Seinfeld v. Slager and the Non-Reviewability of Retirement Compensation (Part 2)
We are discussing Seinfeld v. Slager, 2012 Del. Ch. Lexis 139 (Del Ch. June 29, 2012).
In Seinfeld, the board agreed to pay $1.8 million to a departing CEO in return for "long service to the company." In other words, the payment was in return for past service. This, the court found, was sufficient to demonstrate "value" received by the company.
In doing so, however, the court did not focus on any unique facts. Instead, companies always received value when providing payments in return for past services. In the case of retiring employees, the benefit to the company could, for example, be the fact
the award may serve as a signal to current and future employees that they, too, might receive extra compensation at the end of their tenure if they successfully serve their term. Other factors may also properly influence the board, including ensuring a smooth and harmonious transfer of power, securing a good relationship with the retiring employee, preventing future embarrassing disclosure and lawsuits, and so on.
These possibilities were enough. There was no need for any actual evidence that this was the case.
Perhaps aware of the lack of actual support for this analysis, the court found additional consideration for the payment by viewing the amount as part of the retirement package. The general release provided by the CEO for the entire package was deemed sufficient to support the $1.8 million payment. See Id. ("The Retirement Agreement, considered as a whole, is clear from its explicit terms that it provided the cash bonus as part of a package intended to secure a general release, to provide continuity in the Board, and to ensure that O'Connor's separation from the Company was amicable.").
The striking thing about the opinion was how little the actual facts of the case mattered. The reasons used by the court to justify payments for past services were reasons that were present in every case. It could always be alleged that the payments would provide an incentive to existing employees to "serve their term" or to permit a "smooth" transition of a departing CEO. Thus, the court essentially validated the use of past service as consideration in all cases.
Moreover, the reasoning was questionable. It was quite unclear whether voluntary payments to a departing CEO would provide any kind of "signal" to "current and future employees" other than the CEO. Arrangements with the CEO -- whether generous or parsimonious -- likely provide no guidance as to how other employees will be treated.
To the extent that the payments were intended to "serve as a signal" for future CEOs, the signal was likely to have little value. A payment to one CEO would not support a conclusion that a future CEO would be treated in an identical fashion. Boards and circumstances change. Moreover, if the goal was to ensure that the CEO completed his or her term, the board (and the CEO) had a more certain mechanism -- the employment contract. Severance in an agreement was much more likely to achive the goal of term completion than the need to read "signals" based upon the treatment of past CEOs.
The use of a general release to support consideration provided another basis for upholding severance payments in all cases, irrespective of the specific facts. Indeed, the court ignored the fact that the board had specified the reasons for the payment -- past service to the company -- and concluded that the payments were also supported by any consideration connected to the retirement package as a whole. The court made no attempt to analyze the particular waiver to determine whether in fact it provided the company with any meaningful value.
The use of past service and general releases to sustain severance packages means that they can no longer be challenged in Delaware as unsupported by consideration. The "benefits" given by the court that arise from payments for past service are always present (as is a waiver). After this case, the only way a severance package can be challenged as waste is by alleging that the amount is excessive. Subsequent cases show that this is avenue has also been more or less foreclosed by the Delaware courts.
In short, meaningful limits on severance payments will have to be imposed at the federal level. Congress has already recognized this. Say on pay provides an advisory vote on some golden parachutes. With cases such as Slager, pressure could arise for additional federal intervention.
Primary materials on the case have been posted at the DU Corporate Governance web site.