Corporate Governance

Delaware Courts and Exonerating the Board from Supervising Risk: In re Citigroup Derivative Litigation (Compensation and the Effort to Avoid Further Preemption)

By J. Robert Brown

We are discussing In re Citigroup.

Despite having dismissed the causes of action related to the board's oversight of the excessive risk taking by the financial institution, the decision managed to find a way to keep alive the one claim of waste related to the severence package paid to Citigroup's departing CEO.

The letter agreement setting out the compensation provided, according to the plaintiffs, the following terms:

• [that] Prince will receive $68 million upon his departure from Citigroup, including bonus, salary, and accumulated stockholdings. Additionally, the letter agreement provides that Prince will receive from Citigroup an office, an administrative assistant, and a car and driver for the lesser of five years or until he commences full time employment with another employer.

In return for the compensation, the agreement "contemplated that Prince would sign a non-compete agreement, a nondisparagement agreement, a non-solicitation agreement, and a release of claims against the Company."

The court noted that while boards had considerable discretion in the area of executive compensation, there was in fact an "outer limit."  In other words, the court starts the analysis by pointing out something that would, in any other jurisdiction, be understood and unnecessary to repeat:  That there are substantive limits on executive compensation.  This court needs to repeat the proposition because, in fact in Delaware, the statement is news. 

In any event, the court opted not to dismiss the claim.  The reasons?  There weren't any.  As the court reasoned:

• Even considering the text of the letter agreement, I am left with very little information regarding (1) how much additional compensation Prince actually received as a result of the letter agreement and (2) the real value, if any, of the various promises given by Prince. Without more information and taking, as I am required, plaintiffs' well pleaded allegations as true, there is a reasonable doubt as to whether the letter agreement meets the admittedly stringent 'so one sided' standard or whether the letter agreement awarded compensation that is beyond the 'outer limit' described by the Delaware Supreme Court. Accordingly, the Complaint has adequately alleged, pursuant to Rule 23.1, that demand is excused with regard to the waste claim based on the board's approval of Prince's compensation under the letter agreement. 

Given the traditional ease with which Delaware courts dismiss allegations of waste when it comes to executive compensation, this seems to be a sudden change of heart. 

Perhaps not coincidentally, the Delaware courts have come under increased criticism for their lax approach to executive compensation and the federal government has increasingly preempted the area.  Indeed, much of the criticism has focused upon lavish payments pursuant to golden parachutes and other severance arrangements.  Not surprisingly, some of the harshest provisions in TARP related to severance payments, all but prohibiting them for companies taking public money. 

With such a high level of federal involvement in the area of severance payments, it is interesting to note this sudden willingness by the Chancery Court to take a harder line towards these payments, without much analysis.  Perhaps it is hoped that with the appearance that the Delaware courts take these claims seriously, Congress will not engage in further preemption.   

As usual, we have posted primary materials on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on March 16, 2009 (boomark / email).