Among fictional law firms, perhaps the ultimate illustration of Robert De Niro’s observation that “Everyone has their own mishegoss” (Yiddish: craziness/ eccentricity/ peculiarity) was Boston’s Cage & Fish, the setting of the 1997-2002 Fox television series, Ally McBeal.
Objections that the show undermined the perception of female professionals and professionalism led to a 1998 Time magazine cover, “Is Feminism Dead?”, featuring images of Susan B. Anthony, Betty Friedan, Gloria Steinem, and Calista Flockhart’s McBeal.
The firm’s most egregious violator of social, cultural, and legal standards, name partner Richard Fish (Greg Germann), habitually and breezily (and, often, successfully) declared, “Bygones,” when attempting to dispel, or forestall, outrage over his remarks.
Under what circumstances can a board of directors, charged with monitoring a corporation’s performance and compliance, similarly set aside its (and shareholders’) concerns, misgivings, umbrage, and even fury, and justifiably decide not to pursue current and/or former directors and/or officers for corporate damages attributed to the executives’ alleged—or even well-documented— breaches of fiduciary duty?
● The Larger Context of Responding to Shareholders’ Demands and Derivative Lawsuits
Courts have dismissed shareholder derivative lawsuits when, even if the pleadings’ allegations of past misconduct could be substantiated, a board and/or its special litigation committee (SLC) determined, in their “sound business judgment” (which is presumed, under the business judgment rule), that “the best interests of the corporation” would not be served by allowing the litigation to continue. Gall v. Exxon Corp., 418 F. Supp. 508, 518-519 (S.D.N.Y. 1976) (involving executives’ alleged bribery of Italian politicians).
Directors, in deliberating whether the corporation should move for the dismissal of an existing derivative lawsuit, are entitled to consider the “unfavorable prospects for success of the litigation, the cost of conducting the litigation, interruption of corporate business affairs and the undermining of personnel morale.” Id. at 514 n.13.
See also In re Primedia, Inc. Shareholders Litigation, 67 A.3d 455, 472 (Del. Ch. 2013) (observing that because the court had “evaluated the risk-adjusted recovery as ‘low,’ it fell within a range of reasonableness for the SLC to recommend [dismissal], rather than imposing upon Primedia the time, expense, and distraction of litigation”); London v. Tyrrell, 2010 WL 877528 (Del. Ch.), at *10 (noting, before criticizing the SLC’s report and denying the company’s motion to dismiss, the SLC’s arguments that discovery “will be extremely disruptive to [the Company’s] operations,” and that “negative publicity associated with the suit will immediately damage the Company’s goodwill and reputation in the government contracting community”); and Kaplan v. Wyatt, 484 A.2d 501, 520 (Del. Ch. 1984) (concluding that two claims “do not appear to be matters of sufficient substance to warrant further protracted litigation and disruption of corporate affairs”).
● Application to Officers’ Departures
Similar concerns (which might suggest analogies to efforts to terminate a personal relationship quietly and neatly) are implicated by shareholder challenges to a board’s severance awards to, and/or separation agreements with, senior officers.
For instance, in its September 7, 2021 decision rejecting Boeing’s motion to dismiss a shareholder lawsuit against directors for damages suffered by the company as the result of two crashes of its 737 MAX planes, the Delaware Court of Chancery did grant the director defendants one victory.
The Court dismissed, for failure to plead particularized facts, claims that the directors had wasted corporate assets, and/or had acted in bad faith, by allowing Dennis A. Muilenburg, the company’s CEO and Chairman, to (in the Court’s summary) “receive unvested equity-based compensation in a quiet retirement, despite knowing that he misled the FAA and the Board, and failed in his response” to the crashes. In re Boeing Company Derivative Litigation, 2021 WL 4059934 (Del. Ch.), at *35.
De Niro, as Goodfellas’ mobster Jimmy Conway, identified to teenage protégé Henry Hill “the two greatest things in life: Never rat on your friends, and, Always keep your mouth shut.” Yet although the shareholders “theorize the Board bought Muilenburg’s silence because he knew the depth of the Board’s ignorance about the 737 MAX,” the Court found that “nothing in the [discovery] production gives rise to the reasonable inference that Muilenburg intended to retaliate against the Board by placing the blame at its feet.” Id.
Moreover, “it is reasonable to infer that the Board was validly exercising its business judgment when it decided to allow Muilenburg to retire with compensation. At that time, Boeing was facing substantial backlash and had spent millions of dollars addressing the 737 MAX corporate trauma. Even accepting as true that the Board allowed Muilenburg to go quietly and with full pockets to avoid further public criticism, it is reasonable to infer that doing so was in furtherance of the legitimate business objective of avoiding further reputational and financial harm to the Company.” Id. at 36.
Such reasoning has protected other boards against challenges to financial arrangements that they had approved for departing executives. As the Chancery Court (foot)noted, id. at *36 n.341, it had upheld a board’s decision to settle with a CEO instead of firing him for cause, which “could have embroiled the Company in an embarrassing legal battle with its former CEO.” Shabbouei v. Potdevin, 2020 WL 1609177 (Del. Ch.), at *12.
The Court had also indicated, in examining practices for awarding bonuses to executives, the importance of “ensuring a smooth and harmonious transfer of power, securing a good relationship with the retiring employee, preventing future embarrassing disclosure and lawsuits, and so on.” Seinfeld v. Slager, 2012 WL 2501105 (Del. Ch.), at *6. (Later in Goodfellas, Conway and mob boss Paul Cicero (Paul Sorvino) even ordered the now-adult Henry Hill (Ray Liotta) to return to his wife, Karen (Lorraine Bracco), because their marital discord endangered the group’s criminal activities.)
In decisions not cited in the Boeing opinion the Court had, in rejecting a shareholder challenge to executives’ separation agreements, observed that the complaint “fails to address other relevant factors considered by the Special Committee and Subcommittee when rejecting the demand, [including] ‘concern of disruption to or distraction from the business,. . . .’” City of Tamarac Firefighters’ Pension Trust Fund v. Corvi, 2019 WL 549938 (Del. Ch.), at *10; and had emphasized that “[s]everance agreements can be used to ensure cooperation from executives or to secure other benefits.” Friedman v. Dolan, 2015 WL 4040806 (Del. Ch.), at *8.
For instance, Hewlett-Packard’s departing CEO Mark Hurd had “agreed: (1) to extend certain confidentiality agreements; (2) not to disparage the Company; (3) to cooperate, among other things, ‘with respect to transition and succession matters’’ and (4) to release all claims he had against the Company.” Zucker v. Andreessen, 2012 WL 2366448 (Del. Ch.), at *8.
Although that board might well have been able, if it had terminated Hurd for cause and thereby denied him a severance payment, to defeat his anticipated litigation, “the Company would need to incur considerable costs of time, resources, and negative publicity in the interim.” Id. In addition, the severance award itself might have ensured the unanimity of the directors in terminating Hurd, which “may have been valuable to HP from an investor-relations standpoint”; and, denying the payment “could have undermined [the Board’s] efforts to attract outside executive talent” to replace Hurd as CEO. Id. at *9.
Most notably, the Court had found that the directors of The Walt Disney Company had not breached their fiduciary duties by awarding departing president Michael Ovitz the large amount of severance called for by his employment agreement, because “terminat[ing] Ovitz for good cause [would have] exposed Disney to the risk and expense of a protracted court battle” (or, some might say, could have “made a scene”). In re The Walt Disney Company Derivative Litigation, 731 A.2d 342, 264 (Del. Ch. 1998), aff’d sub nom. Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
In short, directors can legitimately decide not to make, or invite, a (state or) “federal case” out of their efforts to remove an executive.
In any event, the board might not want a former officer to end up believing that, as De Niro’s Conway judiciously (and with diplomatic restraint) pointed out, after witnessing a volatile confrontation, “You insulted him, a little bit. . . You got a little out of order, yourself.”
