999, at *1).
52
     Seinfeld, 2012 WL 2501105, at *9 (internal quotation marks and citations omitted).


                                              22
consideration. Accordingly, the claim for corporate waste fails to state a claim for relief

and is dismissed.

IV.    CONCLUSION

       For the foregoing reasons, defendants’ motion to dismiss Count I is GRANTED

insofar as it relates to the equity awards issued to Unilife’s outside directors, but

DENIED insofar as it relates to the cash compensation paid to the outside directors.

Count II is dismissed in its entirety.

       IT IS SO ORDERED.




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