Co-authored by Elizabeth D. Langdale.
The Delaware Chancery Court found that where the directors of a closely-held corporation retained the power to terminate or modify employment agreements, the decision to leave such agreements in place could be challenged as a breach of fiduciary duty even though a challenge to the initial decision to enter into these agreements was time-barred. The plaintiffs, minority shareholders in the closely-held corporation at issue, brought a derivative action challenging a series of related-party transactions. The defendants, the directors and majority shareholders, moved for judgment on the pleadings, contending that the equitable doctrine of laches barred the bulk of the plaintiffs’ claims. Based on the parties’ previous agreement as to a presumptive three-year limitations period for laches, the Court found that laches barred the plaintiffs’ challenges to certain stock options granted in 2004 and 2005, and also barred a portion of the plaintiffs’ challenges to compensation received under certain employment agreements entered into in August 2003. However, despite the original contract date of August 2003, the Court did not bar all of the plaintiffs’ challenges related to these agreements. The Court reasoned that because the corporation could terminate the employment agreements on thirty days written notice, and because the Board retained the power to amend the agreements at their convenience, the plaintiffs had a right to challenge the company’s on-going decision to leave the agreements in place as a breach of fiduciary duty. On this basis, the Court held that the plaintiffs could challenge the fairness of the defendants’ failure to terminate or modify their employment agreements from the laches cut-off date (March 18, 2008) though the present.
Buerger v. Apfel, C.A. No. 6539 – VCL (Del. Ch. Mar. 15, 2012).