Supreme Court Rejects Challenge to Executive Compensation

Freedman v. Adams, Del. Supr., No. 230, 2012 (Jan. 14, 2013).

Issue Addressed

Whether the decision by a board to pay executive compensation without structuring it to take advantage of tax deductions was a breach of fiduciary duty or corporate waste. Short Answer:  No.

Short Overview

This decision by the Delaware Supreme Court affirmed a Court of Chancery decision that dismissed a claim of corporate waste based on an argument that the board should not have approved a $130 million executive compensation package without structuring it so that it would have saved $40 million in taxes by qualifying for favorable tax treatment under Section 162(m) of the Internal Revenue Code.  We have previously summarized cases involving the interfacing of fiduciary duties of directors and Section 162(m) of the Internal Revenue Code; and we have also highlighted cases which have found that in Delaware there is no fiduciary duty to minimize tax liability.

TWO TAKEAWAYS:  This decision reinforces well-established case law for the following two points:

(1) It is almost impossible to prevail on a claim of corporate waste (i.e., one must show that the corporation basically “gave away something for free”); and

(2) It is extremely difficult to convince a Delaware Court to second guess a decision by a fully informed and independent board of directors regarding a matter of executive compensation.

See a post by Professor Hamermesh on this case highlighted here, as well as a post by Paul Rowe on the Harvard Corporate Governance BlogSee also prior Chancery decision in this case highlighted here.