Excessive Compensation Claims re Executive Compensation
>>> See also: Director Compensation Litigation / Code 162(m) Litigation
2016.Feb.02 Heads up to Directors: Fiduciary Duties over Executive Hiring and Firing
Rolling forward the logic of the seminal Disney cases that focused on executive compensation, Delaware’s Chancery Court has issued a decision that provides helpful reminders to independent directors: their involvement in executive hiring and firing decisions cannot be “tangential and episodic”; nor should they “mindlessly swallow information” or give deference to the judgments of corporate officers. The court warns that --
2014.Dec.30 ACCEPTED! Abercrombie's Settlement of Excess CEO Compensation Claim
Law360 reports that a district court in the southern district of Ohio has approved the settlement of shareholder derivative litigation that had charged directors of Abercrombie & Fitch with breaching their fiduciary duties by paying its CEO excessive compensation. Law360 reports that "The board approved substantial changes to executive compensation before the suit was filed, leaving the parties to negotiate on the ethics, governance, and compliance issues – issues resolved in the final settlement, according to court documents." As a result, the settlement approved governance changes unrelated to executive compensation, plus payment of $1.6 million of attorney's fees. For the prior decision reject 2014.Sept.29 item below ("REJECTED").
2014.Dec.29 Rescission of Stock Award to End Litigation (Annual Limit Exceeded)
AMD's SEC Form 8-K describes rescission of an incoming CEO's stock plan awards, due to the annual per person limit set forth in the underlying stock plan. This is another example of a "gotcha" claim because the company stands by its award decision, explaining in its 8-K that --
2014.Sept.29 REJECTED! Settlement of Excess CEO Compensation Claim Settled through Governance Reforms
This Reuters article reports that Federal District Court Judge James Graham (S.D. Ohio) has rejected Abercrombie & Fitch's proposed settlement of shareholder derivative claims by a retirement fund investor. The proposed settlement entailed a commitment to make "a complete transformation . . . to being an industry-wide and market leader in the areas of executive compensation, internal controls, and ethics." The retirement fund claimed directors breached their fiduciary duties by paying "penthouse" compensation during periods of deteriorating stock performance. The complaint referenced 20% shareholder support in a 2013 failed say on pay vote. In his rejection of the proposed settlement, Judge Graham wrote that --
2014.Sept.08 Pyrrhic Victory in MD Decision involving Awards Above Plan Limits
On the one hand, a Maryland district court refused to dismiss claims that awards exceeding a plan's individual limit involved breaches of fiduciary duty, breaches of the duty of candor (through proxy statement mis-statements), and unjust enrichment. Nevertheless, the court's decision concludes --
2013.Nov.13 Mere Eligibility for Future Stock Awards does not Make Directors "Interested"
An amended complaint in a shareholder derivative action was dismissed with prejudice after revised allegations failed to excuse demand on the board. The court explained in Abrams v Wainscott (D.DE, 11/13/13):
2013.Aug.16 Stock Plan Limits and §162(m) Disclosure Give Legs to Shareholder Derivative Litigation
A shareholder derivative action has avoided dismissal, despite the absence of a pre-suit demand for board action, because the underlying complaint raised a reasonable doubt that stock awards exceeded a plan’s limits on individual awards, and therefore were not a valid exercise of business judgment. The plan at issue was the AsiaInfo-linkage's 2011 Stock Incentive Plan, which looks innocent on its face by including individual award limits in a typical section titled "Section 162(m) Limits," with those limits being applicable only to awards "intended to qualify" as performance-based compensation for 162(m) purposes. The complaint seemed to involve no more than a gadfly allegation that executives received stock option grants in excess of 162(m)'s limits.
Unfortunately for Asia-Info, the CD&A in its 2012 proxy statement included the following sentence:
That text led to the court's decision in Halpert v Zhang (D.DE 8/1/2013):
The Halpert case consequently serves as another reminder that public companies should take at least three precautions when dealing with the Code §162(m) implications of their stock plans:
2013.Jul.31 Negative Discretion under LTIP Held to be Authorized and Valid Business Judgement (DE)
A Delaware court has dismissed shareholder derivative litigation claiming that Viacom's compensation committee exercised impermissible subjective discretion when deciding LTIP awards. Viacom argued that the LTIP at issue authorized negative discretion, and that awards were consequently valid products of business judgement. The court agreed, holding that "there is no clear and undisputed violation, let alone a violation that, standing alone, would create a reasonable doubt that the Board acted without knowledge or intent" (Freedman v. Redstone, D. DE, 7/16/2013).
2012.Apr.10 Stillwater Rescinds CEO Awards, Perhaps to Quell Derivative Suit
Mainly to secure exemptions from Code §162(m)'s $1M deduction limit, it is common for stock award plans to establish maximum limits on the awards that any individual may receive. The recent experience of Stillwater Mining reminds that these limits need monitoring, because awards in excess of shareholder-approved plan limits are vulnerable to challenge. In the case of Stillwater Mining, a shareholder derivative complaint made such allegations in early April. Within a week afterward, Stillwater filed an SEC Form 8-K announcing that, with the CEO's consent, the company had rescinded grants of restricted stock units covering just under 190,000 shares (valued around $2M, @ $11/share). Two days later, on April 12th, Stillwater issued additional proxy materials providing more context: basically explaining the Code §162(m) origin for the limit, its past irrelevance to the company due to inability to claim deductions, and the conclusion that "Despite the cost to Mr. McAllister personally, the costs and distraction of litigation were not in the best interests of the Company and its shareholders and agreed the most prudent course of action would be to rescind the grants that exceeded the cap."
2013.Feb.26 Excessive Compensation Complaint Dismissed vs. Houston American Energy
According to this SD Texas decision, the complaint in King v. Terwillegar failed to satisfy Delaware's law that conditions shareholder derivative actions on allegations establishing demand futility and a lack of director independence. The underlying claims for fiduciary breach, waste, and unjust enrichment allege that the following executive compensation actions violated performance standards promised by financially-troubled Houston American Energy: the approval of new change in control agreements (promising 2.5 times pay as severance), and granting of stock option grants, bonuses, and salary increases. The court concluded that --
2013.Feb.07 Excess Comp Litigation Strikes AmerisourceBergen due to 162(m) Limits
A stock plan's provision setting forth per-individual limits for Code §162(m) purposes has spurred shareholder derivative litigation alleging that CEO awards in excess of the limits involved breaches of fiduciary duties, corporate waste, and unjust enrichment. To request a copy of the complaint, send an email to Mark.
2012.Jul.09 Delaware Court Permits Claims to Proceed re Director Equity Awards
The typical omnibus stock plan includes non-employee directors among the list of those eligible to receive discretionary stock awards. Shareholder approval of those plans will not alone insulate directors from claims that they have awarded themselves excessive compensation, based on refusal to dismiss such a claim in Seinfeld v. Slager, DE Ch, 6/29/2012.
2012.June.21 Delaware Dismisses Claims vs H-P alleging Excess Severance and Inadequate CEO Succession
A Delaware chancery court has ventured into new ground in analyzing claims that H-P's directors breached their fiduciary duties with regard to CEO succession planning. In its decision, the court declined "under the circumstances of this case" to impose such a fiduciary duty by judicial fiat, and finding that "Plaintiff has not identified any case law or alleged any facts that suggest that directors have been or are on notice that such a failure is a breach of fiduciary duty." Dismissal of the claim resulted because, reflecting a continuing Delaware judicial theme in these cases: "if Plaintiff had made presuit demand regarding his succession planning claim, the Board could have impartially considered its merits without being influenced by improper considerations.96" On the same ground, the court dismissed the shareholder derivative claim alleging excessive severance. See Excess Severance Claims. See also June 18, 2012 entry re dismissals for absence of pre-suit demand.
2012.April.16 Say on Golden Parachute Disclosure Sparks Shareholder Derivative Litigation vs Encore Bancshares
According to the Complaint: "as further alleged below, the Company delegated the task of negotiating the sale of the Company to its conflicted Chairman and CEO, James D. D’Agostino Jr., who, in addition to monetizing his large shareholdings in Encore – which he would not be able to profitably do at this time absent a sale of the Company – is also receiving more than $1 million in cash compensation he would not receive at this time absent a sale of the Company. In addition, the other members of Encore’s Board will also receive substantial personal compensation that they would not otherwise receive at this time absent consummation of the Sale Agreement." For further info, see Law360 "Encore Shareholders Blast Exec Perks in $250M Cadence Deal" (4.17.2012); see generally, Executive Compensation Litigation vs Corp Boards.
2012.Mar.30 Broad Range of Excess Compensation Claims Dismissed - Freedman v. Adams (Del.Ch.), holding that "This Court rejects the notion that there is a broadly applicable fiduciary duty to minimize taxes, and, therefore the Plaintiff's argument that the board failed to act despite a duty to minimize taxes is unavailing."
2012.Mar.23 NY Court Dismisses Excessive Compensation Case vs. Morgan Stanley Directors
According to Reuters: “Shareholders [of Morgan Stanley] accused the outside directors of corporate waste and breaching their duties by setting aside 62 percent of net revenue, or $14.3 billion, for compensation in 2009. … They said the amount was excessive given that Morgan Stanley had lost $907 million that year and had accepted a $10 billion government bailout the previous fall. … Shareholders said incentive payments made in 2006 and 2007 should be clawed back because they were based on results goosed by excessive risk-taking and which the 2008 global financial crisis had shown to be ephemeral. … A New York State appeals court panel in Manhattan said the shareholders should have demanded that the board make changes before suing. The panel said investors had not shown that the board had conflicts of interest that would have made such a demand futile.”
>>> Security Police and Fire Professionals of America Retirement Fund, et al. v. John J. Mack, et al. (NY App Div, 1st Dept., 3/22/2012), applying Delaware law and dismissing for lack of pre-suit demand.
(Del.Ch. 2011.Oct.13) Excessive Compensation Claim Dismissed.
In its Goldman Sachs decision, Delaware's Court of Chancery dismisses a shareholder derivative action claiming that "...the Director Defendants violated fiduciary duties in setting compensation levels and failing to oversee the risks created thereby. The facts pled in support of these allegations, however, if true, support only a conclusion that the directors made poor business decisions." Further, the decision states that:
See: 2011 WL 4826104 at *18, 2011 Del Ch LEXIS 151
2005 Disney Case: Brehm v. Eisner (Del.Sup.Ct. 2005), stating:
SD Ohio vs GA State - 9/2011. Courts in failed say-on-pay litigation reached different results in applying DE law, with the SD Ohio ruling in Cinci Bell against dismissal of the complaint, and the Fulton Co. (GA) court reaching an opposite conclusion re an action involving Beazer Homes. See Failed Say on Pay Litigation.
AR - 3/30/2011. In a case alleging that board members breached their fiduciary duties of loyalty and good faith by paying exhorbitant compensation to members of the founding Dillard family, the Arkansas Court of Appeals dismissed a shareholder -derivative action for lack of presuit demand or futulity. See Berry v. Dillard, applying Delaware law, and citing Heineman v. Datapoint Corp., 611 A.2d 950, 955 (Del. 1993) for the requirement of particularized factual allegations to support a demand futility argument.
Inspection of Board Records
2011.Nov.21 Shareholder Not Allowed to Inspect Board Records of Internal Investigation. Delaware's Supreme Court denied a shareholder's action to inspect an internal report prepared for Hewlett-Packard's board in connection with its investigation into sexual harassment allegations against its former chief executive officer, because the shareholder "has not shown that the [report] is essential to his stated purpose, which is to investigate possible corporate wrongdoing" (Espinoza v. Hewlett-Packard Co., Del., 11/21/2011). The decision concludes, in pertinent part:
OK - 11/3/2011 CEO Returns Part of 2008 Bonus paid for Map Collection. The CEO of Chesapeake Energy has agreed to return $12 million of his $100 million total compensation reported for 2008 (essentially undoing his sale of an antique map collection to the company), according to today's Law360. This action and certain corporate governance improvements are reported to settle an Oklahoma shareholder derivative claim alleging directors breached their fiduciary duty in part through authorizing purchase of the antique map collection. See Reuters.
(9th Cir. 2009) ESOP Participants Allege ERISA Breach from Excessive Executive Compensation -- "Where, as here, an ESOP fiduciary also serves as a corporate director or officer, imposing ERISA duties on business decisions from which the individual could directly profit does not seem to us an unworkable rule." Also: the court held it likely that ERISA 410 would invalidate an indemnification agreement between the employer and its executives, because ERISA 410 prohibits agreements that exculpate plan fiduciaries from liability for their own misconduct. Johnson v. Couturier, 7/27/2009.
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