Zucker is a case we have already discussed. Go here, here and here. Nonetheless, it is worth revisiting in connection with our discussion of the standard of review for severance packages. We noted in Seinfeld v. Slager that the court all but held that past service to the board and general waivers would be sufficient to justify the payment of severance.
Zucker arose out of the departure of Mark Hurd from HP. Although not having an employment contract, he received severance benefits allegedly valued at $53 million. The plaintiff challenged the payments as waste. Plaintiff argued that the execution of a "waiver" was not sufficient consideration to justify the payments.
Although the court found that plaintiff was entitled to a presumption that the court could have terminated the CEO for cause, the court found that "there is no allegation from which the Court reasonably can infer that Hurd necessarily would have acquiesced in such a decision." Moreover, "[c]reative counsel advocating on Hurd's behalf could have claimed that he, in fact, was entitled to severance under HP's general executive officer severance plan notwithstanding the expense report violations." As a result, while the board "might have prevailed," the company could have been required to "incur considerable costs of time, resources, and negative publicity in the interim."
In other words, the argument that the waiver was worthless because it was the board that had possible claims, not the CEO, was rejected by the court out of hand. It was enough that "creative counsel" could still find a way to file a claim (presumably while avoiding the risk of sanctions under Rule 11). Moreover, irrespective of the value of the waiver, the company "arguably still could have compensated him for his past stewardship of HP."
As for the argument that the amount was excessive, the court found that the amount was actually not the determining factor in a claim for waste.
Plaintiff's waste claim reduces to his belief that $40 million was just too much. Be that as it may, "the size of executive compensation for a large public company in the current environment often involves large numbers," and "amount alone is not the most salient aspect of director compensation" for purposes of a waste analysis. Without question, the amount of Hurd's severance may appear extremely rich or altogether distasteful to some. But, "[t]he waste doctrine does not . . . make transactions at the fringes of reasonable decision-making its meat." Rather than by judicial predilection, "[t]he value of assets bought and sold in the marketplace, including the personal services of executives and directors, is a matter best determined by the good faith judgments of disinterested and independent directors, men and women with business acumen appointed by shareholders precisely for their skill at making such evaluations."
In other words, even a "distasteful" payment would be upheld if the process used by the board was adequate.
The case, therefore, stands for the proposition that severance packages paid to departing CEOs who do not have a compensation agreement cannot be challenged due to a lack of consideration and cannot be challenged because the amount is excessive. In other words, the outer limits set by the waste doctrine in the context of severance agreements are no limits at all. The Delaware courts, therefore, do not intend to impose any limits on these payments. To the extent that limits are imposed, as we have noted earlier, they will have to be imposed by the federal government.