Friedman v. Dolan: Substituting Ineffective Process for Substance (Part 4)
We are discussing Friedman v. Dolan.
Where does this leave things? In the court's analysis:
- The controlled nature of the company was irrelevant;
- The allegation that the family held a majority of the seats on the board and more than 70% of the voting power was irrelevant;
- The fact that the total compensation obtained by directors in 2011 was in the vicinity of $200,000 and was irrelevant in determining director independence (see 2012 proxy statement at 48) (similar amounts were provided in 2012 and 2013 and 2014).
- The desire to maintain a board position and continue to be paid as a director was deemed irrelevant (the court stated that the fact of compensation was "not enough" to affect independence without bothering to examine whether the amounts were actually material);
- The reality that directors on the compensation committee, had they approved less lucrative compensation packages, would have had to interact with the same individuals (and their family members) at subsequent board meetings was irrelevant;
- The allegations that one of the family members assisted in "choosing and evaluating the peer group" used by the board in connection with the compensation was irrelevant;
- The allegations that the chair of the compensation committee served on the board since 1996, with Charles having been Executive Chairman since 1985 and James a member of the board since 1995 was irrelevant; and
- The allegation that the chair of the compensation committee served as a director for MSG, "another company under the Dolan family's control" (and where his brother also worked) was considered irrelevant.
Leave aside that in other countries, the fact that directors are elected by a controlling shareholder matters. Leave aside that, in other countries, the number of years serving on the board matters. Delaware courts categorically dismiss these factors but have never really explained how these factors are irrelevant to a determination of director independence. Leave aside that fees paid to directors can be material but that Delaware courts refuse to analyze the materiality of the amount. And leave aside that the only thing shareholders really asked in this case was to have the compensation reviewed for fairness.
The ultimate outcome may or may note have been fair to the company. But certainly, given these allegations, an examine of the fairness of the compensation was in order. The court, however, examined the allegations individually, as if they stood alone. A holistic examination of the facts alleged by plaintiff would have dictated more than a court coming away "troubled." It would have dictated an examination of the fairness of the amounts paid.
In Delaware, compensation need not be fair. It is enough that there process. Process in Delaware, however, is a quantitative rather than a qualitative standard. It is enough that certain boxes are checked.
Because inadequate process does not guarantee fairness, the system used in Delaware will continue to impose no meaningful restraints on compensation. If meaningful restraints are to be imposed, they will have to come from the federal government and occur through preemption, a process that SOX and Dodd-Frank have already shown is well underway.
For primary materials in this case, go to the DU Corporate Governance web site.