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This concept is at the heart of the business judgment rule, under which Delaware courts will defer to decisions a board makes in good faith after reasonable investigation.
The judge wrote:
Therefore, Chandler continued:
Courts analyze business decisions that turn out badly from those made in bad faith, as Chandler pointed out by mentioning Vice Chancellor Leo E. Strine, Jr.'s recent opinion arising from a shareholder suit against American International Group Inc. (NYSE:AIG). Strine found that the complaint supported the contention that AIG senior managers were running a "criminal organization." By contrasting that decision with the Citi ruling, Chandler effectively cabined the AIG ruling. But Chandler's ruling was important in two respects. First, he declined to defer to a suit against Citigroup filed in New York as his colleague Donald Parsons did last year in a suit brought by Bear Stearns Cos. In there, Chandler wrote:
Many observers, including this one, felt that Parsons avoided ruling in a situation so politically loaded that the Delaware courts wanted to duck it. Chandler approved of that decision but made clear how unusual it was. Second, Chandler declined to dismiss the shareholders' claim that the severance agreement former Citi CEO Charles Prince signed in 2007 constituted corporate waste (a technical legal term). The CEO walked away with $68 million in bonus, salary and accumulated stockholdings and also stood to receive an office, a secretary and a car and driver for as long as five years after his ouster. The judge held that though directors of Delaware companies have "broad discretion" to set executive compensation, that discretion is not "unlimited." Chandler found "a reasonable doubt" as to whether Prince's severance constitutes waste under Delaware law. Chandler knows first-hand how public opinion on executive compensation has changed in the last decade; he heard the case arising from the $140 million payout Michael Ovitz received when he left Walt Disney Co. The judge initially dismissed a shareholder suit arising from the payout, then had to hear a 37-day trial when the Delaware Supreme Court reversed him. In his 2005 ruling for Disney, he noted "the protean nature of ideal corporate governance practices. Unlike ideals of corporate governance, a fiduciary's duties do not change over time," he wrote in Disney. "How we understand those duties may evolve and become refined over time, but the duties themselves have not changed." The ruling on Prince's severance is evidence of such refinement. Boards of Delaware companies can still lose a lot of money, but they'd better be careful about paying a lot of money to a CEO in the process. - David Marcus David Marcus is the editor of The Deal's Corporate Control Alert journal. Categories Deal Video
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William B. Chandler III's Feb. 24 dismissal of a shareholder suit against Citigroup Inc. (NYSE:C) was for the most part predictable. In a 60-page ruling, the Delaware chancellor held that the bank's board of directors did not somehow violate its fiduciary duties because the decisions it approved turned out badly, which is hornbook Delaware law.
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