Friedman v. Dolan, C.A. No. 9425-VCN (Del. Ch. June 30, 2015) (Noble, V.C.)
In this letter opinion, the Court of Chancery dismissed claims for breach of fiduciary duty and waste under Chancery Rule 12(b)(6), holding that the business judgment rule, rather than entire fairness review, applied to executive compensation determinations made by an independent committee of a controlled company.
Cablevision Systems Corporation was founded by its Executive Chairman Charles Dolan. James Dolan, the Chairman’s son, served as a director and the Chief Executive Officer. The Dolan family accounted for ten members of Cablevision’s sixteen-member board, held approximately 73% of Cablevision’s voting power, and were parties to a block voting agreement that necessitated Cablevision’s identifying as a “controlled company” under New York Stock Exchange rules. Cablevision’s compensation committee, comprised of three directors who were not members of the Dolan family (the “Committee Directors”), approved compensation, with input from the CEO and based on peer group comparisons, that totaled $40 million for the Chairman and $41 million for his CEO son (the “Executive Compensation”). The Committee Directors also approved one-time stock option grants to incentivize the retention of the Chairman and the CEO, valued at $6 million and $7 million, respectively (the “Options”). Three non-employee directors, each daughters of the Chairman (the “Non-Employee Directors”), were awarded compensation by the entire Cablevision board equivalent to the compensation package received by all other non-employee directors.
Plaintiff, a Cablevision stockholder, asserted claims for (1) breach of fiduciary duty against the Committee Directors, the Chairman and the CEO for awarding and accepting the Executive Compensation, (2) breach of the duties of loyalty and good faith against the Non-Employee Directors for accepting compensation despite a lack of qualification and participation on Cablevision’s board, and (3) waste based on the grant of the Options to the Chairman and the CEO on the grounds that neither required an incentive to remain with Cablevision.
The Court first rejected plaintiff’s contention that the entire fairness standard of review applied to the compensation claims. In so ruling, the Court distinguished compensation decisions of an independent committee from transactions clearly requiring entire fairness review, such as a controlling shareholder possessing an informational advantage or employing coercion. Relying on Tyson Foods, Inc. Consolidated Shareholder Litigation and the fact that setting annual compensation is not a major or transformative decision of a corporation, the Court held that the business judgment rule applied.
In addressing the presumption of independence afforded by the business judgment rule with respect to the Committee Directors, the Court held that the conflicts alleged by plaintiff, such as long-term board service, service on boards at other entities controlled by Cablevision, age and retirement status, were insufficient to demonstrate that the committee’s decision-making process was tainted. For the same reasons, the Court rejected plaintiff’s assertion of bad faith by the Committee Directors as plaintiff had failed to plead any improper motive or utter failure to fulfill responsibilities. The Court concluded that the mere fact that the CEO had consulted with the Committee Directors regarding the compensation did not establish any manipulation. Therefore, the Court dismissed the breach of fiduciary duty claims against the Committee Directors.
As to the breach of fiduciary duty claims against the Chairman and the CEO for accepting the Executive Compensation, the Court reiterated that it typically defers to the business judgment of independent directors and that compensation decisions would not be scrutinized unless clearly improper or the product of wrongful influence. Having determined that plaintiff failed to allege coercion or wrongful influence over the Committee Directors’ decision-making, and that the CEO’s providing input to the independent committee did not support an inference of wrongdoing, the Court dismissed the claims against the Chairman and the CEO.
The Court further rejected the breach of fiduciary duty claims against the Non-Employee directors for receiving compensation despite alleged minimal participation in board meetings and lack of credentials. The Court observed that Delaware law does not mandate any minimum level of service, committee participation or professional experience for a director. The Court therefore declined to assess the qualifications of the Non-Employee Directors in the absence of a showing of incompetence, improper motive or complete disregard of duty, and granted defendants’ motion to dismiss as to the Non-Employee Directors.
Finally, the Court addressed the waste claim against the Chairman and the CEO based on the Options and rejected plaintiff’s contention that executives with a large stake in the corporation are prohibited from receiving incentive-based compensation because they cannot be expected to leave. Noting that Delaware law mandates deference to directors’ decisions on stock options in the absence of fraud, and that other employees received similar stock options, the Court held that plaintiff failed to plead sufficiently that the Options were irrational or otherwise impermissible, and dismissed the waste claims.