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An Introduction to the Law of Corporations: Cases and Materials, Fall 2017

Frank David Seinfeld, Plaintiff, v. Donald W. Slager; James E. O'connor; John W. Croghan; Tod C. Holmes; David I. Foley; Ramon A. Rodriguez; Michael W. Wickham; James W. Crownover; Nolan Lehmann; Allan C. Sorensen; William J. Flynn; W. Lee Nutter; John M. Trani; Michael Larson; And Republic Services, Inc., Defendants

Headnote

Stockholder challenges to excessive executive compensation packages are relatively common. For the most part, such challenges are extremely difficult for plaintiffs to win. In most instances, the executives' pay is approved by a disinterested board of directors. As you already know, a disinterested board making an informed decision will receive the protection of the business judgment presumption when the decision to pay an executive a large amount of money is challenged by stockholders. Because it is extremely difficult to plead demand futility in such cases, they are often characterized as “waste” claims in order to access Aronson's second prong. 

Some believe that boards have an obligation to minimize tax liability or to avoid paying taxes. Such a view has never been supported by any corporate law doctrine. Nevertheless, that fact does not stop some litigants from bringing challenges against board decisions with respect to tax strategy. Such challenges, assuming a disinterested and reasonably informed board are doomed for failure. Consequently, plaintiffs who bring such claims are left to characterize such claims as “waste” claims.

One area where plaintiffs are more successful is in claims against directors, rather than executives, for director compensation. Although directors are expressly authorized by statute to set their own pay (DGCL 141(h)), the levels of such pay can give courts pause. Plaintiffs are obviously more successful in such cases because by their nature, directors are interested parties in their own pay.  Consequently, plaintiffs are much more likely to succeed in overcoming Aronson's demand futility pleading burden.

In Seinfeld, the court deals with all three of these issues.