by: David Marcus, The Deal, March 19, 2007
The Delaware Court of Chancery has seen enough. In five cases issued since November, Chancellor William B. Chandler III and Vice Chancellor Stephen Lamb have censured corporate defendants for issues related to executive compensation. The decisions involve a range of fact patterns, from options backdating and spring-loading to the spinoff of a subsidiary, a management-led buyout and a large stock-for-stock merger.
Taken as a body of work, the decisions reflect the belief that executive compensation has become a pervasive -- and pernicious -- influence on corporate governance, profoundly affecting even such fundamental decisions as when and to whom to sell a company.
Judges can hear only the cases that come before them, of course, and the recent spate of opinions ultimately stems from the displeasure with CEO pay that has motivated investors to bring the suits in the first place. But in the most closely watched ruling of the quintet, Chandler went out of his way to savage Edwin "Mac" Crawford, the CEO of Caremark Inc., for the pay he will receive if Caremark completes its merger with CVS Corp. rather than succumb to a hostile bid from Express Scripts Inc. Chandler usually employs a restrained if sometimes pointed style, and his chiding tone in Caremark suggests a personal distaste not just for Crawford's compensation but for the standard practice it exemplifies.
The cases are perhaps most significant in their implications for Delaware takeover law, which is premised on the belief that directors and managers can generally be trusted to act in good faith -- and thus that courts should generally defer to their decisions even when the company's fate hangs in the balance. Read broadly, Chandler's comments in Caremark and, to a lesser extent, Lamb's in SS&C, cast doubt on that assumption and the conclusion that flows from it.
The five recent Chancery cases present situations where an executive profits from his position at a company at the expense of shareholders and with inadequate -- even nonexistent -- board oversight. In the three cases involving a major transaction, the court depicted a CEO at least as concerned with what he stood to receive in the deal as with the return to shareholders. Chandler's Caremark decision and Lamb's in SS&C suggests that image has affected Chancery's view of M&A significantly. Now the big question is, will it affect Delaware takeover law?