Monday, January 19, 2009
The issue in Rosenfeld is whether a corporation must pay for expenses incurred in connection with a proxy fight when the insurgent group wins the proxy fight and gains control of the leadership positions in the corporation. The general rule is that the corporation pays the expenses of the incumbent leadership so long as those expenses are reasonable and the proxy fight relates to issues not to personalities (a meaningless distinction, in my view). Rosenfeld establishes that victorious insurgents are also entitled to reimbursement of reasonable expenses on the same conditions, if the shareholders approve. Board approval is a given, since the insurgents now control the Board and will certainly vote to reimburse themselves.
In this case, the dissent pointed out that neither part of the test for reimbursement was really satisfied in this proxy fight. The key issue in the proxy fight was a generous employment contract that the incumbent board approved for a former officer. That seems like a clash of personalities rather than a substantive difference. In addition, many of the expenses were incurred in wining and dining key shareholders. That may stretch the bounds of reasonable reimbursement. The latter topic makes for interesting class discussions. How far should management go to win the votes of key shareholders? Can the company's private jet be used to fly key players to corporate headquarters? How much should be spent on food? On entertainment? And what kind of entertainment is appropriate?
Rosenfeld v. Fairchild Engine and Airplane Corp.
Should a contest for proxies arise
Over insider deals in disguise,
Shareholders may pay
For both sides in the fray
If the shareholders deem payment wise.