Excessive Severance Claims re Executive Compensation
2016.April.13 Former Director's RSUs - Business Judgement Rule Protects Board. In Friedman v. Maffei (2016 BL 115461, Del. Ch.), TripAdvisor's board succeeded in dismissing a shareholder derivative litigation challenging the board's decision to fully vest a former director's RSU (on the premise there was a termination without cause), even though the director had emailed a resignation (with resignation triggering forfeiture). The Delaware court reviewed the decision under the highly deferential business judgment rule, and dismissed the litigation because the inquiry was not whether the board made a wise decision, but whether, wise or foolish, the action had been taken in good faith.
2014.Mar.14 Executive Severance Challenged as Corporate Waste by Yahoo!'s Board
This Law360 article describes the filing of shareholder derivative litigation in Delaware Chancery Court. The complaint alleges that $127 million of severance paid to Yahoo!'s former COO was "egregious and wasteful." The case is The David R. & Lynn B. Hughes Trust of June 25, 1987 v. de Castro et al. FOR AN UPDATE AS OF 2/2/2016: see Excessive Compensation Claims.
2012.Sept.25 California Also Dismisses Shareholder Complaint re H-P's Severance Paid to Former CEO
The application of Delaware law principles led a California district court to dismiss shareholder challenges alleging waste through H-P's payment of $53 million of severance to former CEO Hurd. The grounds for dismissal included findings that H-P had received valuable consideration through receipt of a claims release, even though the amount paid could be considered "extremely rich or altogether distasteful." Shortly afterward in the opinion, the court decides that "Plaintiffs have failed to show that approving the Separation Agreement was so egregious or irrational that it could not have been based on a valid assessment of the corporation's best interests." The decision, In re HP Derivative Litigation (N.D.CA).
2012.June.21 Delaware Dismisses Claims vs H-P alleging Excess Severance and Inadequate CEO Succession. Due to the absence of a pre-suit demand, a Delaware chancery court has dismissed shareholder derivative claims premised on allegations that H-P's former CEO "Hurd was not entitled to, and did not deserve, any severance upon his termination from the Company. Nevertheless, the defendant directors granted Hurd a severance package estimated to be worth $40 million or more." In its decision, the court dealt with H-P's motion to dismiss the complaint due to the absence of a pre-suit demand and allegations establishing that the demand would have been futile. The court first found that "the only question in terms of demand excusal is whether Plaintiff has satisfied Aronson's second prong by alleging particularized facts that raise a reasonable doubt that the Severance Agreement was the product of a valid exercise of business judgment." The court went on to dismiss the claim based on application of the following standard:
Regarding the complaint's allegations of excess severance, here are relevant quotations from the Delaware decision:
2012.Feb.20 Golden Parachutes and Board Accountability. Board members should beware of warnings within the conclusion to a Governance Metrics International analysis of large golden parachute payments: "Directors who approve such awards for an incoming CEO or allow them to continue in place for existing CEOs may be held accountable when CEOs receive tens of millions after a short or unproductive tenure. They may also be held accountable if CEOs are paid twice for their successes."
2009. In re Citigroup (Del.Ch. 2009): "Plaintiffs allege that this compensation package constituted waste and met the “so one sided” standard[of Delaware law] because, in part, the Company paid the multi-million dollar compensation package to a departing CEO whose failures as CEO were allegedly responsible, in part, for billions of dollars of losses at Citigroup. In exchange for the multi-million dollar benefits and perquisites package provided for in the letter agreement, the letter agreement contemplated that Prince would sign a non-compete agreement, a nondisparagement agreement, a non-solicitation agreement, and a release of claims against the Company. Even considering the text of the letter agreement, I am left with very little information regarding (1) how much additional compensation Prince actually received as a result of the letter agreement and (2) the real value, if any, of the various promises given by Prince. Without more information and taking, as I am required, plaintiffs’ well pleaded allegations as true, there is a reasonable doubt as to whether the letter agreement meets the admittedly stringent “so one sided” standard or whether the letter agreement awarded compensation that is beyond the “outer limit” described by the Delaware Supreme Court. Accordingly, the Complaint has adequately alleged, pursuant to Rule 23.1, that demand is excused with regard to the waste claim based on the board’s approval of Prince’s compensation under the letter agreement."
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