Saturday, April 21, 2018

Corporate Waste Makes a Comeback

I tell my students that corporate waste technically may be a mechanism for defeating the business judgment rule in the absence of any other evidence of lack of compliance with fiduciary duty, but - as one Delaware decision put it - it's really more theoretical than real.  See Steiner v. Meyerson, 1995 Del. Ch. LEXIS 95.  When my students ask for some kind of real world example of waste, I tell them the facts of Fidanque v. American Maracaibo Co., 92 A.2d 311 (Del. Ch. 1952), where a corporation paid "consulting fees" to a 70-year-old former executive who had recently suffered a stroke that left him sufficiently incapacitated to be noticeable during his deposition.

I assumed that case was sui generis, but it turns out history has a way of repeating, this time in the form of Sumner Redstone's contract with CBS.  As described in a recent opinion by Chancellor Bouchard, plaintiff stockholders of CBS adequately alleged that the Board made wasteful payments by refusing to terminate Redstone's $1.75 million contract as Executive Chair once his declining health left him unable to eat or speak, and by designating him Chairman Emeritus - at a $1 million salary - after he resigned from the Executive Chair position.

The decision strikes me as significant not merely because it presents a modern example of waste that I can now offer to my students - at a large, public company no less - but also because CBS is contemplating a merger with Viacom.  Both companies are controlled by the Redstone family via supervoting shares, though they are - purportedly - negotiating the deal via independent committees.  This kind of self-interested transaction was already vulnerable to legal challenge; how much stronger will that challenge be now that there's already evidence of a supine board willing to cater to Redstone?

Ann Lipton | Permalink


Thanks for addressing this topic. Corporate waste is something that has fallen off my radar.

Posted by: Tom N | Apr 21, 2018 6:06:54 AM

Well, I don't know if we'll see it's like again soon, but it is interesting for now!

Posted by: Ann Lipton | Apr 21, 2018 6:19:28 AM

I hate to burst the notion that waste claims haven't gotten past the pleading stage since 1952, but the 2010 Citbank decision found adequate pleading of the waste claim for the outgoing CEO's severance package.

Posted by: Franklin Gevurtz | Apr 22, 2018 7:06:54 PM

Ha -I didn't actually mean to suggest no one's pleaded a waste claim since 1952, but - fair enough, you're right! I do think Citigroup was a bit different, though, since the court mostly seemed to be saying there were few facts available and so plaintiffs would skate by on a pleading motion - the Redstone decision seems much more willing to find the standard met based on a relatively detailed complaint.

Still, we'll have to see what comes of it, though I suspect the defendants will have little appetite for a drawn-out discovery process.

Posted by: Ann Lipton | Apr 23, 2018 1:06:39 AM

Thanks for the post. If I teach again, I will definitely assign this case.


Posted by: Bernard S. Sharfman | Apr 23, 2018 9:24:44 AM

You're welcome! I'll probably use it too!

Posted by: Ann Lipton | Apr 23, 2018 9:30:00 AM

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