Executive Compensation Paid to Controlling Shareholders Subject to Business Judgment Review When Approved by an Independent Committee
Members of the Dolan family hold 73% of the voting power of Cablevision Systems Corporation’s stock. A shareholder commenced a derivative action regarding the executive compensation paid to Dolan family members serving as Executive Chairman and Chief Executive Officer and the Delaware Court of Chancery dismissed the claims.
In setting the compensation for the two family members that serve as Executive Chairman and Chief Executive Officer of Cablevision, the compensation committee used a peer group of 14 publicly traded companies. The court, in analyzing the case, also looked to additional companies in Cablevision’s ISS peer group, for a total peer group of 26 companies. 18 members of the peer group had market capitalizations of over $10 billion and the average total revenue was $30.87 billion. By comparison, Cablevision had a market capitalization of $4.39 billion and $19.58 billion in revenue.
Of the 17 peer companies with less than $30 billion in market capitalization, only two paid their CEO more than Cablevision paid its CEO. The Executive Chairman earned more than 14 (of 17) CEOs at peer companies with a market capitalization below $30 billion.
The plaintiff claimed that the entire fairness standard should apply to review of the executive compensation rather than the business judgment rule. The rational that was advanced was that transactions between controllers and a controlled company are reviewed under the entire fairness standard regardless of whether the transaction is approved by a committee or whether challenged in a merger or non-merger.
The Court agreed with the defendants’ analysis about the need to distinguish an independent committee’s compensation decisions from other matters warranting default entire fairness review. For example, major concerns in applying entire fairness review are informational advantages and coercion. The Court noted the complaint does not support its allegations of leveraging control over the compensation committee with a factual basis to make that inference, and the Court did not believe the Executive Chairman and the CEO had a material informational advantage over the compensation committee about the value of their services. Additionally, the Court would not endorse the principle that every controlled company, regardless of use of an independent committee, must demonstrate the entire fairness of its executive compensation in court whenever questioned by a shareholder. Finally, the Court stated it was especially undesirable to make such a pronouncement here, where annual compensation is not a “transformative” or major decision.
The Court found the compensation committee was independent and rejected the plaintiff’s allegations of non-independence based on long-term board service, service at other Dolan controlled entities, age, retirement status, a sibling’s employment, and continued self-nomination with board approval. The Court stated it was not reasonable to infer that age and retirement defeated independence — the plaintiff did not make fact-based allegations suggesting that the compensation committee defendants had infirmities or were dependent on their compensation. In addition, there were no allegations of how a compensation committee member’s decision were tied to his brother’s general employment by a Dolan entity that would lead the Court to deem the director’s decisions were discretion sterilized. According to the Court, the totality of the complaint did not make a reasonably conceivable case that the directors wanted to remain on the board so much that they sacrificed their professional integrity.
ABOUT STINSON LEONARD STREET
Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.
The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.
Contact Steve Quinlivan for more information.