Zucker v. Andreessen, C.A. No. 6014-VCP (Del. Ch. June 21, 2012).
(1) Whether a $40 million severance package for the CEO of Hewlett-Packard, who could have been terminated for cause, constituted corporate waste; and (2) Whether the failure of the board to have a clearly defined succession plan in place was a breach of fiduciary duty.
No as to both questions. See Seinfeld v. Slager, Chancery decision one week later that also dismissed a waste claim alleging excessive compensation (highlighted here). My LexisNexis short videocast on the Zucker case is available here.
This is a derivative action brought on behalf of the Hewlett-Packard Company (HP) accusing certain HP Directors of committing waste and breaching the duty of care in connection with the August 2010 termination of former CEO Mark Hurd. Prior related decisions in this case by the Delaware Supreme Court were highlighted on these pages here (denying Section 220 request), and here (regarding efforts to keep salacious letter about Hurd under seal).
Specifically, in this most recent ruling, the plaintiffs argue that the severance package estimated to be worth more than $40 million was a waste of corporate assets and the failure of the company to have in place a long-term CEO succession plan was a breach of the duty of care of the directors. The Court determined that there was a failure to excuse pre-suit demand and on that basis the Court granted a motion to dismiss.
The Court conducted the familiar analysis under Court of Chancery Rule 23.1 which requires a derivative complaint to “allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or the reasons for not making the effort.” (citing Aronson v. Lewis, 473 A.2d at 811-12.)
Under the test set forth in Aronson, well known to many readers of this blog, in order to successfully establish demand futility, or in other words, in order to satisfactorily explain why pre-suit demand was not made, the successful plaintiff must allege particularized facts that “create a reasonable doubt that: (1) the directors are disinterested and independent, or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.” See footnote 37.
Moreover, for claims based on board inaction, or when a specific transaction is not challenged, it is not possible to perform the Aronson inquiry because there is no transaction to review. Therefore, in reviewing allegations of a board’s failure to act, demand futility is assessed under the Delaware Supreme Court decision in Rales, 634 A.2d at 933, which requires: “particularized factual allegations raising a ‘reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.’”
Use of Special Litigation Committee does not, Ipso Facto, Excuse Demand
The Court distinguished the Sutherland v. Sutherland decision at 2008 WL 3021024, at *1 (Del. Ch. Aug. 5, 2008) (one of many Chancery decisions between those parties), and clarified an important point of Delaware law as follows: “[The] appointment of a special litigation committee is not, in all instances, an acknowledgment that demand was excused and ergo that a shareholder’s lawsuit was properly initiated as a derivative action.” See footnote 43.
In connection with an analysis under Rales, the Court explained that “only defendant directors who face a substantial likelihood of personal liability are deemed interested.” Moreover, the threat of directors’ liability is significantly lessened where the corporate charter exculpates directors from liability to the extent authorized by 8 Del. C. § 102(b)(7). Thus, in order for the HP directors to suffer a disabling likelihood of personal liability, the alleged breach of care for failing to implement a succession plan “must rise to the level of bad faith, such as a conscious disregard of a known duty to act.” See footnotes 90 and 91.
Not Per Se Breach of Fiduciary to Fail to Implement CEO Succession Plan
The Court observed that the plaintiffs did not cite, nor is the Court aware, of any Delaware precedent that stands for the proposition that failure to adopt a long-term succession plan amounts to a breach of duty. The Court reasoned that in the absence of bad faith, the exculpatory provision of the HP certificate of incorporation eliminated the threat of personal liability for alleged breaches of care. Therefore, if the plaintiff had made pre-suit demand the board could have impartially considered the merits.
The Court also noted that in the absence of any fiduciary duty to establish a long-term succession plan, it was important to emphasize that the mere aspirational ideals of good corporate governance practices may be commendable for many reasons, but they are not required by the corporation law and do not define standards of liability. See footnote 95.
The Court underscored in its conclusion that it had “no need to address whether the duty of care requires directors to adopt succession plans, and it expresses no view on that issue.” Rather, the Court held that there can be no substantial threat of personal liability predicated on bad faith disregard of a known duty to implement a succession plan because the complaint fails to allege a basis from which the existence of such a known duty reasonably could be inferred.