Seinfeld v. Slager and the Non-Reviewability of Retirement Compensation (Part 1)
Seinfeld v. Slager, 2012 Del. Ch. Lexis 139 (Del Ch. June 29, 2012) is an example of the Delaware appraoch to compensation. The case illustrates some of the reasons why compensation decisions have increasingly become a matter of federal rather than state oversight.
In providing for the review of CEO compensation, Delaware courts do not take into account the interested influence of the CEO inside the board room. In public companies, CEOs almost always sit on the board. Nonetheless, the standard of review for CEO compensation is usually the duty of care rather than the duty of loyalty. As a result, challenges are mostly limited to the process used in approving the compensation, with the amount and terms of the pay package essentially irrelevant to the analysis.
The extent to which courts render compensation decisions, particularly severance packages, unreviewable under this standard was made clear in Seinfeld v. Slager, 2012 Del. Ch. Lexis 139 (Del Ch. June 29, 2012). In that case, the CEO had served for ten years. Although he had no employment contract, the board executed a retirement agreement. As part of the agreement, he received $1.8 million in cash for his "long service to the Company." Shareholders challenged the payment, asserting that it was not supported by consideration.
The Delaware court defined the appropriate standard as the business judgment rule. See Id. ("Employment compensation decisions are core functions of a board of directors, and are protected, appropriately, by the business judgment rule."). That left shareholders with the "a Herculean, and perhaps Sisyphean, task" of establishing that the payment was waste.
Waste typically connotes payments made by the company in return for no benefit. A shareholder might claim that a payment was unsupported by consideration and therefore resulted in no value to the company. Alternatively, a shareholder might argue that the payment was excessive.
In Seinfeld, the issue was whether the payment was supported by consideration. Because of the characterization given by the company, the court had to decide whether past service was sufficient to provide the necessary consideration. Moreover, the court confronted past cases suggesting that it was not. Nonetheless, the court essentially concluded that past service to the company was always consideration.
We will look at the court's reasoning in the next post.
Primary materials on the case have been posted at the DU Corporate Governance web site.