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Chipotle Catches Break, Avoids Legal Trouble

A Delaware judge threw out an investor suit which alleged breaches of fiduciary duty Chipotle Mexican Grill Inc. board. The judge stated Wednesday that the business judgment rule covered the restaurant chain directors’ award of generous stock-based incentive bonuses to both executives and the board.

Law 360 reports that during a hearing in Wilmington, Vice Chancellor J. Travis Laster said that the derivative complaint filed in March by a Chipotle investor failed to state a claim because the stock awards were a decision the board’s independent compensation committee made. Delaware law gives deference to the board when a transaction is approved by independent directors and ratified by a majority of disinterested shareholders, as occurred here.

The Vice Chancellor further stated: “The business judgment rule applies and protects the decision from challenge.”

The directors had argued that the stock incentive program — which saw the company’s outside directors and four members of the executive management team receive up to 3.3 million shares of Chipotle stock valued at nearly $1 billion — was allowed as it had been approved by the board’s two-member compensation committee, reports Law 360.

The directors’ attorney made mention to the court that even if the two members of the board that were also company executives and the two members of the compensation committee were removed from the equation, that would still leave five of the nine board members that voted in favor of the stock incentive plan, passing the decision regardless of other terms.

Though Vice Chancellor Laster had agreed Wednesday that this incentive was covered by the business judgment rule, the plaintiff side still takes credible issue with the portion of the incentive plan that granted restricted stock units to the company’s five outside directors, as it involved two of those directors approving the awards via the compensation committee.

“This is a classic case of self-dealing where you have parties standing on both sides of a transaction,” Vice Chancellor Laster said. “I view it as a conflicted decision to which the entire fairness standard applies.”

The entire fairness standard is much more stringent than the more deferential business judgment rule, and requires the court to assess the overall impact of the stock plan in this case. Vice Chancellor Laster said the directors’ stock award meets the standards by virtue of its relatively modest size. The directors were each given $85,000 in restricted stock units per year between 2011 and 2014.

“I cannot conceive of a setting where I would rule this level of compensation to the directors of a public company fails the entire fairness standard,” Vice Chancellor Laster said.

Jessica Oldfather, the Chipotle shareholder  who had filed this derivative complaint in March, more than three years after Chipotle’s compensation committee approved the 2011 stock incentive plan for the directors and executives. Her complaint accused the recipients of breaching their fiduciary duty and of “unjustly enriching themselves at the expense of the company and its investors,” as its main allegation was that the awards were excessive and that executives could essentially receive limitless shares under the plan, which allocated up to 3.1 million shares in the first year, at the time worth nearly $1 billion.

For your reference, the case is filed under Oldfather et al. v. Ells et al., case number CA-12118, in the Court of Chancery of the State of Delaware.

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