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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 --

  • “Directors who choose not to ask questions take the risk that they may have to provide explanations later, or at least produce explanatory books and records as part of a Section 220 investigation.”   See pages 42-43 of Amalgamated Bank vs Yahoo (Del.Ch. 2/2/2016).


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 --

  • In voiding and rescinding the equity awards described above, the full Board also determined that the total compensation package provided for in Dr. Su’s employment agreement, including the equity compensation, was appropriate and aligned with stockholders’ interests. Having reaffirmed that the compensation it had promised to Dr. Su was appropriate and reasonable, the full Board determined that the Company intends to return Dr. Su’s equity compensation to the level it should have been prior to the action to void and rescind the equity awards described above at or near the earliest practicable opportunity available to the Company, subject to law and the terms of the 2004 Plan.


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 --  

  • "The court's fundamental concern is that, given the seriousness of the allegations ... the proposed settlement broadly releases shareholders' claims for little, if any, consideration and provides no monetary compensation to the company."The case is City of Plantation Police Officers Retirement System v. Jeffries et al, S.D. Ohio. 


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 --

  • "Because only derivative claims remain, a favorable verdict for Plaintiff would appear to yield him only marginal, if any, direct benefit. Accordingly, I encourage the parties to give serious consideration to an early settlement conference with a Magistrate Judge of this Court prior to undertaking significant discovery. This will allow the parties to attempt to work out their competing positions before running up unnecessary expenses, freeing up resources that otherwise might be spent on discovery and motions practice."


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):

  • "While the pool of shares increased, this fact alone is not sufficient to raise a reasonable doubt that the outside directors (i.e., a majority of the board) were disinterested in the proposals. As demand futility analysis proceeds transaction-by-transaction, the transaction here - the proxy proposals - split the Director Defendants' interest in determining their own pay from both the increase in the time period during which the Directors receive compensation and the increase in the options pool.  In other words, the Directors' ability to grant themselves stock remains unaffected by the proxy vote and exists regardless of the proxy proposals. . . . Therefore, for the reasons stated above, the Plaintiff has failed to plead sufficient facts to raise a reasonable doubt concerning the Directors' disinterest." 


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: 

  • "Awards issued under our stock incentive plans (including stock options, RSUs, and PSUs) have been structured so that any taxable compensation derived pursuant to the exercise of options granted under such plans should not be subject to these [162(m)] deductibility limitations." 

That text led to the court's decision in Halpert v Zhang  (D.DE 8/1/2013): 

  • "Therefore, under the well-pled facts and Asialnfo's own characterization of the challenged grants, Halpert has established a prima facie case that the Board exceeded its authority by awarding more stock options than authorized under the Plan."

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: 

  • Be sure the stock plan itself authorizes, but does not require, the making of awards that qualify for the performance-based award exemption from Code §162(m).  
  • Best practice: draft the plan to authorize both stock and cash awards, so that shareholder approval allows the broadest possible flexibility for the making of exempt awards.
  • In proxy statements, make it crystal clear that awards may but are not required to be exempt from Code §162(m).
  • Be attentive to this in two places: the initial proposal for shareholder approval of the plan, and the CD&A discussion of Code §162(m).
  • In operation, be aware that §162(m) requires monitoring from the date of an award through its payout in order to assure exempt awards occur when desired. For instance, awards other than stock options and SARs generally require –
    • establishment of performance goals within the first 90 days of the performance period,
    • administration by independent (“outside”) directors,
    • their certification of performance results before the performance-based compensation is paid, and
    • shareholder approval or re-approval of the plan every five years . . . even if the plan term has a term of ten years.


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 --

  • In essence, he asks this court to determine the wisdom of the Board’s compensation decisions—precisely the type of decision that courts should not second guess. Id. at 983 (“The acumen of the business executive, the competitive environment in the industry, and the recruitment and retention challenges faced by the hiring corporation all bear heavily on an appropriate level of compensation. ‘How much is too much?’ is a question far better suited to the boardroom than the courtroom.”).


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:

  • "So long as such individuals [directors and officers] act within the boundaries of their fiduciary duties, judges are ill-suited by training (and should be disinclined by temperament) to second-guess the business decisions of those chosen by the stockholders to fulfill precisely that function."
  • "On the contrary, the pleadings suggest that the Director Defendants kept themselves reasonably informed and fulfilled their duty of oversight in good faith.230 Good faith, not a good result, is what is required of the board."
  • "Goldman’s board and management made decisions to hedge exposure during the deterioration of the housing market, decisions that have been roundly criticized in Congress and elsewhere. Those decisions involved taking objectively large risks, including particularly reputational risks. The outcome of that risk-taking may prove ultimately costly to the corporation. The Plaintiffs, however, have failed to plead with particularity that the Director Defendants consciously and in bad faith disregarded these risks; to the contrary, the facts pled indicate that the board kept itself informed of the risks involved. The Plaintiffs have failed to plead facts showing a substantial likelihood of liability on the part of the Director Defendants under Caremark."

See: 2011 WL 4826104 at *18, 2011 Del Ch LEXIS 151

2005 Disney Case: Brehm v. Eisner (Del.Sup.Ct. 2005), stating: 

  • But, in the pragmatic, conduct-regulating legal realm which calls for more precise conceptual line drawing, the answer is that grossly negligent conduct, without more, does not and cannot constitute a breach of the fiduciary duty to act in good faith. The conduct that is the subject of due care may overlap with the conduct that comes within the rubric of good faith in a psychological sense,104 but from a legal standpoint those duties are and must remain quite distinct. Both our legislative history and our common law jurisprudence distinguish sharply between the duties to exercise due care and to act in good faith, and highly significant consequences flow from that distinction.
  • To recover on a claim of corporate waste, the plaintiffs must shoulder the burden of proving that the exchange was “so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration.”135 A claim of waste will arise only in the rare, “unconscionable case where directors irrationally squander or give away corporate assets.”136 This onerous standard for waste is a corollary of the proposition that where business judgment presumptions are applicable, the board’s decision will be upheld unless it cannot be “attributed to any rational business purpose.”137


Exhaustion/Futility.

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:

  • "First, the Report itself does not discuss the “for cause” issue.  Second, Espinoza has not shown, by a preponderance of the evidence, that the Covington Report was “central” to the Board’s decision to enter into the separation agreement, rather than terminate Hurd for cause.  Third, HP has already disclosed the information contained in the Covington Report that is essential to Espinoza’s Section 220 stated purpose."


Remedies

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. 

Retirement Plans

(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.