London v. Tyrrell

iGov (defendant) was a government contracting firm. In late 2006, iGov adopted an equity incentive plan for 2007 for its directors and executives (2007 plan). Craig London and James Hunt (plaintiffs) were removed as directors of iGov’s then four-member board after they objected to the 2007 plan. Michael Tyrrell (defendant), iGov’s chief financial officer, replaced London and Hunt on the board. London and Hunt brought derivative and potentially direct claims against Tyrell and the two other directors (collectively, directors) (defendants) in Delaware Chancery Court, alleging that the directors violated their duties of care and loyalty in adopting the 2007 plan because, among other things, the 2007 plan used artificially low option-strike prices based on unduly pessimistic financial projections. In addition to seeking damages, London and Hunt sought to rescind the 2007 plan. The directors moved to dismiss the complaint, but the vice chancellor denied the motion. iGov then appointed a special litigation committee (SLC) comprised of John Vinter and Vincent Salvatori, two new directors who did not benefit from the 2007 plan. However, Vinter’s wife was Tyrell’s cousin and, although the cousins arguably were not close, they saw each other periodically. Salvatori and Tyrrell had worked together in a previous venture, and Salvatori was grateful to Tyrrell for helping Salvatori receive a good price when that company was sold. The SLC recommended dismissing the complaint because (1) the directors could not be held financially liable for breaching their duties of care due to iGov’s charter’s clause exculpating iGov’s directors from such liability (exculpatory clause) and (2) the directors did not breach their duties of loyalty because the 2007 plan was entirely fair. London and Hunt opposed dismissal, arguing that the SLC was not independent because of Vinter and Salvatori’s relationships with Tyrrell and that the SLC’s recommendations were invalid because the SLC did not consider London and Hunt’s request for rescission and did not adequately challenge Tyrrell’s use of pessimistic projections in deciding that the 2007 plan was entirely fair.