By Anne Sherry, J.D.
A stockholder’s demand on the full board of United Airlines that it claw back severance paid to ousted CEO Jeffery Smisek did not concede the disinterestedness or independence of the special committee that rejected that demand. However, the Delaware Court of Chancery dismissed the pension fund’s derivative complaint on the basis that it failed to plead with sufficient particularity that the special committee was conflicted (City of Tamarac Firefighters’ Pension Trust Fund v. Corvi, February 12, 2019, McCormick, K.).
David Samson, then Port Authority chairman, proposed to Smisek that United reinstitute an unprofitable route between Newark, New Jersey, and Columbia, South Carolina, where Samson owned a vacation home. Smisek agreed to reopen the route in exchange for Samson’s approval of projects at United’s regional hub. A federal investigation into an unrelated matter uncovered this arrangement in 2014, and Smisek and United entered into a separation agreement negotiated and approved by a special committee of outside directors.
The pension fund plaintiff made two litigation demands asking United’s board to claw back the severance package or rescind the separation agreement. Rather than consider the demands itself, the board delegated them to a special committee, which recommended that the demands be rejected. The executive committee followed that recommendation.
When a stockholder makes a presuit litigation demand, it tacitly concedes that the board is disinterested and independent for purposes of considering the demand. The decision of that concededly disinterested and independent board is thus entitled to the business judgment presumption. The defendants argued that this tacit concession automatically extends to board committees, but the court disagreed. By making demand on the full board, the stockholder concedes only that a majority of the board is capable of considering the demand. The court described a hypothetical in which a nine-member board delegates consideration of a demand challenging the CEO’s pay to a special committee consisting only of the CEO. There, it is easy to understand why the board’s decision to delegate that decision to the CEO could be grossly negligent or in bad faith—but it would still need to analyze whether the CEO is conflicted.
Here, the plaintiff failed to make that showing of conflicts on the part of the special committee that refused the demand. The fund did not allege any financial or personal benefit to the director defendants in approving the separation agreement or rejecting the litigation demands. Instead, it focused on the committee members’ prior involvement in the decision to approve the separation agreements. But a person is not conflicted in deciding whether to exercise a contractual right by reason of the fact that the person negotiated for the right. The plaintiff did not allege that the committee members were involved in United’s clawback policies or the decisions to approve the separation agreement. The court concluded that “for the prior-involvement theory of conflicts to have legs, at a minimum, Plaintiff must allege some prior involvement.”
The case is No. 2017-0341-KSJM.