Wasting the corporate waste doctrine: How the doctrine can provide a viable solution in controlling excessive executive compensation

Michigan Law Review

Volumn 109, Issue 1, 2010, Pages 111-136

  Caywood, Steven C ^a  

^a NONE

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EID: 77957563084     PISSN: 00262234     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Note

References (147)

1. George T. Washington, The Corporation Executive's Living Wage, 54 Harv. L. Rev. 733, 733 (1941).
2. See Joel Seligman, The Transformation of Wall Street 25-26 (3d ed. 2003) (noting that excessive executive compensation played a crucial role in arguments for federal securities regulation in the 1930s).
3. Albert R. Hunt, Letter From Washington: As U.S. rich-poor gap grows, so does public outcry, N.Y. Times, Feb. 18, 2007, available at http://www.nytimes.com/2007/02/18/world/ americas/18iht-letter.4637416.html.
4. But see Robert H. Frank, Should Congress Put a Cap on Executive Pay, N.Y. Times, Jan. 3, 2009, available at http://www.nytimes.com/2009/01/04/business/economy/04view.html (arguing that current executive compensation practices are the result of a properly functioning market). This Note argues that some executive compensation reform will likely occur; it is only a matter of choosing the best method.
5. Ben S. Bernanke, Chairman, Fed. Reserve, Speech Before the Greater Omaha Chamber of Commerce: The Level and Distribution of Economic Well-Being (Feb. 6, 2007), available at http://www.federalreserve.gov/newsevents/speech/Bernanke20070206a.htm. Chairman Bernanke explained that "American economic success has resulted from the flexibility and adaptability of our dynamic market economy." Id. He then went on to caution that if drastic income inequality continues, "the public at large might become less willing to accept the dynamism that is so essential to economic progress." Id.
6. For example, Richard Fuld, former CEO of Lehman Brothers, collected roughly $480 million in compensation in the years leading up to the bank's collapse in 2008. Jonathan Siban, Former Lehman Brothers boss attacked over Wall Street excesses, Daily Telegraph (London), Oct. 7, 2008, available at http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3147479 /Former-Lehman-Brothers-boss-attacked-over-Wall-Street-excesses.html. Even corporations that are profitable, however, are still subject to compensation scrutiny. Shareholders recently sued Goldman Sachs even though the company's share price has risen dramatically and has reported record profits during the past year. Int'l Bhd of Elec. Workers Local 98 Pension Fund v. Blankfein, No. 5315 (Del. Ch. filed Mar. 8 2010); see also Jonathan Stempel & Steve Eder, Goldman Sachs Sued by Big Pension Fund Over Pay, Reuters, Mar. 8, 2010, available at http://www.reuters.com/article/ idUSTRE62763320100308.
7. See Marketplace (NPR radio broadcast Nov. 2, 2009), available at http://marketplace.publicradio.org/display/web/2009/11/02/pm-compensatio n/.
8. See Harwell Wells, "No Man Can Be Worth $1,000,000 a Year": The Fight Over Executive Compensation in 1930s America, 44 U. Rich. L. Rev. 689, 766 (2010) ("Vigorous political efforts to rein in compensation are of a more recent vintage . . . .").
9. See Linda Barrett, Note, Unsharing the Wealth: Recent Economic Volatility Has Greatly Impacted Executive Compensation, 54 Rutgers L. Rev. 293, 293 (2001) (noting that CEO salaries grew sixfold from 1990 to 2001).
10. See Jim Puzzanghera, Massive Financial Reform Passes House, L.A. Times, Dec. 12, 2009, at A1 (discussing House Speaker Nancy Pelosi's speech on financial and compensation reform in which she stated that "[w]e are sending a clear message to Wall Street: The party is over"); see also infra note 13.
11. See International Monetary Fund, World Economic Outlook Update, Jan. 28, 2009, available at https://www.imf.org/external/pubs/ft/weo/2009/update/01/index.htm (examining global gross domestic product figures and determining that the most recent recession caused the largest drop in gross domestic product since the end of World War II).
12. Rogers v. Hill, 289 U.S. 582 (1933); see also Wells, supra note 8, at 766.
13. Corporate and Financial Institution Compensation Fairness Act of 2009, H.R. 3269, 111th Cong. (2009). On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010). The Act made say-on-pay federal law. Id. at § 951 (codified as amended at 15 U.S.C. 78n-1). The framework of the say-on-pay provision from the earlier bill referenced elsewhere in this Note is largely the same as the framework adopted in the new law. Therefore, the arguments made in this Note are largely intact. The federal say-on-pay provision requires that every three years, shareholders, during their annual meeting, conduct a "separate resolution subject to shareholder vote to approve the compensation of executives." Id. Every six years, the annual shareholder meeting "shall include a separate resolution subject to shareholder vote to determine whether [the say-on-pay required every three years] will occur every 1, 2, or 3 years." Id. Therefore, at the very minimum, a corporation subject to the Security and Exchange Commission's proxy rules will conduct a say-on-pay vote every three years. Id. The shareholder vote will not be binding and not "create or imply any change to the fiduciary duties of such issuer or board of directors." Id. Although it could be argued that a reinvigorated corporate waste doctrine as a result of a disapproving say-on-pay resolution is a change in the board of directors' fiduciary duties, this Note is instead arguing that the say-on-pay vote should be used as evidence of possible corporate waste, and not an alteration of the standard itself.
14. David Cho & Tomoeh Murakami Tse, House Backs Greater Say On Pay by Shareholders, Wash. Post, Aug. 1, 2009, at A9.
15. See D. Gordon Smith & Cynthia A. Williams, Business Organizations: Cases, Problems, and Case Studies 532-34 (2d ed. 2008).
16. Id.
17. Id.
18. Id. at 533.
19. Harbor Fin. Partners v. Huizenga, 751 A.2d 879, 895 (Del. Ch. 1999).
20. For an example of a case of excessive compensation that has yet to result in a corporate waste claim, see Siban, supra note 6.
21. The corporate waste doctrine has been the main subject of only one law review article in at least the past five years. See John W. Murrey, III, Excessive Compensation in Publicly Held Corporations: Is the Doctrine of Waste Still Applicable?, 108 W. Va. L. Rev. 433 (2005) (arguing that the corporate waste doctrine is not clearly defined as applied by Delaware courts and calling for a more coherent explanation of the standard).
22. Jones v. Harris Assoc., 537 F.3d 728, 730 (7th Cir. 2008) (Posner, J., dissenting).
23. See Stephen Deane, Majority Voting in Director Elections: From the Symbolic to the Democratic, 1543 PLI/Corp. 331, 352 (2006) ("Furthermore, the ability of shareholders at certain companies to remove directors is far from a universal right. Shareholders can only exercise that right by going through an extraordinary process that is expensive and fraught with restrictions.").
24. Corporate best practices now state that the CEO should be separate from the board chairman, and more corporations are following this practice. See Martha Graybow, More Firms Split CEO and Chairman Roles, Reuters, June 16, 2009, available at http://uk.reuters.com/article/ idUKN1634597920080616.
25. See Deane, supra note 23.
26. Because corporate law is generally made at the state level, state courts apply the corporate waste doctrine of their particular state. This Note relies solely on Delaware's corporate law because its corporate code, the Delaware General Corporation Law, is considered the most sophisticated corporate code in the country. This has made Delaware the state of incorporation for a majority of the most sophisticated U.S. companies and provides it with the country's most authoritative and cited-to corporate law jurisprudence. See Robert H. Sitkoff, Corporate Political Speech, Political Extortion, and the Competition for Corporate Charters, 69 U. Chi. L. Rev. 1103, 1142-43 (2002); Marcia Coyle, Facing the Fallout: Delaware Courts in Crosshairs, Nat'l L. J., Oct. 13, 2008. Additionally, other states routinely cite Delaware law as support even though Delaware's law has no binding effect on them. See, e.g., Mullen v. Acad. Life Ins. Co., 705 F.2d 971, 973 n.3 (8th Cir. 1983) (per curiam) ("[C]ourts of other states commonly look to Delaware law . . . for aid in fashioning rules of corporate law."); Ann M. Scarlett, Confusion and Unpredictability in Shareholder Derivative Litigation: The Delaware Courts' Response to Recent Corporate Scandals, 60 Fla. L. Rev. 589, 593 (2008).
27. See, e.g., Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
28. Rogers v. Hill, 289 U.S. 582 (1933).
29. Id. at 591.
30. Id. at 591-92 (quoting Rogers, 50 F.2d at 113-14 (1932)).
31. Id. at 592.
32. Id.
33. Gottlieb v. Heyden Chem. Corp., 90 A.2d 660 (Del. 1952). The Delaware Supreme Court remanded the case to the trial court for an evidentiary hearing, even though the shareholders approved the compensation plan and there was no claim that the board acted dishonestly or without good faith. Id. at 665.
34. Id.
35. 746 A.2d 244 (Del. 2000).
36. Id. at 248. Ovitz was hired as the successor to Michael Eisner, chairman and chief executive at the time. Id. at 249. Ovitz's contract entitled him to a salary of $1,000,000 per year for five years, payment of a discretionary bonus, and stock options. Id. at 250. If the Board removed Ovitz without cause, he would be entitled to his full contract plus $10,000,000 with an additional $7,500,000 for each year remaining on his contract. Id. Most importantly, unless fired for cause, Ovitz would be able to exercise his stock options for 3,000,000 shares. Id. Just fourteen months after signing this contract, Disney's board removed Ovitz without cause on December 27, 1996. Id. at 252. Ovitz then exercised his options and Disney paid him roughly $140,000,000. Id. at 253.
37. Brehm, 746 A.2d at 262 n.56 ("[T]here is an outer limit to that discretion, at which point a decision of the directors on executive compensation is so disproportionately large as to be unconscionable and constitute waste.").
38. Id. at 263.
39. In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 73-75 (Del. 2006).
40. Brehm, 746 A.2d at 263.
41. Indeed, Delaware courts even seemed skeptical that plaintiffs could ever prove a waste claim: [T]he waste theory represents a theoretical exception to the statement very rarely encountered in the world of real transactions. There surely are cases of fraud; of unfair self dealing and, much more rarely negligence. But rarest of all-and indeed like Nessie, possibly non existent- would be the case of disinterested business people making non fraudulent deals (nonnegligently) that meet the legal standard of waste! Zupnick v. Goizueta, 698 A.2d 384, 387 (Del. Ch. 1997) (internal citation omitted). In Part II, this Note will propose that these cases, while possibly rare, exist.
42. In re Citigroup Inc. S'holder Derivative Litig., 964 A.2d 106 (Del. Ch. 2009).
43. Id. at 138 (internal quotation marks and footnotes omitted).
44. Id.
45. See Derivative Complaint at 18, In re Citigroup Inc. S'holder Derivative Litig., 964 A.2d 106 (Del. Ch. 2009) (No. 3338-CC) 2007 WL 5208459.
46. In re Citigroup, 964 A.2d at 138.
47. Id. at 139.
48. Perhaps because of In re Citigroup, corporations expect a rise in shareholder litigation, including a renewed focus on the corporate waste doctrine. See Kevin H. Douglass & D. Scott Holley, The Path Ahead: Corporate Law Current Trends and Forecasts for 2010, Fin. Fraud L., Dec. 28, 2009, at 387, available at http://www.bassberry.com/files/upload/ThePathAhead2009.pdf ("Over the next year, we expect more fiduciary duty decisions in the area of corporate oversight, including in the compensation arena (and a possible tightening of the corporate waste doctrine) . . . ."). This increase in litigation may actually be harmful to the long-term viability of the corporate waste doctrine: a deluge of corporate waste cases before Delaware courts may lead the overburdened courts to dismiss waste claims in preliminary motions, as they have been prone to do in the past.
49. In re Citigroup, 964 A.2d at 138 (internal quotation marks omitted).
50. See Murrey, supra note 21, at 457.
51. The Delaware courts have never stated explicitly that this is the reason for its disuse, but they have complained that the doctrine has "many practical problems." Harbor Fin. Partners v. Huizenga, 751 A.2d 879, 896 (Del. Ch. 1999). It is not surprising, then, that courts would dismiss and rarely invoke a doctrine with "many practical problems."
52. It is important to note that the Supreme Court decision in Rogers v. Hill applied New Jersey corporate law and thus was not binding on Delaware state law. See Rogers v. Hill, 289 U.S. 582, 584 (1933). Nonetheless, Delaware did adopt the corporate waste standard. Gottlieb v. Heyden Chem. Corp., 90 A.2d 660, 665 (Del. 1952).
53. Murrey, supra note 21, at 457.
54. See Lewis v. Vogelstein, 699 A.2d 327, 338 (Del. Ch. 1997) (describing that with a valid waste claim, "a full hearing is required regardless of shareholder ratification" (quoting Michelson v. Duncan, 407 A.2d 211, 223 (Del. 1979))).
55. Grobow v. Perot, 539 A.2d 180 (Del. 1988); Aronson v. Lewis, 473 A.2d 805 (Del. 1984).
56. Brehm v. Eisner, 746 A.2d 244, 249 (Del. 2000). The portion of Chancery Rule 23.1 the Delaware Supreme Court relied on to dismiss these cases appears as follows: In a derivative action brought by 1 or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly by asserted by it, the complaint shall allege that the plaintiff was a shareholder or member at the time of the transaction of which the plaintiff complains or that the plaintiff's share of membership thereafter devolved on the plaintiff by operation of law. The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and the reasons for the plaintiff's failure to obtain the action or for not making the effort. Del. Ch. Ct. R. 23.1 (emphasis added). The demand requirement is met when the plaintiff gives notice to the corporation of its claims and demands the corporation takes action. Plaintiffs are reluctant to make a demand requirement as this empowers the board of directors to form a litigation committee. This committee can recommend that the claim has no merit and Delaware courts will defer to this recommendation. Smith & Williams, supra note 15, at 671-72.
57. In re Citigroup Inc. S'holder Derivative Litig., 964 A.2d 106, 120 (Del. Ch. 2009).
58. Id. But see Murrey, supra note 21, at 454 (arguing that waste claims cannot be dismissed on Rule 23.1 grounds because the court always must determine if there is waste). Murrey contends that further litigation is required because the board of directors cannot sanction waste. See id. If this is true, then every waste allegation would require an evidentiary hearing and discovery to determine if waste occurred. Id.
59. In re Citigroup, 964 A.2d at 120 (citing Aronson v. Lewis, 473 A.2d 805, 814 (1985)). In Part II, this Note will propose a litigation strategy, which includes pleading the independence and lack of personal interest of the board of directors to fall under the second prong of Aronson. Although this would not have been necessary under Rogers and Gottlieb, modern Delaware corporate law requires it.
60. In re Walt Disney Co. Derivative Litig., 731 A.2d 342, 361 (Del. Ch. 1998) (quoting Aronson, 473 A.2d at 814).
61. 964 A.2d at 83-84.
62. See, e.g., Brehm v. Eisner, 746 A.2d 244, 263-64 (Del. 2000); In re The Limited, Inc. S'holders Litig., No. CIV.A. 17148-NC, 2002 WL 537692, at 8-9 (Del. Ch. Mar. 27, 2002); Harbor Fin. Partners v. Huizenga, 751 A.2d 879, 892-93 (Del. Ch. 1999); see also Yale D. Tauber & Donald R. Levy, Executive Compensation 730-42 (2002).
63. Cf. Winkelman v. Gen. Motors Corp., 39 F. Supp. 826, 834-35 (S.D.N.Y. 1940) (speaking approvingly of the executive compensation plan but nonetheless denying defendants' motion for summary judgment).
64. When they survive a defendant's motion to dismiss, shareholder suits against corporations tend to settle at a rate higher than that of other civil litigation. See, e.g., Dienna Ching, Does Negative Equity Negate the Hanging Paragraph?, 16 Am. Bankr. Inst. L. Rev. 463, 497 (2008) (describing evidentiary hearings as costly and time-consuming in bankruptcy cases); Jennifer J. Johnson & Edward Brunet, Critiquing Arbitration of Shareholder Claims, 36 Sec. Reg. L.J. 181, 201 n.19 (2008) ("Due to the enormous expense involved in proceeding through discovery to trial and the potential for damages that could imperil the company's future operations, most cases settle if plaintiffs' complaint survives the motion to dismiss. For example, for securities class actions filed between 1996 and 2007, 81% have been concluded: 41% were dismissed and 59% settled. Only 11 cases went to trial.").
65. Cf. Robert Mason Hogg, Note, The Evidentiary Scope of De Novo Review In ERISA Benefits Litigation After Firestone Tire & Rubber Co. v. Bruch, 78 Minn. L. Rev. 1575, 1598 (1994) (citing Pierre v. Conn. Gen. Life Ins. Co., 932 F.2d 1552, 1559 (5th Cir. 1991) to show the Fifth Circuit's implication that evidentiary hearings are burdensome on the courts).
66. See Murrey, supra note 21, at 437 (stating that if an evidentiary hearing was always required, it would "invite excessive litigation").
67. This Note does not attempt to outline how courts should analyze compensation packages. Many have argued that the important benchmark for best-practices executive compensation is to take long-term company value into account. See, e.g., Lucian A. Bebchuk & Jesse M. Fried, Pay Without Performance: Overview of the Issues, 30 J. Corp. L. 647, 669 (2005); Richard C. Ferlauto, Compensation Best Practices Overview, 1774 PLI/Corp 47, 51 ("[T]he Committee for Economic Development, a distinguished panel of business and academic leaders, found that [d]ecision making based primarily on short-term considerations damages the ability of public companies, and therefore, of the U.S. economy to sustain superior long-term performance.") (internal quotation marks omitted). Rather, this Note assumes that if the corporate waste doctrine continues to develop, the courts will develop a robust body of law on best practices for executive compensation. Take, for example, Foreign Sovereign Immunities Act jurisprudence. The Act placed sovereign immunity questions squarely in the jurisdiction of the federal courts. Although the federal courts had little experience with this area of law, they quickly became experts in applying immunity claims. Barry E. Carter et al., International Law (5th ed. 2007); see also Pamela J. Stephens, Beyond Torture: Enforcing International Human Rights in Federal Courts, 51 Syracuse L. Rev. 941, 966 (2001) ("Similarly, as federal courts have over the past twenty years taken on the task of normenunciation in the realm of international human rights, confidence has grown in their expertise to address such issues."). Delaware courts are similarly capable of determining best practices for executive compensation.
68. As of March, 16, 2010, the Corporate and Financial Institution Compensation Fairness Act of 2009 has not passed. It is likely, however, that a say-on-pay provision will pass in some form. On March 15, 2010, Senator Chris Dodd (D-CT) introduced a bill which included a say-on-pay resolution. Sewell Chan, Dodd to Unveil a Comprehensive Financial Overhaul Bill, N.Y. Times, Mar. 14, 2010, at A18, available at http://www.nytimes.com/2010/03/14/business/14bank.html.
69. Corporate and Financial Institution Compensation Fairness Act of 2009, H.R. 3269, 111th Cong. (2009). As noted above, "say on pay" is now federal law. See supra note 13. Any reference to the previous bill should be supplanted with the Dodd-Frank Bill.
70. H.R.
71. Id.
72. The description of the bill in the first sentence reads, "A Bill [t]o amend the Securities Exchange Act of 1934 to provide shareholders with an advisory vote on executive compensation and to prevent perverse incentives in the compensation practices of financial institutions." Id.
73. These regulators will also have control over executive compensation in these corporations. Id. § 4. This is likely to prevent systemic risk-which occurs when a corporation grows so large that its insolvency would drastically affect the entire economy-from materializing. See generally Richard A. Posner, A Failure of Capitalism: The Crisis of '08 and the Descent into Depression 75-112 (2009) (assessing causes of the financial crisis, including systemic risk).
74. H.R.
75. Id. § 4(a)(3).
76. Lucian Bebchuk & Jesse Fried, Pay without Performance: The Unfulfilled Promise of Executive Compensation 195-99 (2004).
77. Attacking the corporate gravy train, Economist, May 30, 2009, at 71 (discussing a British say-on-pay shareholder resolution disapproving of the executive compensation at Royal Dutch Shell). The Shell board of directors notably did not take any action as a result of the nonbinding resolution. Id.
78. Knotting the Purse Strings, Economist, Aug. 8, 2009, at 57 ("In May 59% of voting shareholders of Royal Dutch Shell, an oil giant, rejected the executive pay package for 2008, but the company intends to pay it anyway-though it lamely promised to consult shareholders more closely in future.").
79. 17 C.F.R. § 240.14a-8; see also Smith & Williams, supra note 15, at 450-52.
80. These resolutions are increasing, but do not occur as regularly as a say-on-pay proposal would. See Smith & Williams, supra note 15, at 460 (describing these proposals as "an especially vibrant area for corporate governance . . . today").
81. Id. at 463.
82. Corporate and Financial Institution Compensation Fairness Act of 2009, H.R. 3269, 111th Cong. § 2 (2009) ("Any proxy or consent or authorization for an annual meeting of the shareholders . . . shall provide for a separate shareholder vote to approve the compensation of executives as disclosed pursuant to the Commission's compensation disclosure rules . . . .").
83. H.R. 3269 (providing few guidelines as to when a regulator should exercise his or her authority).
84. See Jones v. Harris Assoc., 537 F.3d 728, 730 (7th Cir. 2008) (Posner, J., dissenting).
85. Miriam A. Cherry & Jarrod Wong, Clawbacks: Prospective Contract Measures in an Era of Excessive Executive Compensation and Ponzi Schemes, 94 Minn. L. Rev. 368 (2009) (arguing for the use of a prospective clawback provision as a method of executive compensation reform).
86. Id. at 372-73.
87. Id.
88. Andrew Ross Sorkin, Don't Fail, Or Reward Success, N.Y. Times, Oct. 12, 2009, at B1. Over 300 companies now have some form of clawback provision, up from only fourteen years ago. Gretchen Morgenson, Pay It Back If You Didn't Earn It, N.Y. Times, June 8, 2008, at B1.
89. Cherry & Wong, supra note 85, at 372.
90. H.R. 1586, 111th Cong. § 1 (2009).
91. Cherry & Wong, supra note 85, at 392 ("One of the major problems with executive compensation has been a focus only upon short-term performance. Such short-term thinking often leads to opportunistic behavior, at the expense of the long-term health of the company. By in a senseoperating as a 'lead parachute,' prospective clawback provisions begin to align incentives over a longer time frame.").
92. Id. at 411-12.
93. An example of one such effective use would be to require inclusion of prospective clawback provisions in employment contracts and thereby eliminate the need for retroactive clawback solutions.
94. See infra Section II.B.
95. A corporate waste claim likely would not advance without a negative say-on-pay resolution. See infra Section II.A. Shareholders would be unlikely to disapprove of a pay structure with a clawback provision because this would provide evidence that the corporation was sensitive to excessive executive compensation. Of course, it is possible that the clawback provision would not be adequate to prevent excessive compensation.
96. See infra Section II.A.
97. See Deborah Solomon & Mark Maremont, Bankers Face Strict New Pay Cap: Stimulus Puts Retroactive Curb on Bailout Recipients, Wall St. J., Feb. 14, 2009, at A1.
98. Stephen Castle, French Ideas for Curbs on Bonuses Get E.U. Support, N.Y. Times, Sept. 2, 2009, available at http://www.nytimes.com/2009/09/03/business/global/03euro.html.
99. Suzy Jagger, France set to go it alone and cap bank bonuses, Times (London), Sept. 5, 2009, News, at 8. This proposal was not adopted at the G20 summit.
100. Troubled Assets Relief Program, 12 U.S.C.S. § 5221 (West 2009). TARP allowed the government to lend money to struggling banks because of the financial crisis. It was passed in late 2008 but this section of the code was amended in early February 2009. Edmund L. Andrews & Eric Dash, Stimulus Plan Tightens Reins on Wall St. Pay, N.Y. Times, Feb. 14, 2009, at A1.
101. See Jay Newton-Small, The AIG Bonuses: Getting Mad and Getting Even, Time, Mar. 18, 2009, available at http://www.time.com/time/politics/article/0,8599,1885977,00.html.
102. 12 U.S.C.S. § 5221(b)(3)(D)(i)(III).
103. Lucian Bebchuk, Pay Caps Debate: They Don't Go Far . . . , Wall St. J., Feb. 6, 2009, at A11.
104. Kevin Crowley, G-20 Pay Plans Risk Losing Top Employees, Bankers Say, Bloomberg, available at http://www.bloomberg.com/apps/news?pid=20601087&sid=aWjMXU1Mbk4Q.
105. Id.
106. Many believe that long-term corporate value means a high stock price. Tim Koller et. al., Valuation: Measuring and Managing the Value of Companies 391 (4th ed. 2005) (stating that company value, and by extension shareholder value, is driven partially by long-term company outlook). While this is partially true, long-term company value focuses mainly on the future viability of the corporation. See generally Dean Krehmeyer et al., Breaking the Short-Term Cycle, Ctr. Fin. Mkt. Integrity, 2006, available at www.darden.virginia.edu/corporateethics/ pdf/Short-termism_Report.pdf.
107. Some agree that deferred compensation such as stock options that do not vest immediately are adequate for prioritizing long-term company value. Rebecca A. Crawford, Note, Corporate Governance Reform: How to Promote the Long-Term Health and Value of U.S. Corporations, 5 N.Y.U. J. L. & Bus. 905, 923 (2009) (arguing that "slowly vesting stock options will incentivize directors and executives to focus on the long-term health of their corporations"). However, others have questioned the adequacy of tying compensation predominantly to corporate shares. Attacking the corporate gravy train, supra note 77 ("[Lucian A. Bebchuk] points out that equity-based bonus plans align bankers' interests only with those of shareholders. This encourages them to make big bets . . . . But if those bets go wrong . . . [losses] are borne by unsuspecting bondholders and taxpayers too."). It is possible to tie compensation to long-term performance using executive compensation best practices. See generally Bebchuk & Fried, supra note 67.
108. Lucian Bebchuk, Editorial, Congress Gets Punitive on Executive Pay, Wall St. J., Feb. 16, 2009, at A15.
109. David Yermack, Editorial, Keeping the Pay Police at Bay, Wall St. J., Oct. 10, 2009, at W1.
110. Attacking the corporate gravy train, supra note 77.
111. Smith & Williams, supra note 15, at 533.
112. Steven Labaton, U.S. Will Order Pay Cuts at Firms With Bailout Aid, N.Y. Times, Oct. 22, 2009, at A1.
113. It is unlikely that the corporate waste doctrine provides a deterrent, as evidenced by the substantial increase in executive salaries since reporting began. Hunt, supra note 3.
114. Smith & Williams, supra note 15, at 533.
115. This Note takes no position as to what factors a court should examine when determining a waste claim on its merits. This is a complicated issue that requires a full analysis of executive compensation best practices. See generally Bebchuk & Fried, supra note 76. Instead, this Note focuses on passing an initial Rule 23.1 dismissal in the hopes of reaching the costly hearing and discovery phase of a case.
116. While a corporation may succeed in proving that there is no waste, an intrusive discovery process is burdensome and can uncover other serious problems. Wells, supra note 8, at 730 ("The court reached that conclusion [finding no waste], however, only after commissioning an intrusive and embarrassing examination of National City's compensation plans, which left the directors liable for damages of almost two million dollars [due to other, non-waste oversights].") (discussing Gallin v. Nat'l City Bank, 281 N.Y.S. 795, 797-98 (Sup. Ct. 1935).
117. Corporate and Financial Institution Compensation Fairness Act of 2009, H.R. 3269, 111th Cong. § 2 (2009).
118. Making the shareholder resolution nonbinding preserves the traditional function of the board of directors to manage the corporation. See 1 James D. Cox & Thomas Lee Hazen, Cox & Hazen on Corporations 390-92 (2d ed. 2003).
119. This Note recognizes that a binding say-on-pay resolution may result in a similar outcome as this Note proposes in Part II. However, a binding say-on-pay resolution is not an adequate solution for two reasons. First, it would be extremely difficult for Congress to pass a binding say-onpay resolution, as evidenced by Congress's failure to do so despite past attempts. In fact, a binding say-on-pay resolution has never been seriously considered in the United States. (Though the Netherlands and Norway recently passed binding say-on-pay legislation.) Stephen Davis, Does 'Say on Pay' Work? Lessons on Making CEO Compensation Accountable, 1622 PLI/Corp. 30, 46 (2007). The United States, however, is more inclined to follow the Great Britain model of a nonbinding resolution. Laraine S. Rothenberg and Todd S. McCafferty, 'Say-on-Pay': Linking Executive Pay to Performance, N.Y.L.J., Sept. 24, 2008, available at http://www.law.com/jsp/cc/ PubArticleCC.jsp?id=1202424735938#27 ("Shareholders and legislators in the United States have generally followed the advisory approach and have not embraced the idea of giving shareholders binding power."). Second, a binding say-on-pay resolution would force the board of directors to take action. This Note proposes a more nuanced approach that allows the board of directors the necessary discretion to manage the corporation while giving shareholders recourse when they feel the board of directors is abusing its power. See infra Part II.
120. The Shell board of directors did not take substantial action to adjust executive compensation after shareholders voted to voice their objection to the company's executive pay plan. A say-onpay resolution is mandated under British law and is nonbinding, much like the proposed U.S. law. Guy Chazan & Joann S. Lublin, Shell Investors Revolt over Executive Pay Plan, Wall St. J., May 20, 2009, at B1 ("Shell Chairman Jorma Ollila said board members 'take the outcome of this vote very seriously and we will reflect carefully upon it.' But Sir Peter Job, head of Shell's remuneration committee, stressed it was 'advisory' and wouldn't invalidate the pay award.").
121. Google Finance Historical Prices for Citigroup, http://www.google.com/finance/ historical?q=NYSE:C (last visited May 15, 2010).
122. Id.
123. Id.
124. See, e.g., Donald P. Delves, Getting beyond share price: the truer measure of corporate value, Entrepreneur, June 2008, available at http://www.entrepreneur.com/tradejournals/article/ 200909542.htmp; Margery Kraus, Op-Ed, Reputation is now a tangible measure of corporate value, PRWeek, May 26, 2003.
125. In re Citigroup Inc. S'holder Derivative Litig., 964 A.2d 106, 136 (Del. Ch. 2009) (quoting White v. Panic, 738 A.2d 543, 554 n.36 (Del. 2001)).
126. Id. at 139 (quoting Malpiede v. Townson, 780 A.2d 1075, 1082-83 (Del. 2001)).
127. In re Citigroup has been cited seven times by the Delaware courts. In fact, a Westlaw search conducted on December 27, 2009 for "964 A.2d 106" in the Delaware's Courts database yielded seven results. In In re Countrywide Corp. S'holder Litig., 2009 WL 846019, at 8 (Del. Ch. Mar. 31, 2009), the court used In re Citigroup in discussing the corporate waste doctrine. This is important for plaintiffs because In re Citigroup looked more favorably on the corporate waste doctrine compared with Brehm.
128. Of course, even a disapproving say-on-pay resolution would not be enough to prove irrationality per se. In fact, it may be likely that there will still be no finding of waste even with a disapproving say-on-pay resolution. The goal of this litigation strategy, however, is merely to pass the initial stages of litigation. See infra Section II.B.
129. Brehm v. Eisner, 746 A.2d 244, 263 (Del. 2000).
130. Id.
131. 964 A.2d at 112.
132. Id. at 138.
133. Id. at 138-39.
134. Plaintiffs argued this in their brief opposing the motion to dismiss. Plaintiffs' Answering Brief in Opposition to Defendants' Motion to Dismiss or Stay this Action or, in the Alternative, to Dismiss the Consolidated Second Amended Derivative Complaint at 124, In re Citigroup Inc. S'holder Litig., 964 A.2d 106 (Del. Ch. 2009) (No. 3338-CC), 2009 WL 81303 (stating that Prince received an exorbitant amount of income even despite the "disturbing inadequacies in Citigroup's risk management and control procedures that directly implicated defendant Prince, shedding additional light on his involvement in the Company's historic collapse").
135. In re Citigroup, 964 A.2d at 138 (quoting Brehm v. Eisner, 746 A.2d 244, 263 (Del. 2000)).
136. Rogers v. Hill, 289 U.S. 582, 591 (1933).
137. 751 A.2d 879, 896-900 (Del. Ch. 1999).
138. Id. at 899. The court dismissed the explicit language of Rogers v. Hill, which stated that "majority stockholders have no power to give away corporate property against the protest of the minority." 289 U.S. at 591-92.
139. Harbor Fin. Partners, 751 A.2d at 900.
140. Id. at 901 (internal quotation marks and citations omitted).
141. Id.
142. Brehm v. Eisner, 746 A.2d 244, 263 (Del. 2000) (internal quotation marks omitted).
143. See supra Section I.B.
144. Bebchuk & Fried, supra note 67, at 672 ("The most promising route to improving pay arrangements is thus to make boards more accountable to shareholders and more focused on shareholder interests.").
145. E.g. Blasius Indus., v. Atlas Corp., 564 A.2d 651, 659 (Del. Ch. 1988) (holding that a board action that stifles a shareholder vote is not entitled to deference and recognizing that corporations have long "dismiss[ed] the stockholder vote as a vestige or ritual of little practical importance").
146. William T. Allen et al., Function Over Form: A Reassessment of Standards of Review in Delaware Corporation Law, 56 Bus. Law. 1287, 1318 (2001) ("The waste exception, which is a vestige of a long-gone era of corporation law, has no present-day utility. When fully informed, disinterested stockholders have approved a transaction, on what principled basis could a court determine that the transaction is wasteful?").
147. Paul Hodgson, A Brief History of Say on Pay, Ivey Bus. J., Sept./Oct. 2009, available at http://www.iveybusinessjournal.com/article.asp?intArticle_ID=856 (finding that say-on-pay resolutions will be rare and stating that "[e]ven companies that actually had a vote on pay on the agenda, saw support for excessive pay as usual remain strong") (emphasis omitted).