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Weil Wins Dismissal of Stockholder Derivative Action Against lululemon Directors Regarding Alleged CEO Misconduct

On April 2, 2020, Weil won a decisive victory for the Board of Directors of global retailer lululemon athletica inc. in a stockholder derivative complaint alleging that the company’s former CEO – in plaintiff’s words – “created a toxic culture at lululemon and engaged in a pattern of sexual harassment and sexual favoritism while CEO.” The Delaware Court of Chancery’s 39-page opinion granted the Board’s motion to dismiss the action in its entirety.

Plaintiff alleged that the members of the Board breached their fiduciary duties by negotiating a separation agreement with, rather than terminating for cause, the former CEO, and paying him “unwarranted severance.” The court held that the “Board was operating well-within the bounds of proper business judgment when it decided to settle with [the former CEO] rather than fire him ‘for cause,’ a decision that could have embroiled the Company in an embarrassing legal battle with its former CEO.” The court found that the Board did not act “too fast” because it did “not wait[…] for [an] external investigation to be ‘completed’ or for the Board’s sub-committees to make separate, formal presentations before taking action,” and that the Board did not act improperly by discussing the matter in “‘off the record conversations’” that were not minuted in order “to encourage ‘an open dialogue on the facts’ concerning what should be done about the Company’s CEO.”

In an important ruling for boards of all Delaware companies, the court stated that the business judgment rule “presumption that the board’s decisions were made in the company’s best interest” is a “fundamental precept” that “calls for deference to the board’s decisions regarding (i) how much information it needed before it decided to act and (ii) how to structure its meetings.” The court also rejected claims that the Board lacked disinterestedness in the settlement because the former CEO released lululemon and the Board from claims the former CEO might have had against lululemon and the Board, stating that “it is more or less universally the case that when a corporation pays value to settle a claim, it demands and receives releases in favor of its directors, officers and other agents.”

The Weil team was led by Securities Litigation practice Co-Head Joseph Allerhand and Securities Litigation partner Stephen Radin, who argued the motion. The team also included associate Andrew Meerwarth and former associate Thomas James.