Sunday, July 19, 2009

The Waste Claim for Recouping Executive Pay under Delaware Law

Stephanie has discussed a bit the difficulty in successfully making the waste claim in New York for recouping executive pay. It is similarly difficult to win under a claim for waste in Delaware. The Delaware Court has said that to prevail on waste, “the plaintiff must overcome the general presumption of good faith by showing that the board’s decision was so egregious or irrational that it could not have been based on a valid assessment of the corporation’s best interests.” White v. Panic, 783 A.2d 543, 554 n.36 (Del. 2001). Surely a high hurdle to meet. A former professor of mine gave a clear example of waste: collecting the company’s cash and setting it aflame.

While the Board of Directors of a Delaware corporation has broad discretion in setting executive pay, the law is clear that there is an outer limit to this discretion, at which point a pay package constitutes waste. A recent decision by Chancellor Chandler of the Delaware Chancery Court (In Re Citigroup Inc. Shareholders Derivative Litigation, Civil Action No. 3338-CC, Del. Ch., Feb. 24, 2009) provides at least a little bit of hope for shareholders seeking to recoup executive pay from executives at poorly-performing companies that provide lavish executive pay packages.

In November 2007, Citigroup entered into a letter agreement with its then-CEO, Charles Prince, which provided Prince with $68 million upon his departure from the company including bonus, salary and accumulated stockholdings. Additionally, Prince was provided with an office, an administrative assistant, and a car and driver. In return, he contracted to sign a non-compete agreement, a non-disparagement agreement, a non-solicitation agreement, and a release of claims against the Company. Shareholders sued claiming that the pay package was so one-sided that it amounted to waste because Prince was paid millions even though he was allegedly responsible, in part, for billions of dollars of losses at Citigroup. The defendants moved to dismiss the complaint for failure to state a claim.

In a decision handed down on February 24, 2009, Chancellor Chandler denied defendants’ motion to dismiss the claim for waste. He noted that he was 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 plaintiffs’ well pleaded allegations as true, the Chancellor concluded that there was reasonable doubt as to whether the letter agreement constituted waste.

The waste claim was part of a broader lawsuit where shareholders alleged that Citigroup officers and directors breached fiduciary duties by failing to adequately protect the company from exposure to the subprime lending market. Other than the waste claim relating to Prince’s pay package, all the claims were dismissed.

The decision for the plaintiffs on the waste claim is admittedly at an early stage of the litigation. Discovery is ongoing. If the waste claim is to be decided on its merits, it will be interesting to see whether the Delaware court maintains the high hurdle that plaintiffs must meet to satisfy the waste test or provides an opening for future plaintiffs to succeed on a claim for corporate waste.

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1 comment:

  1. Hi Allen!

    Thanks for writing about Prince >> the media will eat that trial alive, if the parties don't settle before arguments occur ...

    In any event: thanks so much for taking the time to write here! Was grateful you could join us, and appreciate your contribution.

    Hope you enjoyed it - we'll speak soon. Sls.


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