Executive Incentive Plan May Have Been Corporate Waste Says Delaware Court

An executive incentive plan for three management directors may have constituted corporate waste, declared Delaware Vice Chancellor Strine in a wide-ranging opinion that dealt with other issues arising from the incentive plan, which was approved by the company’s compensation committee. Even in an age when compensation committees ``misunderstand the pertinence of Santa Claus to their work,’’ noted the court, the grants to the senior executives were extraordinary. (Sample v. Morgan, Del. Chan Ct, C.A., No. 1214-N)

For a tenth of a penny per share, or some $200 in total, the three executives got immediate control of nearly a third of a company’s voting power, its dividend flow, and its value in the event of any sale. On top of that, the executives got their taxes paid for them by the company, which had to go into debt in order to bestow that beneficence. In exchange, the company got the three executives to stay without any indication that they had offers to go elsewhere. These pled facts supported an inference of waste, got judicial nostrils to ``smell something fishy,’’and got the complainant shareholder past Go and to full discovery into the background of the transaction.

The doctrine of waste, explained the Vice-Chancellor, allows a plaintiff to pass Go even when the motivations for a transaction are unclear when economic terms are so one-sided as to create an inference that no person acting in good faith pursuit of the company’s interests could have approved them. This burden was satisfied here.