Applying
Delaware law, a federal
judge
rejected a company shareholder’s contention that the company’s approval
of an executive compensation package that the shareholders had rejected in a
Dodd-Frank mandated advisory vote violated the fiduciary duty of the directors
to act in good faith. The shareholder’s argument contradicted the express
language of Dodd-Frank and
Delaware
corporation law, said the court. (Swanson v.
Weil, DC
Colo, No. 11-cv-02142, Sept. 26, 2012).
The Dodd-Frank Act
provides that a shareholder say-on-pay vote does not overrule a decision by a
board or crate or imply any additional fiduciary duties to rescind or otherwise
respond to such a vote. Delaware
law, which Dodd-Frank expressly declined to alter, authorizes directors, not
shareholders, to set executive pay, said the court, declining to hold that an
adverse say-on-pay vote alone would be enough to rebut the presumed protections
of the business judgment rule.
Delaware law also makes clear that shareholder
disagreement with a board’s business judgment does not suffice to state a
breach of fiduciary duty claim, said the court, since directors may take good
faith actions they believe will benefit stockholders even if they know that the
stockholders do not agree with them. And this is true even when many or even
most of the shareholders do not agree with them and would prefer that the board
do otherwise than it has done. All this is so because Delaware provides that the directors rather
than the shareholders manage the business of the company.
Delaware courts have long-held that a board’s
decision on executive pay is entitled to great deference since the size and
structure of executive compensation is inherently a matter of judgment, and
indeed the essence of business judgment. While there are outer limits to this
rule, noted the court, they are confined to unconscionable cases where
directors irrationally squander or give away corporate assets.
Finally, the court
noted that an additional reason for rejecting the shareholder’s claim was that
the result of an advisory shareholder vote on pay cannot rebut the business
judgment rule because it occurred after the board had approved the 2010
executive compensation. Delaware
law forbids using events after the challenged action to second guess a board’s
business judgment.