Continued Compensation to Incapacitated Controllers
The Harvard Law School Forum on Corporate Governance and Financial Regulation 2018-05-25
In an unusual finding, the Delaware Court of Chancery held that demand was partly excused and claims for corporate waste, bad faith and unjust enrichment could proceed against CBS Corporation for compensation paid to its former Executive Chairman, Sumner Redstone, who later became Chairman Emeritus. The plaintiff alleged that Mr. Redstone became incapacitated yet continued to receive compensation for work he did not perform.
The court noted that claims of corporate waste and bad faith require a plaintiff to show that the board’s decision was “so egregious or irrational” that it could not be based on a valid assessment of a company’s best interest, and amount to an “extreme factual scenario.” In making its determination, the court reviewed the salary payments made to Mr. Redstone as Executive Chairman pursuant to an employment agreement. Under the agreement, the compensation committee could only increase, but not decrease, Mr. Redstone’s salary. Either party could also terminate the agreement. The agreement required Mr. Redstone to be “actively engaged” in working with the board and management, including providing overall leadership and strategic direction, offering guidance and support, coordinating board activities and communicating with shareholders.