Friedman v. Dolan: Substituting Ineffective Process for Substance (Part 1)

There can’t be a better decision in recent years from the Delaware courts that shows the need for preemption of the standards for determining executive compensation.  The Delaware courts have, for the most part, substituted process for substantive review.  Unfortunately, the courts do not interpret the process in a manner that ensures the fairness of the compensation.  This was made very clear by the decision in Friedman v. Dolan, C.A. No. 9425–VCN, June 30, 2015.  

In Friedman, the Chancery Court described the allegations surrounding compensations this way:  

  • It is hard to look at the facts of this case without going away troubled. A compensation committee with various ties to the controlling shareholder family awarded considerable executive compensation and benefits to the patriarch of that family and his son. Additionally, a board dominated by members of the controlling family approved non-executive director compensation, which accrued to three family-member directors with qualifications and attendance records that have been called into question. 

Expressions of concern or even outrage is never a good sign at the introduction of an opinion.  Thus, after noting these “concerns,” the court had this to say: 

  • Nonetheless, compensation decisions are not the expertise of trial judges, and the Court should not second-guess an independent compensation committee's business decisions that are not irrational. The Court also lacks a principled way to evaluate a director's decision to accept a position and her performance as a director. Although the amount of compensation and board composition raise some concern, that concern does not justify judicial intervention into that thicket here.

We will explore these "concerns" in the next several posts.  

J Robert Brown Jr.