Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca7-15-01006/USCOURTS-ca7-15-01006-0/pdf.json

Nature of Suit Code: 160
Nature of Suit: Stockholder's Suits
Cause of Action: 

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In the 

United States Court of Appeals 

For the Seventh Circuit ____________________ 

No. 15-1006 

JAN DONNAWELL, 

Plaintiff-Appellant, 

v.

DANIEL HAMBURGER, et al., 

Defendants-Appellees. 

____________________ 

Appeal from the United States District Court for the 

Northern District of Illinois, Eastern Division. 

No. 12 C 9074 — George M. Marovich, Judge. 

____________________ 

ARGUED OCTOBER 1, 2015 — DECIDED OCTOBER 20, 2015 

___________________ 

 

 Before POSNER, MANION, and HAMILTON, Circuit Judges. 

 POSNER, Circuit Judge. The plaintiff is a stockholder in 

DeVry Education Group, Inc., a Delaware company that 

owns and operates a number of for-profit colleges and universities. See DeVry Education Group, www.devryeducation

group.com (visited October 19, 2015). The suit is a shareholders’ derivative suit against current and former members 

of DeVry’s board of directors. Federal jurisdiction is based 

Case: 15-1006 Document: 44 Filed: 10/20/2015 Pages: 8
2 No. 15-1006 

on diversity of citizenship; the substantive law governing 

the suit is Delaware corporation law. The appeal is from the 

dismissal of the suit with prejudice. 

 An incentive plan adopted by the company in 2005 authorized the award of stock options to key employees, including the company’s CEO. The plan limited the awards to 

150,000 shares per employee per year. Yet the company 

granted Daniel Hamburger, who became its CEO in 2006, 

options on 184,100 shares in 2010, 170,200 in 2011, and 

255,425 in 2012. Later that year the company, discovering its 

mistake, reduced each grant under the 2005 plan to 150,000 

shares. But at the same time it allocated Hamburger 87,910 

additional shares available under the company’s 2003 incentive plan, which held shares that had been authorized to be 

allocated but hadn’t yet been allocated. As a result Hamburger received options in 2012 far above the 150,000 that 

were the most he could receive under the 2005 plan. All 

these grants were proposed by the company’s Compensation 

Committee to the company’s independent directors (directors who are not also employees of the company). The independent directors approved the award of the additional 

shares to Hamburger. At the time, all the members of the 

Compensation Committee, and all but two of the members 

of the board of directors—one of them being Hamburger—

were independent directors.

 The plaintiff argues that the award is improper because 

only the company’s Plan Committee, and not the Compensation Committee, was authorized to grant stock options under the 2003 plan. But there was no Plan Committee in 2012. 

The committee was to consist of members of the board of directors who were full-time, salaried employees of the comCase: 15-1006 Document: 44 Filed: 10/20/2015 Pages: 8
No. 15-1006 3 

pany, and the only full-time, salaried employee of the company who was also a member of the board of directors was 

Hamburger. One supposes that he could have designated 

himself the Plan Committee, but he didn’t, so there was no 

Plan Committee. In lieu thereof the grant of the 87,910 stock 

options was approved by the Compensation Committee, and 

in turn by the independent directors as a whole. 

 Approval by the Compensation Committee may have 

been fairer to stockholders than approval by the Plan Committee would have been. The Compensation Committee was 

made up exclusively of independent directors and its decisions were approved by the other independent directors. Independent directors might be more likely to question a generous award to the CEO than an employee would be (“I vote 

to deny my boss stock options”—not likely!).

 Any decision by the Plan Committee, moreover, would 

have required approval of the Compensation Committee to 

be valid under the 2003 plan. The Plan Committee (when it 

exists) is thus the agent of the Compensation Committee; 

and what the agent can do, the principal can do. Furthermore, to obtain favorable tax treatment of performancebased compensation (which stock options are), a compensation committee consisting of at least two independent directors must determine the performance goals on which the 

compensation is based and certify that those goals have been 

achieved. 26 U.S.C. § 162(m)(4)(C). DeVry’s Compensation 

Committee satisfied these criteria, the Plan Committee did 

not, and so the Compensation Committee must have had the 

final say over whether to award stock options to CEO Hamburger as otherwise the tax benefit would have been forgone.

Case: 15-1006 Document: 44 Filed: 10/20/2015 Pages: 8
4 No. 15-1006 

 It may help to think of the case in golf terms. A “mulligan” is the practice of allowing a player who has made a bad 

shot to do it over, and the bad shot isn’t shown on his scorecard. Mulligans are commonly allowed in informal golf 

matches (as opposed to tournament matches, in which mulligans are never permitted) because no harm is thought to be 

done by them in such matches. Likewise no harm was done 

by allowing the Compensation Committee to do over, in effect, the erroneous grant of stock options under the 2005 

plan, by invoking the 2003 plan, thus sinking the ball in the 

hole. The end result, from the shareholders’ perspective, was 

no different from what it would have been had the first shot 

been a hole in one. 

 The plaintiff further argues that it was error to value the 

additional 2012 shares at their price in August of that year, 

when the initial grant (later realized to be forbidden) was 

made, rather than in December, the month in which the mistake was corrected by awarding shares available under the 

2003 plan to Hamburger. But the award of shares in December was just a way of fulfilling the intention of the board and 

the Compensation Committee in making the initial grant to 

Hamburger in August, the grant that violated the 2005 plan. 

This is not a case in which shares granted at one time are later backdated to take advantage of market shifts. See Ryan v. 

Gifford, 918 A.2d 341 (Del. Ch. 2007). The board was merely 

trying to keep the promise it had made in August by fulfilling it from a different bank of shares.

 Against all this the plaintiff insists that the Delaware 

courts enforce corporate rules with absolute rigidity, indifferent to what is sensible, reasonable, or realistic, and therefore that the grant of stock options to Hamburger was invaCase: 15-1006 Document: 44 Filed: 10/20/2015 Pages: 8
No. 15-1006 5 

lid—period—because it was not made by the Plan Committee. It quotes a decision of the Delaware Chancery Court 

which states that “contract interpretation starts with the 

terms of the contract. If the terms are plain on their face, then 

the analysis stops there.” Sanders v. Wang, No. 16640, 1999 

WL 1044880, at *6 (Del. Ch. Nov. 8, 1999). It’s rather insulting to Delaware judges to interpret Delaware law on the assumption that the judges are mindless automata. Drafters of 

contracts are not omniscient; they are not gifted with exact 

knowledge of what the future holds. Literal interpretation 

can produce absurdities when applied to unforeseen occurrences, as when an ordinance forbidding unleashed dogs in 

a park is sought to be applied to a statue of Lassie. 

 The nonexistence of the Plan Committee created an unforeseen hole in the 2003 incentive plan, and the company 

plugged the hole by substituting the Compensation Committee—a substitution that might well make the shareholders 

better off, and would be very unlikely to make them worse 

off, than if there had been a Plan Committee. It makes no 

sense to allow a harmless error to drive a judicial decision—

indeed the legal meaning of “harmless error” is an error that 

for lack of consequence is to be ignored by the court. We haven’t found Delaware cases that invoke harmless error in regard to violations by boards of directors of compensation 

plans, but that can be of no comfort to the plaintiff in this 

case; for the Delaware case law requires, for liability to be 

imposed, that the board have violated an unambiguous term 

of the plan, and that didn’t happen in this case. E.g., Sanders 

v. Wang, supra, 1999 WL 1044880, at *7. 

A further point is that the 2003 plan authorized the Plan 

Committee to amend the plan as it saw fit, albeit with excepCase: 15-1006 Document: 44 Filed: 10/20/2015 Pages: 8
6 No. 15-1006 

tions, but the exceptions did not require the committee’s remaining the initiating body—and did not even require the 

committee’s continued existence. Since the committee could 

thus have dissolved itself in favor of the Compensation 

Committee without violating the plan, the nonexistence of 

the Plan Committee was no bar to the decision in 2012 to 

grant shares from the 2003 plan to CEO Hamburger. 

 The district judge dismissed the suit on the ground that 

the plaintiff had failed to make a demand on the corporation 

to correct what she contends was a violation of Delaware 

law in awarding Hamburger extra shares under the 2003 incentive plan. Such a demand is required by Delaware law 

unless it would be futile, which in this context means that 

“particularized facts have been alleged to create a reasonable 

doubt either that ‘(1) the directors are disinterested and independent [or] (2) the challenged transaction was otherwise 

the product of a valid exercise of business judgment.’” 

Friedman v. Khosrowshahi, No. 9161–CB, 2014 WL 3519188, at 

*9 (Del. Ch. July 16, 2014), quoting Aronson v. Lewis, 473 A.2d 

805, 814 (Del. 1984); see also Wood v. Baum, 953 A.2d 136, 140 

(Del. 2008); Brehm v. Eisner, 746 A.2d 244, 256 (Del. 2000); 

Westmoreland County Employee Retirement System v. Parkinson, 

727 F.3d 719, 724–26 (7th Cir. 2013). Neither futility condition was satisfied. There is no doubt either that the directors 

who approved the Compensation Committee’s recommendation were disinterested or that the recommendation was 

the product of a valid exercise of business judgment. Notice 

that this is just a roundabout way of saying that the administration of the 2003 plan by the Compensation Committee, 

given the nonexistence of the Plan Committee designated in 

that plan, was not “a clear or intentional violation of a compensation plan,” Friedman v. Khosrowshahi, supra, 2014 WL 

Case: 15-1006 Document: 44 Filed: 10/20/2015 Pages: 8
No. 15-1006 7 

3519188, at *12, and the Compensation Committee’s deviation from the literal terms of the plan was, as we said, at 

worst a harmless error, though more likely no error at all. 

Literalism is not the only valid method of interpreting contracts (and sometimes it is invalid, because it can produce 

unforeseen absurdities). 

 For completeness we’ll comment briefly on another of 

the district judge’s rulings—his denial of a motion by Milton 

Pfeiffer to intervene as a plaintiff. Pfeiffer, like Donnawell a 

stockholder of DeVry Education Group though he owned 

only one share, worth no more than $50, had filed a stockholder derivative suit, very similar to the present one, in Illinois state court. The suit was dismissed as moot when the 

company corrected the errors in its administration of the 

2005 plan, which was before Donnawell had amended her 

complaint in the present case to challenge the award of stock 

options to Hamburger under the 2003 plan. Although it 

dismissed the suit, the Illinois court awarded Pfeiffer nontrivial attorney’s fees on the ground that his suit had alerted 

the company to the errors in the administration of the 2005 

plan, leading the company to correct them. One might therefore have thought Pfeiffer an appropriate intervenor in the 

present case. But the district judge denied the motion on the 

ground that Pfeiffer’s claim was identical to Donnawell’s 

and Donnawell was adequately representing his legal interest, and so allowing him to intervene would add nothing. 

Donnawell was dismissed from the case because of her failure to make the required demand on the board of directors, 

and her dismissal left no one to represent the interest of other shareholders except Pfeiffer. Yet as the district judge noted, Pfeiffer, like Donnawell, had failed to make a demand on 

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the board—and in any event has not appealed the denial of 

his motion for leave to intervene.

 The judgment dismissing the suit and denying Pfeiffer’s 

motion to intervene is 

AFFIRMED. 

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