When It Comes To Director Compensation Claims, Nevada And Delaware Are Fundamentally Different

Since 1969, there has no question that directors of a Delaware corporation have the authority to set their own compensation.  8 DGCL § 141(h).  Having authority to do something, however, doesn’t mean that the use of that authority won’t be challenged, as was illustrated by newly appointed Chancellor Andre G. Bouchard’s ruling last month in Cambridge Ret. Sys. v. Bosnjak, 2014 Del. Ch. LEXIS 107 (Del. Ch. June 26, 2014).  Some plaintiffs’ firms may view these challenges as tempting because the Delaware Supreme Court has held:

Like any other interested transaction, directoral self-compensation decisions lie outside the business judgment rule’s presumptive protection, so that, where properly challenged, the receipt of self-determined benefits is subject to an affirmative showing that the compensation arrangements are fair to the corporation.

Telxon Corp. v. Meyerson, 802 A.2d 257, 265 (Del. 2002) (citing Hall v. John S. Isaacs & Sons Farms, Inc., 37 Del. Ch. 530, 146 A.2d 602, 610-11 (Del. Ch. 1958), aff’d in part, 39 Del. Ch. 244, 163 A.2d 288 (Del. 1960); Meiselman v. Eberstadt, 39 Del. Ch. 563, 170 A.2d 720 (Del. Ch. 1961); Wilderman v. Wilderman, 315 A.2d 610 (Del. Ch. 1974)).  In fact, Chancellor Bouchard cited this holding to find in Cambridge Ret. Sys. that it would be the “defendants’ burden to demonstrate the fairness of the cash compensation paid to the outside directors.”

This jurisprudence contrasts with Nevada’s statute which actually presumes fairness and places the burden on person challenging the fairness:

Unless otherwise provided in the articles of incorporation or the bylaws, the  board of directors, without regard to personal interest, may establish the compensation of directors for services in any capacity.  If the board of directors establishes the compensation of directors pursuant to this subsection, such compensation is presumed to be fair to the corporation unless proven unfair  by a preponderance of the evidence.

While somewhat obscure, the phrase “without regard to personal interest” was added to the statute in 1997.  The legislative history indicates that the change “allows even interested directors to vote on their compensation.”  Minutes of the Senate Committee on Judiciary, April 22, 1997.

 

 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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