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Wednesday
Nov072012

Non-Reviewability of Directors' Fees: In re Huron Consulting Group, Inc. Shareholder Deriv. Litig., 971 NE 2d 1067 (Ill App. 2012)

In re Huron Consulting Group, Inc. Shareholder Deriv. Litig., 971 NE 2d 1067 (Ill App. 2012) involved a derivative suit filed in Indiana.  In considering the standard for demand futility, the courts applied Delaware law since the corporation had been formed under the laws of that state.  As part of the analysis, the court had to determine whether a majority of the board was disinterested and independent.  

Shareholders sought to show a lack of independence by pointing to the fees paid to directors.  As the plaintiff alleged:  "the members of the board of directors earned an average of $330,438 in annual salary."  Shareholders asserted that the fees were "materially higher" than those paid to directors of other corporations.  The court, however, found that the allegation, standing alone, did not establish a lack of disinterest or independence. 

His allegations that individual directors lacked independence is merely a comparison of the fees Huron paid its directors and fees awarded to directors of other Fortune 500 companies he selected. He then concludes that "[b]ecause of the sheer size of the atypical director fees" awarded to each director in this case, "there is reason to doubt [their] independence from other directors, rendering [them] incapable of impartially considering a demand to commence and vigorously prosecute this action." Plaintiff cannot survive dismissal based on such conclusory statements. . . .

Significant fees, standing alone, will not result in the loss of director independence.  The court did not provide any insight into the method of showing that fees were excessive and impaired independence.  The court, however, added an additional element to the analysis.  "More importantly, plaintiff failed to allege that any director has used his influence to pressure the others to do his bidding to further his personal interests, as the test for 'independence' requires under Rales." 

The element suggests that a loss of independence requires some affirmative evidence of actual pressure by the interested director.  Putting aside the merits of the requirement, this is an almost impossible burden to meet at the pleading stage.  Thus, non-independent boards would be treated as independent not because they were but because of the insurmountable pleading burden.   

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