Seinfeld v. Slager, et al., C.A. No. 6462-VCG (Del. Ch. June 29, 2012) (Glasscock, V.C.)
June 29, 2012
In this memorandum opinion, the Court of Chancery granted in part and denied in part defendants’ motion to dismiss claims challenging several compensation decisions.
Plaintiff, a shareholder of Republic Services, Inc. (the “Company”), brought a derivative action alleging that the Board breached its fiduciary duties and committed waste by (i) deciding to pay the CEO compensation not required by any agreement, (ii) awarding an incentive payment to the CEO that did not minimize the Company’s tax liability, (iii) awarding stock options that did not minimize the Company’s tax liability, (iv) awarding incentive payments to employees even though the incentive plan requirements had not been met, and (v) awarding stock options to themselves pursuant to a stock option plan lacking sufficiently defined terms. Plaintiff did not make a demand upon the Board pursuant to Court of Chancery Rule 23.1 prior to filing suit. Defendants moved to dismiss all claims pursuant to Court of Chancery Rule 12(b)(6), and moved to dismiss all claims except the excessive compensation claim pursuant to Court of Chancery Rule 23.1. With regard to defendants’ motion to dismiss under Rule 23.1 for failure to make a pre-suit demand, the Court applied the test enunciated in Aronson v. Lewis, 473 A. 2d 805, 814 (Del. 1984), under which a plaintiff alleging waste must allege particularized facts leading to a reasonable inference that the exchange was so one-sided that no business person of ordinary, sound judgment could conclude the transaction was supported by adequate compensation.
First, plaintiff challenged a $1.8 million payment to the CEO, which was approved after the CEO had announced his retirement. Plaintiff argued that because the compensation was not required under an existing employment agreement, the award was an improper retroactive payment. Although the Court acknowledged that payment for services previously rendered and compensated could constitute waste, the Court also recognized that the decision whether to grant a severance or retirement bonus was within the business judgment of the Board. Finding that the size of the award was not unreasonable and the bonus was provided in exchange for a general release, to provide continuity in the Board, and to ensure an amicable separation, the Court held the transaction was not so one-sided that it amounted to waste, and dismissed the claim.
The Court next dismissed plaintiff’s claim that a $1.25 million incentive payment to the CEO constituted waste because the award might expose the Company to future tax liability. Plaintiff premised its argument on its belief that an IRS revenue ruling, upon which the Board relied to structure the compensation, was incorrect and eventually would be overturned, thereby rendering the Company’s compensation plan non-tax-deductible. Noting that the Court previously had held that a board of directors does not have a general fiduciary duty to minimize taxes, the Court held that the decision to rely on the IRS revenue ruling was within the business judgment of the Board.
The Court also dismissed plaintiff’s claim that the Board’s decision to grant employees only time-vesting stock units, rather than performance-vesting units, constituted waste. Although plaintiff asserted that peer companies awarded a greater percentage of performance-vesting units compared to time-vesting units, time-vesting options did not properly incentivize employees, and time-vesting options were not tax-deductible, the Court held that plaintiff did not allege facts sufficient to create a reasonable doubt that the Board did not properly exercise its business judgment.
The Court similarly dismissed plaintiff’s claim that the Board improperly awarded payments to employees under a stockholder-approved incentive plan intended to promote synergies following a merger. Citing higher earnings before the merger, plaintiff contended that the merger had resulted in no synergies and, therefore, the plan’s performance goal had not been met. As a result, plaintiff argued, payments made to employees constituted waste. The Court, however, held that plaintiff’s argument did not necessarily demonstrate that the merger failed to achieve cost savings or that the Board ignored the plan’s rules. As a result, the Court found that plaintiff did not show that the Board’s payments under the plan were improper.
The Court, however, declined to dismiss plaintiff’s claim that the directors approved excessive compensation for themselves. Plaintiff argued that the Board’s stock unit awards amounted to waste because the awards were unreasonable and non-tax-deductible. Defendants countered that the awards did not violate the provisions of the stockholder-approved stock plan and, therefore, were protected by the business judgment rule. The Court noted that stockholder-approved plans may afford the protections of the business judgment rule, but only if the plans place meaningful limits on the Board. The Court found that in this case, because the stock plan placed very few limits on the Board’s ability to set its own stock awards, the Board was interested in the compensation decision and the decision would be analyzed under the entire fairness standard.
The full opinion is available here.