By John Filar Atwood
The Delaware Court of Chancery dismissed a Skechers U.S.A.’s shareholder’s claims for breach of the duty of oversight, waste, breach of contract, and disclosure violations for alleged excessive use of corporate airplanes for personal travel. The court determined that since the shareholder did not make a demand on the Skechers board he was required to plead that demand was futile under Court of Chancery Rule 23.1. He failed to do so, the court concluded, because certain directors did not face a substantial likelihood of liability for the oversight, waste, and disclosure claims, and one of the directors was sufficiently independent from Skechers’ founder and largest shareholder (Conte v. Greenberg, February 2, 2024, Zurn, M.).
Skechers owns two corporate airplanes which company management used for personal and business travel from 2018 through at least 2021. Their employment agreements grant them “reasonable use” as a perquisite. The plaintiff cites 52 trips in which management used a corporate jet for personal travel between 2019 and 2021, many of which included management’s friends and family.
If management does not reimburse Skechers for its personal airplane travel, their use is treated as taxable personal income. Skechers provided management with a payment equal to those taxes, referred to as a tax gross-up payment.
The company disclosed in public filings that management received about $5.3 million worth of compensation attributable to personal airplane use between 2018 and 2021, including tax- gross-up payments and operating costs such as the cost of crew travel expenses, landing fees, trip-related hangar/parking costs, and fuel. The plaintiff alleges that by comparison, the median value of aircraft perquisites for executives at S&P 500 companies was $53,967.
Complaint. The plaintiff filed a complaint that asserts for counts focused on management’s personal airplane use and the board’s alleged failure to curtail it. Count 1 asserts a claim against certain company directors for allowing management to use the company planes primarily for personal use, and for failing to put in place safeguards even after being notified of the issue. Count a further alleges that management breached its fiduciary duties by expropriating company assets for personal use.
Count 2 asserts a claim for waste against the defendants for failing to prevent the allegedly excessive personal airplane use. Count 3 asserts claims for breaches of the duties of disclosure and candor against management for causing Skechers to issue a proxy statement which allegedly omitted material information and included materially false or misleading information about management’s personal airplane use. Count 4 asserts the management defendants breached their employment agreements through unreasonable personal use of the airplanes.
The defendants moved to dismiss because Court of Chancery Rule 23.1 requires dismissal where the plaintiff failed to plead demand futility. The court agreed.
The court noted that the two of the three prongs of the demand futility test at issue are whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand, and whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct.
Likelihood of liability. On the issue of a substantial likelihood of liability, the court applied the Caremark standard of whether there was a bad faith failure to exercise adequate oversight. The court determined that the plaintiff failed to demonstrate that the defendants’ excessive personal use of Skechers’ airplanes, even if in violation of their employment agreements, was of such a scope, magnitude, or questionable legality that the only good faith response was to create a policy. For inaction on that risk to constitute bad faith, the court stated, the plaintiff would have to plead more that he did.
Waste. The court also ruled that the defendants do not face a substantial likelihood of liability for waste. Among other things, the court noted that the plaintiff faults the defendants for not intervening to prevent the ongoing excessive use of the airplanes, but cites no case in which a Delaware court has evaluated a claim for waste based on a failure to act to prevent ongoing harm as opposed to challenging the decision to enter into a transaction. The court also said that the loss of favorable tax treatment for both airplanes in 2020 and one airplane in 2021 does not constitute evidence of waste.
Disclosure claims. As to the claims that the company’s proxy statement included certain omissions or misstatements, the court found that the plaintiff failed to meet his burden of establishing that some of the statements were false, and failed to substantiate other allegations of misstatements. With several of the claims, the court determined that the plaintiff failed to show that the omission of certain information was material.
The case is No. 2022-0633-MTZ.