Under Delaware law, where a stockholder cannot rebut the presumptive business judgment standard, the stockholder must show that the board's decision cannot be attributed to any rational purpose (essentially, the waste standard under Disney (see Practice Note, Fiduciary Duties of the Board of Directors: Corporate Waste)). However, where a stockholder does rebut the business judgment standard, the court will review the directors' decision under the entire fairness standard, under which directors must establish to the court's satisfaction that the transaction was the product of both fair dealing and fair price.

The Court found that Plaintiff successfully rebutted the presumptive business judgment standard of review. In doing so, the Court cited to the Delaware Supreme Court's decision in Telxon Corp. v. Meyerson, 802 A.2d 257 (Del. 2002), which held that director self-compensation decisions are conflicted transactions that lie outside the presumptive protection of the business judgment rule. In this case, because the members of the compensation committee approved their own compensation and the compensation of other non-employee directors, the Court concluded that Plaintiff had rebutted the presumptive business judgment standard. Therefore, the Court was required to review the directors' decision under the entire fairness standard.

Even when the entire fairness standard would otherwise apply, defendant directors can raise the affirmative defense of common law stockholder ratification. Under the doctrine of ratification, if a decision of the board is ratified after the fact or approved ahead of time by a majority of informed and disinterested stockholders, the claim of breach is reviewed under the forgiving waste standard. (A wasteful decision can only be ratified by unanimous stockholder approval.) Here, Defendants argued that the RSU awards should be reviewed under the waste standard because the awards were the result of the board's administration of the Plan and were made under, and in full compliance with, the stockholder-approved Plan. Plaintiff responded that although the RSU awards were granted under the Plan, Defendants were still required to establish the entire fairness of the RSU awards because the Plan had "no meaningful limits" on the total equity compensation that Citrix's non-employee directors could hypothetically receive.

Drawing on 60 years of jurisprudence on the doctrine of ratification in general and ratification of compensation decisions in particular, the Court accepted Plaintiff's understanding of the limits of ratification. The Court surveyed several decisions in which the defendants had successfully raised the ratification defense, including Steiner v. Meyerson, (Del. Ch. July 19, 1995) and In re 3COM Corp. Shareholders Litigation, (Del. Ch. Oct. 25, 1999). Critical to each of those decisions was the fact that the plan in question set forth specific awards or ceilings for the amounts to be granted to the non-employee directors. By contrast, in the Court's later decision in Sample v. Morgan, the Court rejected the ratification defense where the defendants attempted to rely on a "blank check" ratification by the stockholders of the broad parameters of a plan where they had not voted in favor of specific awards (914 A.2d 647, 663 (Del. Ch. 2007)).

For its part, Plaintiff relied primarily on the Court's decision in Seinfeld v. Slager, C.A. No. 6462-VCG, (Del. Ch. June 29, 2012), in which a stockholder challenged the fairness of RSU awards that non-employee directors received under the company's stockholder-approved compensation plan. Unlike the plans in prior Delaware cases in which ratification was deemed effective, the plan approved by the stockholders in Slager did not set out any specific amounts (or director-specific ceilings) of compensation that would or could be awarded to directors. Rather, the plan featured a generic limit on the compensation that any one beneficiary could receive per fiscal year, similar to the Plan in this case. The Court in Slager noted that because the plan authorized up to 10.5 million shares and there were 12 members of the board, each of those directors could have received 875,000 RSUs as compensation in one year. This would have been worth about $21.7 million in 2009. The Court in Slager rejected the defendants' ratification defense, emphasizing that the plan had no effective limits on the total amount of pay that could be awarded, which gave directors a theoretical "carte blanche" to award themselves tens of millions of dollars per year. Because the stockholders in Slager had not voted for the specific RSU grants or to impose a limit that would apply to only directors, the ratification defense did not apply.

Defendants had attempted to argue that Slager was out of step with the Delaware precedent that came before it. The Court here disagreed, holding that the principles underlying Slager were consistent with the decisions that had granted the ratification defense and those that had denied it. In that vein, the Court here set out two principles of common law stockholder ratification relevant to director compensation:

Applying these principles to the case at hand, the Court considered the stockholder approval of the Plan in 2005, and its subsequent amendments, as a vote of approval by a majority of informed, uncoerced and disinterested stockholders. Although the Plan specified the total shares available, the beneficiaries under the Plan and the total number of shares a beneficiary could receive in a calendar year, the Plan did not specify the amount or form of compensation to be issued to Citrix's non-employee directors. Instead, there was only a generic limit of one million shares (or RSUs) per beneficiary per calendar year that at the time the action was filed were worth over $55 million.

Because Citrix stockholders were never asked to approve any action bearing specifically on the magnitude of compensation for non-employee directors, Defendants could not establish a ratification defense. The Court found no meaningful difference between the allegations in this case and those in Slager because the Plan did not specify any amounts, or director-specific ceilings, of equity compensation that Citrix directors would or could receive apart from the generic limit applicable to all classes of beneficiaries under the Plan. The stockholder approval of the Plan's generic limits, and the amendments of those limits, did not establish a ratification defense for the RSU awards because the stockholders were not asked to approve any action specific to director compensation. Stockholders were simply asked to approve, in very broad terms, the Plan itself. Therefore, the correct standard of review remains entire fairness, with the burden on the Defendants.

Under the entire fairness standard, a defendant must establish that the decision was the product of both fair dealing and fair price. Here, the parties framed the issue around whether Citrix's non-employee director compensation practices were in line with those of Citrix's peer group. The parties differed on what the definition of peer group should be for this purpose:

The Court held that Plaintiff had raised meaningful questions as to whether companies with higher market capitalizations, revenue and net income, such as Amazon, Google and Microsoft, should be included in the peer group used to determine the fair value of compensation for Citrix's non-employee directors. Because those questions could not be answered at a procedural stage, the Court denied Defendants' motion to dismiss Plaintiff's claim of breach of fiduciary duty.