Delaware Court of Chancery Partially Denies Motion to Dismiss Waste Claim in Shareholder Derivative Suit Filed on Behalf of CBS Corporation
On April 19, 2018, the Court of Chancery partially denied defendants’ motion to dismiss plaintiff’s corporate waste claim against certain directors and officers of CBS Corporation (“CBS” or the “Company”). The derivative lawsuit alleged that around May 2014, Sumner Redstone (“Redstone”), controlling stockholder, former Executive Chairman and former Chairman Emeritus of CBS, became incapacitated and could no longer provide valuable services to the Company. Despite having knowledge of Redstone’s deteriorating condition, certain members of CBS’s board of directors (the “Board”) approved over $13 million in cash compensation for Redstone over the next few years.
Defendants moved to dismiss the complaint under Court of Chancery Rule 23.1 for failure to make a demand on the Board, and Rule 12(b)(6) for failure to state a claim upon which relief can be granted. The complaint challenged three different categories of compensation awarded to Redstone: (i) $10.75 million in compensation paid to Redstone in 2014 for his service as Executive Chairman of the Board, consisting of base salary in the amount of $1.75 million and a bonus of $9 million; (ii) $1.75 million in base salary paid to Redstone in 2015 for his service as Executive Chairman of the Board; and (iii) $1 million in base salary paid to for his service as Chairman Emeritus in 2016.
In considering defendants’ motion to dismiss under Rule 23.1, Chancellor Andre G. Bouchard agreed with defendants and found that demand was not excused with respect to the $9 million in bonus compensation paid to Redstone in 2014 because the responsibility for setting Redstone’s compensation as Executive Chairman solely laid with the four-member compensation committee of the Board. Because only 4 out of the 13 members of the Board participated in the decision to award Redstone the $9 million bonus, plaintiff failed to show that demand upon a majority of the Board would have been futile.
Unlike the $9 million bonus payment, Redstone’s salary in the amount of $1.75 million paid annually for 2014 and 2015 for his service as Executive Chairman was not the product of a decision by the compensation committee. Rather, his salary was set by default in the Employment Agreement and the only way for CBS to reduce or eliminate Redstone’s salary would have been to terminate the Employment Agreement, which the Board had the power to do. Given that a condition of Redstone’s Employment Agreement required Redstone to “be actively engaged” in performing his duties, Chancellor Bouchard found that the amended complaint alleged numerous factual allegations demonstrating that it should have been “abundantly clear” to the Board that Redstone was performing no meaningful services to CBS beginning at some point in the latter part of 2014 or in 2015. Thus, the Court of Chancery denied defendants’ motion to dismiss the claims relating to Redstone’s annual salary payments in 2014 and 2015 and found that a majority of the Board faces a substantial threat of liability for waste claims with respect to these payments.
Finally, like the bonus payment in 2014, the decision to award Redstone $1 million in compensation as Chairman Emeritus for 2016 laid in the hands of the compensation committee. The Court of Chancery, in denying defendants’ motion to dismiss the waste claim with respect to Redstone’s compensation as Chairman Emeritus, found that “it would be against the personal interests of [the other members of the Board] to be critical of a decision to pay Redstone an annual salary of $1 million given that plaintiff’ claims regarding the base salary payments made to Redstone as Executive Chairman after May 2014 (before he became Chairman Emeritus in February 2016) will proceed against them.”
A copy of the Court of Chancery’s decision can be found here.
About Faruqi & Faruqi, LLP
Faruqi & Faruqi focuses on complex civil litigation, including securities, antitrust, consumer and wage and hour class actions, as well as shareholder derivative suits. The firm is headquartered in New York, and maintains offices in California, Delaware, Pennsylvania and Georgia. Since its founding in 1995, Faruqi & Faruqi has served as lead or co-lead counsel in numerous high-profile cases which ultimately provided significant recoveries to investors, consumers, and employees.
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About Nina Varindani
Nina Varindani is a Partner in Faruqi & Faruqi, LLP’s New York office and focuses her practice on securities litigation and shareholder derivative litigation, representing investors in federal and state class action and derivative lawsuits, books and records demands and litigation demands. Please feel free to contact Nina regarding any questions concerning this blog post or any questions related to F&F’s practice areas, firstname.lastname@example.org.