Spinoff Carve-Out for Equity Award Amendments and Demand Futility Clarified by Delaware Supreme Court

Introduction

This commentary examines the Supreme Court of Delaware’s decision in Vladimir Gusinsky Revocable Trust v. Gregory J. Hayes, decided May 28, 2025. The derivative plaintiff, a trust purportedly holding shares of RTX Corporation (formerly Raytheon Technologies Corporation), challenged the board’s amendment to an equity‐award conversion formula following United Technologies Corporation’s spinoff of Otis Worldwide and Carrier Global and its merger with Raytheon. The key issues were (1) whether the board properly delegated final approval of the amendment to a Special Committee, and (2) whether that amendment—alleged to violate the Long Term Equity Incentive Plans (LTIPs)—required stockholder approval or gave rise to demand‐futility for a derivative suit.

Summary of the Judgment

The Delaware Supreme Court affirmed the Court of Chancery’s dismissal of the derivative complaint for failure to plead demand futility. The Court held:

The Special Committee resolutions validly delegated “final approval” authority, without depriving the full board of any power to seek further approvals.
The LTIPs expressly exempted spinoff‐related modifications from the stockholder‐approval requirement (Section 3(e) carve‐out), so the board reasonably believed no vote was needed.
Because the certificate of incorporation exculpated directors for duty‐of‐care breaches, the plaintiff had to allege bad faith. The complaint lacked particularized allegations of intentional dereliction or conscious disregard.
Demand was not excused as futile under Court of Chancery Rule 23.1, and therefore the suit was properly dismissed.

Analysis

Precedents Cited

Brehm v. Eisner (746 A.2d 244, 2000): The Court reaffirmed the burden‐shifting framework for demand futility under Rule 23.1 and the requirement to plead particularized facts raising a reasonable inference of director liability.
In re Walt Disney Co. Derivative Litigation (906 A.2d 27, 2006): The decision clarified that bad faith allegations must show an “intentional dereliction of duty” or a “conscious disregard” of responsibilities when exculpatory charter provisions eliminate duty‐of‐care liability.
United Food & Commercial Workers Union v. Zuckerberg (262 A.3d 1034, 2021): This case elaborated the numerical test for demand futility—at least half the board must be incapable of impartially considering a demand due to a personal interest or likelihood of liability.
Garfield v. Allen (277 A.3d 296, Del. Ch. 2022) and Pfeiffer v. Leedle (2013 WL 5988416, Del. Ch. 2013): Both decisions emphasize that when charter or plan documents plainly require stockholder approval, a board’s conscious violation can establish demand futility.

Legal Reasoning

The Court’s analysis proceeded in two stages—delegation authority and demand futility under Rule 23.1:

Delegation to Special Committee: The board’s resolutions empowered the Special Committee to “provide final approval” and “take such other actions… necessary” to effect the amendment. Read in context, these delegations did not strip the board of any power to secure further approvals, including from stockholders. Delaware law permits boards to form committees and delegate functions so long as the full board retains ultimate authority to act.
Demand Futility and Bad Faith: Because RTX’s certificate exculpated directors for duty‐of‐care lapses, the plaintiff had to plead bad faith—a high scienter standard—by alleging that directors knowingly violated a plain, mandatory requirement. Section 5(c) of the LTIPs generally requires stockholder approval for amendments but expressly exempts “actions pursuant to Section 3(e)”—which addresses spinoffs. The Court held it was reasonable for the board to treat the amendment as part of the spinoff process and thus within the carve‐out. Absent plausible allegations that the board intentionally misinterpreted or ignored an unambiguous provision, demand futility was not established.

Impact

This decision provides important guidance on two fronts:

Spinoff‐Related Awards: Boards may rely on express carve‐outs in incentive plans to modify equity awards in connection with corporate reorganizations without triggering stockholder votes, provided the modifications fall squarely within the plan’s terms.
Derivative Litigation: Plaintiffs face a rigorous standard when challenging board decisions under exculpatory charters: they must plead particularized facts demonstrating bad faith. Mere disagreement over an interpretation of plan documents will not excuse the demand requirement.

Complex Concepts Simplified

Demand Futility (Rule 23.1): Before a shareholder can sue derivatively on behalf of the corporation, they must either make a demand on the board or show that demand would be “futile.” Futility arises if a majority of directors are conflicted or likely to be sued themselves.
Exculpatory Charter Provision: A charter clause that eliminates director liability for duty‐of‐care breaches, shifting the plaintiff’s burden to plead bad faith.
LTIP Section 3(e) Carve-Out: A specific plan provision allowing the compensation committee to adjust awards in connection with spinoffs, exempting such adjustments from the general stockholder‐approval requirement in Section 5(c).
VWAP (Volume-Weighted Average Price): A formula to determine stock price by averaging prices weighted by trading volume over a specified period.

Conclusion

The Delaware Supreme Court’s decision in Gusinsky Revocable Trust v. Hayes reaffirms the board’s authority to form special committees and rely on explicit plan carve‐outs when amending equity‐award terms tied to spinoff transactions. It underscores the high bar for establishing demand futility when a corporate charter exculpates duty‐of‐care claims, requiring particularized allegations of bad faith. Going forward, corporations can take comfort in structuring equity plans with clear spinoff provisions, and plaintiffs will face stringent pleading requirements to challenge such board decisions.