Summary
The Delaware Supreme Court held that a derivative complaint failed to state a corporate waste claim based on XTO Energy’s decision not to adopt a Section 162(m) compensation plan. The court concluded that the board’s deliberate choice to preserve flexibility in executive compensation, despite foregoing potential tax savings, was an exercise of business judgment and was not irrational or unconscionable. The court affirmed the Court of Chancery’s judgment.
Topics
Practice areas
Questions Presented
- Whether the derivative complaint adequately alleged a claim for corporate waste based on XTO's board's failure to adopt a Section 162(m) compensation plan.
- Whether the complaint's failure to state a waste claim meant that demand on the board was not excused and that Freedman was not entitled to attorneys' fees after dismissal as moot.
Holdings
- The complaint failed to state a claim for corporate waste because it did not allege that any bonuses actually would have been tax deductible under a Section 162(m) plan, and the board knowingly chose compensation flexibility over potential tax savings.
- Because the complaint did not adequately plead corporate waste, it did not adequately allege that demand on the board would have been futile.
- Freedman was not entitled to attorneys' fees because the complaint was not meritorious when filed.
Key quotations
“A claim of waste will arise only in the rare, unconscionable case where directors irrationally squander or give away corporate assets.” (417)
“The decision to sacrifice some tax savings in order to retain flexibility in compensation decisions is a classic exercise of business judgment.” (417)
Factual background
XTO Energy paid its executives more than $130 million in bonuses from 2004 through 2007 without making the payments tax deductible under a Section 162(m) plan. XTO's board knew that a qualified plan could permit tax deductions but intentionally chose not to adopt one because it did not want compensation decisions constrained by the plan. XTO later adopted a Section 162(m) plan, but never used it before merging into an ExxonMobil subsidiary.
Procedural history
Freedman filed a derivative complaint in 2008 alleging corporate waste based on XTO's failure to adopt a stockholder-approved plan that could have made executive bonuses tax deductible. XTO later adopted a Section 162(m) plan, but never used it before merging with an ExxonMobil subsidiary. Freedman agreed to dismissal as moot and sought $1 million in attorneys' fees. The Court of Chancery denied the fee motion, concluding that the complaint did not adequately allege demand futility because it failed to state a waste claim. The Delaware Supreme Court affirmed.