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Thursday
Jul192012

Corporate Governance and the Problem of Executive Compensation: State Law Redux (Zucker v. Andreessen) (Part 2)

We have been looking at the problem of executive compensation.  In that regard, we are discussing the most recent Delaware decision on the subject, Zucker v. Andreessen, 2012 Del. Ch. LEXIS 135 (Del. Ch. June 2012).  The case addresses the standard for waste under Delaware law.

According to the complaint, Hurd was dismissed by the board.  The same day the board approved a severance package.  The package provided Hurd with: 

over $12 million in cash; (2) an extension of the expiration date for any outstanding options to purchase 775,000 shares of HP common stock; (3) pro rata vesting and settlement of 330,177 performance-based restricted stock units; and (4) settlement on December 11, 2010 of 15,853 nonperformance-based restricted stock units at a price equal to the lesser of (a) the closing price of HP's common stock on August 6, 2010 or (b) the per share closing trading price of HP common stock on December 11, 2010.     

The benefits were not the product of any existing contractual obligation.  The Agreement provided that the benefits "exceed[ed] any payment and benefits to which you are otherwise entitled."  Indeed, the existing employment agreement with Hurd had expired.  More general benefits paid to departing officers were explicitly unavailable to those "involuntarily terminated without Cause." 

The severance was apparently provided in return for additional commitments by Hurd.  He agreed to extend certain already existing confidentiality provisions, not to disparage the Company, to cooperate with the Company in certain circumstances, and to release any claims he had against the Company. 

The Complaint asserted that the Company had not identified any claims held by Hurd and, that as a result, he “provided nothing of value to the Company in exchange for the compensation in excess of that which the Company was obligated to provide to him pursuant to his employment agreement, or otherwise.”  The compensation was, according to Plaintiff, a gift. 

In considering whether to dismiss the case for failure to make demand, the court applied the traditional standard from Aronson.   Because Plaintiff did not challenge the independence of the board, the only issue under Aronson was whether the severance agreement was a valid exercise of the board’s business judgment.  To show that it was not, Plaintiff asserted that the agreement amounted to waste.    

It was destined to be a high standard to meet.  Waste, according to the court, required a showing that the board’s action “was so egregious or irrational that it could not have been based on a valid assessment of the corporation's best interests."  A claim for waste would be defeated by a showing that the board received “any substantial consideration” and made in good faith.  This was true even if the transaction was “ill-advised."  In presaging the ultimate result, the court acknowledged that “[t]his is obviously an extreme test, very rarely satisfied by a shareholder plaintiff."