Delaware Court of Chancery Affirms CEO Termination Decision Protected by Business Judgment Rule: Court Dismisses Action Against lululemon Directors Based on Paying Severance to Former CEO Notwithstanding Ability to Terminate for “Cause”

Sullivan & Cromwell LLP - April 15, 2020
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On April 2, 2020, in Shabbouei v. Potdevin, the Delaware Court of Chancery granted a motion to dismiss a stockholder derivative action against the board of directors of lululemon athletica inc. alleging that the directors breached their fiduciary duties in connection with entering into a separation agreement with the former CEO.  

In reaching its decision, the Court found that Plaintiff did not support a reasonable inference that the Board failed to exercise proper business judgment in settling with the CEO rather than terminating his employment for cause.  Although Plaintiff did not affirmatively assert a Caremark claim, the Court nevertheless analyzed implied allegations that the Board failed to exercise appropriate oversight and determined that the Board’s actions in investigating and settling the claim did not implicate a “conscious indifference” to “red flags” underlying such a claim.  Furthermore, the Court held that the Plaintiff had not reached the outer limit whereby the Board’s decision would have constituted waste, and that the complaint did not plead sufficient facts to constitute a claim of unjust enrichment against the CEO.