Private jets, million-dollar compensations and bonuses during COVID-19? When does corporate waste get of hand and becomes actionable?
Corporate waste is when exchange is “so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration.”[1] However informed decisions by the board of directors are in most cases protected by the business judgment rule. The courts measure corporate waste against an extremely high standard of proof in shareholder derivative litigation.
In the case of CBS’ former Executive Chairman, and at the time of the lawsuit, Chairman Emeritus, Sumner Redstone, CBS approved over $13 million in cash compensation despite the fact that he was no longer meaningfully contributing to the Company on account of his deteriorating health condition. The Delaware Court in this particular case found the particularized pleadings enough for the case to continue and noted “it should have been abundantly clear to the members of the Board—from their attendance at Board meetings, press publicity, and other interactions with the Company—that far from being ‘actively engaged’ in the CBS’s affairs, Redstone was providing no meaningful services to the Company beginning at some point in the latter part of 2014 or in 2015”[2] when most of the $13 million went towards his performance bonuses.
Argo Group International Holding paid $900,000 to the Securities and Exchange Commission last year for failing to disclose perks and benefits given to their former CEO Mark E. Watson III. The allegations included personal use of corporate jets, lodging, transportation for family members, club memberships, totaling up to $5.3 million between 2014 and 2018.[3]
On the other hand, recently CEO of Goldman Sachs, David Solomon was in the news for his lavish lifestyle at the expense of corporate assets. A very public critic of work-from-home, the CEO has used the Company’s newly acquired Gulfstream jets to take four trips to Bahamas and a birthday trip to Barbuda. Also, a frequent visitor at Hamptons, he has been in the news for flouting social-distancing norms, resulting in a state probe. Last year when the COVID-19 Pandemic was at the peak, Goldman Sachs shareholders approved Solomon’s just under $24 million salary despite the looming economic crisis.
In a public statement by the Bank, Solomon continues to work while in Bahamas, pays for his own travel and cited Bank’s financial performance of profit of $9.46 billion and a 22% increase in sales. Solomon has also been handed a $10 million pay cut over the 1MDB bribery scandal[4], though not a result of any misconduct by Solomon. While the conduct here seems questionable, the corporate waste standard in this case will likely not be met.
Feel free to contact Radhika Gupta at rgupta@lowey.com for any questions or comments.
[1] Brehm v. Eisner, 746 A.2d 244, 263 (Del. 2000).
[2] Feuer ex rel. CBS Corp. v. Redstone, No. CV 12575-CB, 2018 WL 1870074, at *12 (Del. Ch. Apr. 19, 2018).
[3] SEC Press Release, Insurance Company Settles SEC Charges for Failing to Disclose Executive Perks (June 4, 2020), https://www.sec.gov/news/press-release/2020-127.
[4] In 2015, Malaysia’s then-Prime Minister Najib Razak was accused of channelling over US $700 million from 1Malaysia Development Berhad (1MDB), a government-run strategic development company to his personal bank accounts. Goldman Sachs was charged in Foreign Bribery Case and agreed to pay over $2.9 billion in a settlement with the U.S. Department of Justice. DOJ Press Release (Oct. 22, 2020), https://www.justice.gov/opa/pr/goldman-sachs-charged-foreign-bribery-case-and-agrees-pay-over-29-billion.