Freedman v. Adams

• Decision Date: 14 January 2013
• Docket Number: 2012.,No. 230,230
• Citation: 58 A.3d 414
• Parties: Susan FREEDMAN, Plaintiff Below, Appellant, v. William H. ADAMS, III, Keith A. Hutton, Jack P. Randall, Phillip R. Kevil, Herbert D. Simons, Vaughn O. Vennerberg, II, Lane G. Collins, Scott G. Sherman, Bob R. Simpson and XTO Energy, Inc., Defendants Below, Appellees.
• Court: Supreme Court of Delaware

58 A.3d 414

Susan FREEDMAN, Plaintiff Below, Appellant,
v.
William H. ADAMS, III, Keith A. Hutton, Jack P. Randall, Phillip R. Kevil, Herbert D. Simons, Vaughn O. Vennerberg, II, Lane G. Collins, Scott G. Sherman, Bob R. Simpson and XTO Energy, Inc., Defendants Below, Appellees.

No. 230, 2012.

Supreme Court of Delaware.

Submitted: Oct. 24, 2012.
Decided: Jan. 14, 2013.

[58 A.3d 415]

Court Below: Court of Chancery of the State of Delaware, C.A. No. 4199.
Upon appeal from the Court of Chancery. AFFIRMED.

Robert D. Goldberg, Esquire, Biggs and Battaglia, Wilmington, Delaware; Of Counsel: Alexander Arnold Gershon, Esquire (argued) and Michael A. Toomey, Esquire, Barrack, Rodos & Bacine, New York, New York; and Daniel E. Bacine, Esquire, Barrack, Rodos & Bacine, Philadelphia, Pennsylvania, for Appellant.

Raymond J. DiCamillo, Esquire (argued) and Margot F. Alicks, Esquire, Richards, Layton & Finger, P.A., Wilmington, Delaware, for Appellees.

Before HOLLAND, BERGER, JACOBS and RIDGELY, Justices and VAUGHN, President Judge,^* constituting the Court en Banc.

[58 A.3d 416]

BERGER, Justice:

In this appeal we consider whether a derivative complaint challenging a corporate board's decision to pay certain executive bonuses without adopting a plan that could make those bonuses tax deductible states a claim for waste. The trial court concluded that the complaint fails to allege, with particularity, that the board's decision not to implement a so-called Section 162(m) plan was a decision that no reasonable person would have made. We agree and affirm.

Factual and Procedural Background

Susan Freedman was a stockholder of XTO Energy Inc., a Delaware corporation that, before being acquired by ExxonMobil Corporation, was in the business of oil and gas production. In 2008, she filed a derivative action alleging that XTO's board committed waste by failing to adopt a plan that could have made its bonus payments tax deductible. Specifically, Freedman alleges that compensation awarded to corporate officers in excess of $1 million per year is tax deductible only if paid pursuant to § 162(m) of the Internal Revenue Code.¹ From 2004–2007, XTO paid executive bonuses totaling more than $130 million, and those payments were not tax deductible. The XTO board was aware that, under a qualified Section 162(m) plan, bonuses could be tax deductible, but it did not think its compensation decisions should be “constrained” by such a plan.

Shortly after Freedman filed her complaint, XTO's board approved a Section 162(m) plan. That plan was approved by its stockholders at XTO's 2009 annual meeting. XTO never made use of the plan, however, because it merged with and into a subsidiary of Exxon on June 25, 2010. Freedman agreed to dismiss her complaint, as moot, on April 5, 2011. Then she filed a motion seeking $1 million in attorneys' fees, arguing that the complaint benefitted the company by causing XTO to adopt a Section 162(m) plan. The Court of Chancery denied the motion, finding that the complaint was not meritorious when filed because it does not adequately allege that demand on the board would have been futile. This appeal followed.

Discussion

In a derivative suit...