Tuesday, December 29, 2015

Must the Directors Keep the Corporation's Taxes Low If They Can?

I just read about  Freedman v. Adams, 2012 Del. Ch. LEXIS 74, at *45-46 (Del. Ch. Mar. 30, 2012) at Taxprof and the original discussion by Prof. Hemel at the Chicago Law blog.  It's a good example of  a corporate law case, the kind of situation good for an exam, perhaps.  Part of it is about whether the shareholder plaintiff should get a million dollars in "legal fees" (quantum meruit would be vastly smaller, another issue) because the directors paid unnecessary taxes by using a thoughtless compensation plan. 

It isn't a "duty" to avoid taxes, but only in the technical legal sense. Director and CEO are supposed to act for the good of the shareholders. That generally means they are supposed to maximize profits, though I, and I think most others, think that the director can sacrifice profits if the shareholders prefer something else (e.g., closing on Sundays).

What the Freedman court holds is sound: that tax decisions fall under the business judgement rule. That means the directors can make stupid decisions, as long as it's not on purpose, to help themselves, or by being exceptionally lazy. In Freedman, their decision seems stupid, but innocent.
Question: If the CEO and chief counsel have contracts that allow them to be fired without severance pay "for cause", and they advised on this decision (I don't remember those details), can the Board fire them for cause?




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