Severance, Waste and In re HP Derivative Litigation
We examined the law around severance packages paid to departing CEOs in the absence of an employment agreement in Seinfeld v. Slager. The court in that case validated the payment on the basis of a general release and past service, justifications always present. We noted that in Zucker, the Delaware Chancery Court essentially found that the amount paid as severance could not be challenged as waste where the board was independent and had used proper process.
The federal district court in In re HP Derivative Litigation, 2012 U.S. Dist. LEXIS 137640 (ND CA Sept. 25, 2012) largely made the same points.
The litigation arose out of the departure of Mark Hurd as CEO from HP. At the time of Hurd's departure, he had no employment agreement. The board nonetheless executed a Separation Agreement that provided benefits allegedly valued at $53 million. Plaintiffs alleged that the benefits constituted waste.
The court, however, found that plaintiff had not adequately plead a claim for waste. The court noted that a finding of waste was "inappropriate '[s]o long as there is some rational basis for directors to conclude that the amount and form of compensation is appropriate and likely to be beneficial to the corporation'". The Separation Agreement contained "confidentiality, non-compete and non-solicitation covenants" clauses and provided for a waiver of claims.
In discussing the waiver, court summarily dismissed claims by plaintiffs that the provision provided no meaninful benefit to the company.
- Plaintiffs' argument ignores that if the Board had not negotiated the terms of Hurd's departure and instead had fired him for cause or denied him severance, Hurd could have sued, bringing a claim for wrongful termination or violation of the Severance Plan. . . . The Release protected against the expense of litigation and negative publicity resulting from having to defend against such a claim. That is, even if the release was worth relatively little, Plaintiff overstates his case to say it was worthless.
Moreover, even without the consideration, "at least some portion of Hurd's severance could represent 'reasonable' compensation for his successful past performance."
Plaintiff was, therefore, left with arguing that the amount paid was excessive. Relying on the reasoning in Zucker, the court dismissed the claim.
- "[T]he 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, "[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." Thus, allegations that the payments and benefits Hurd received were valued at approximately $53 million are alone insufficient to demonstrate waste. (citations omitted)
The analysis reiterated what Zucker had already made clear: All severance arrangements with departing CEOs were supported by consideration and allegations of waste would not be allowed to go forward based upon the amount paid.
In concluding that past consideration was sufficient to justify at least part of the severance, the court did not analyze or even note the compensation packages received by the departing CEO in the past. According to the HP proxy statement filed in 2010, Hurd had received total compensation of $30 million in 2009, $42 million in 2008, and $25 million in 2007. In other words, the court did not find it relevant to even examine prior pay packages before determining whether severance was appropriately paid for past performance to the company.
The federal court in this case applied Delaware law. The standard does not permit meaningful review of severance packages paid to departing CEOs. As a result, the state law standard exerts no downward pressure on severance amounts. Any effort to reduce amounts paid as severance will need to percolate up from Congress (see say on pay, clawbacks, and the regulation of Compensation Committees of exchange traded companies).