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finding that complaint stated a claim that board had improperly delegated its authority under Section 141 to the CEO, where the board agreed not to engage in "unreasonable interference, in the good faith judgment of the Executive, by the Board . . . in the Executive's carrying out of his duties and responsibilities"
Summary of this case from Obeid v. HoganOpinion
Civil Action No. 13358.
Date Submitted: September 21, 1994.
Date Decided: January 11, 1995.
Clark W. Furlow, Esquire and Michele C. Gott, Esquire, of SMITH, KATZENSTEIN FURLOW, Wilmington, Delaware; OF COUNSEL: Thaddeus Holt, Esquire, Point Clear, Alabama; Attorneys for Plaintiff.
Thomas R. Hunt, Jr., Esquire and Lawrence A. Hamermesh, Esquire of MORRIS, NICHOLS, ARSHT TUNNELL, Wilmington, Delaware; OF COUNSEL: JONES, DAY, REAVIS POGUE, Dallas, Texas; Attorneys for Defendants.
MEMORANDUM OPINION
This suit, brought by a shareholder of DSC Communications Corporation ("DSC"), seeks a judicial declaration of the invalidity of certain compensation agreements between DSC and James L. Donald, its CEO and chairman on the ground, inter alia that they constitute corporate waste and result in an abdication of board authority and responsibility in violation of Section 141(a) of the Delaware General Corporation Law ("DGCL").
Mr. Donald's employment contract is on its face unusual and troubling in that it contains a provision to the effect that should he unilaterally determine in good faith that the company's board of directors has unreasonably interfered with his management of the corporation, then he may declare his employment terminated and, in doing so qualify for what are alleged to be large payments. It is the ill-conceived concept of the board of directors interfering with the CEO's management that has attracted the most attention from plaintiff.
Under Section 141 of the Delaware General Corporation Law, as under analogous provisions of the incorporation statutes of other states, it is the elected board of directors that bears the ultimate duty to manage or supervise the management of the business and affairs of the corporation. Ordinarily, this responsibility entails the duty to establish or approve the long-term strategic, financial and organizational goals of the corporation; to approve formal or informal plans for the achievement of these goals; to monitor corporate performance; and to act, when in the good faith, informed judgment of the board it is appropriate to act. While these responsibilities may be satisfied in various ways and with varying degrees of formality, it is essential that the members of the board understand that it is with the board and not with the officers of the corporation that ultimate responsibility lies. It is in the light of this fact that I refer to the contractual concept of board interference with the CEO as ill-conceived.
This suit seeks, first, an adjudication that three contracts between Mr. Donald and DSC are inconsistent with Section 141(a) of DGCL and are void as against public policy. It is asserted that these contracts constitute not only a violation of Section 141 but of the fiduciary duties of the corporation's directors. In addition the complaint asserts that DSC's board was inadequately informed when it approved these contracts. Second, the complaint alleges that these contracts contemplate payments that will constitute corporate waste or will constitute an unenforceable penalty. Lastly, this action seeks a declaration that a proxy statement for the 1994 annual meeting of stockholders was false and misleading with respect to its description of the employment contract rights of Mr. Donald. As to this claim plaintiff also seeks an injunction against DSC's performance under the contracts.
Pending is a motion of all defendants to dismiss (1) all claims arising from Mr. Donald's various employment agreements for a failure to state a claim upon which relief may be granted; (2) any purported waste claim on the ground of ripeness; and (3) the derivation aspects of the complaint on grounds that plaintiff's pre-suit demand that the board seek rescission of these contracts was denied and that determination is, in the circumstances, conclusive. The allegations directed to DSC's 1994 proxy statement have not been the subject of attention on this motion and are thus not considered by me now.
For the reasons that follow I conclude that plaintiff has no standing presently to litigate any claim arising from the various contracts he attacks except the claim that they constitute an unlawful abdication of director duty and, with respect to that claim, the facts alleged fail to state a claim. Thus, with the exception of the proxy claims, the motion to dismiss the complaint will be granted.
I. ALLEGATIONS
A. The Parties
DSC is a publicly held telecommunications manufacturer, marketer, and servicer incorporated in the State of Delaware. In addition to Donald, DSC's board at the time of the approval of the contracts in issue was composed of Messrs. Brown, Cumminskey, Fischer, Folsom, Leake, Nolan, and Watson, as well as three others who are not defendants in this action. At the time plaintiff's demand for action was rejected, the DSC board comprised all of the same directors except for Leake and Watson who were replaced by Defendants Dempsey and Fairclough.
Plaintiff's claims that the board wrongfully refused his demand and provided materially misleading proxy materials are not asserted against Defendants Leake and Watson as they were no longer on DSC's board when these alleged events occurred.
According to the complaint, in 1990 the Compensation Committee of the DSC board approved the three contracts in contention: an employment agreement (the "Employment Agreement"); the Executive Income Continuation Plan (the "Income Continuation Plan"); and a benefits plan denominated the 1990 Long-Term Incentive Compensation Plan (the "Long-Term Plan") (collectively, the "Donald Agreements"). They did this at a July 23, 1990 meeting, and immediately thereafter the Committee recommended the contracts to the full board. The full board heard from an outside compensation consultant and then approved the Donald Agreements, though the final version of the Donald Agreements were allegedly not arrived at until after this meeting.
B. The Donald Agreements
The three contracts delegate to Donald extensive, and allegedly exclusive, managing authority over DSC and provide for his compensation. It is the combination of the comprehensive power delegated, the unilateral power to declare a termination, and the benefits payable in the event of termination that plaintiff claims together constitute an abandonment by the board of its obligation to manage the enterprise.
Plaintiff asserts that even before the contracts were approved the board had abdicated its management duties. Plaintiff, however, has not alleged any facts to support such a conclusion.
(a) The Employment Agreement was approved on June 23, 1990, but became effective as of January 1, 1990.
The Employment Agreement defines Donald's duties, compensation, and scope of authority. It designates Donald as chief executive officer of the Company. In his capacity as CEO, Donald is "responsible for the general management of the affairs of the [c]ompany," and "in carrying out his duties . . . [he] shall report to the [b]oard" of directors.
The instances in which DSC may terminate Donald for "Cause" are narrowly defined. Only if Donald has been convicted of a felony "involving moral turpitude" or if his "serious, willful gross misconduct or willful gross neglect of duties . . . has resulted, or in all probability is likely to result, in material economic damage to [DSC]" does the corporation have cause to terminate his contract, "provided that no action or failure to act by [Donald] will constitute "Cause" if [Donald] believed in good faith that such action or failure to act was in [DSC's] best interest. . . ." Am.Cplt. Ex.1 § 1(d)(i) and (ii) (emphasis added).
Under this agreement Donald's employment is continued as chief executive officer of the company until either (1) the attainment of age 75 (which will occur in the year 2006) or (2) his termination by (a) death or disability (b) termination by DSC for cause or (c) his termination without cause. In the event of termination without cause benefits under the contract continue to be payable for an additional period of 6½ years. It is provided that after July 6, 1996 Donald may "relinquish the Office of Chief Executive Officer," in which event he will continue as Chairman of the board (or if not elected, as consultant to the company).
The base salary set forth in the agreement is $550,000 for 1990 and $650,000 for 1991. If he relinquishes the office of CEO his salary will be 75% of his base salary.
Under the Employment Agreement, Donald may declare that he has been "constructively terminated without cause," in a number of identified circumstances. Among these are events that would be expected to constitute substantial concerns of an officer or employee, such as reduction in base salary or existing benefit program (§ 1(f)(i)); significant diminution of responsibilities (§ 1(f)(iv)); failure of the Company in the event of a merger, consolidate, etc., to obtain an assumption in writing or as a matter of law of the Company's obligations under these agreements (§ 1(f)(vi)). More problematically, under § 1(f)(vii) Mr. Donald may declare a constructive termination of his Employment Agreement, without cause, if DSC's board of directors "unreasonabl[y] interfere[s] . . . in [Donald's] carrying out his duties and responsibilities" under the Employment Agreement.
In the event that Donald does in good faith declare himself constructively terminated without cause, or DSC terminates him without cause, Donald is entitled to the following consideration:
1. Continued payment of his "Base Salary" at the level in effect immediately prior to termination for the remainder of his "Term of Employment." which, as stated, will be 6½ years unless Donald dies or turns 75 first. In 1992, Donald's Base Salary exceeded $650,000.
2. Annual incentive awards for the remainder of the Term of Employment equal to the average of the three highest annual bonuses awarded to Donald during his last ten years as CEO. In 1992, such award allegedly equalled $300,000.
3. Medical benefits for Donald and his wife for life, as well as his children until the age of 23.
4. Continued participation in all employee benefit plans in which Donald is participating on the date of termination until the earlier of the expiration of the Term of Employment or the date in which he receives equivalent benefits from a subsequent employer.
5. Other (unidentified) benefits in accordance with DSC's plans and programs.See Am.Cplt. Ex.1 § 11(d).
In addition to these benefits, in the event of a constructive termination or an actual termination without cause, Donald will also receive monetary benefits under the other two agreements, the Income Continuation Plan and the Long-Term Plan.
(b) Pursuant to the Income Continuation Plan, once the Term of Employment under the Employment Agreement ends, Donald is entitled to receive annual payments for the remainder of his life in the amount of three percent of the sum of [(1) his base salary at the time of termination, plus (2) the average of the three highest bonuses of his last 10 years of DSC employment], multiplied by his years of service. His "years of service" include the years following a constructive termination but preceding the commencement of the Income Continuation Plan payments.
(c) Under the third contract, the Long-Term Plan, Donald was awarded 200,000 "units," all of which will have vested by the end of 1995. As disclosed in the Long-Term Plan, which is appended to the amended complaint, a unit is simply an account on the Company's books, which is annually credited, pro-rata with all units, with an amount of money as a form of incentive cash compensation. The cumulative value of the "unit" is simply the value of all past contributions. (It is not clear whether or how amounts held in such accounts appreciate, but that fact is not material to the issues presented). Units can be liquidated under various circumstances; they carry a "gross-up" right to make the compensation they represent tax free to the employee. The Plan is administered by a board committee. Notably the Long-Term Plan includes no formula by which the Company's annual contribution to the Plan is determined. It is to be determined annually "in accordance with criteria established by the [board] Committee" administering it. See Am.Cplt. Ex. 3 at § 7.1.
Donald is entitled to exercise these units at will by written notice to DSC and thereby receive their cash value. The units, however, will only become fully vested (100%) before December 31, 1995, in the event of a change in control or in the event of a termination without Cause. Only 66 2/3 % of the units were vested at the time the amended complaint was filed. Also if Donald exercises them at any time other than pursuant to a change in control, he will only be eligible to receive the "Cumulative Unit Value" as defined in the Long-Term Plan.
In the event of a "Change in Control," as defined in the Employment Agreement and the Long-Term Plan, the Plan contemplates enhanced benefits. In that event, it is alleged that Donald would be entitled to receive a very large sum.
See Am.Cplt., Ex.3 at § 8.3. In general, a Change in Control exists if (a) there is a merger, reorganization or consolidation in which there is a substantial change in the identity of stockholders and the proportion of their ownership; (b) a person or affiliated group acquires more than twenty percent of the company's stock, unless expressly excepted by the Employment Agreement or the Long-Term Plan; or (c) the members of the board as constituted on January 1, 1990 ("Incumbent Board") cease to "constitute at least a majority of the [b]oard; provided, however, that any individual becoming a director subsequent to [January 1, 1990] whose election, or nomination for election by the [c]ompany's stockholders was approved by a vote of at least two-thirds of the directors then constituting the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board," unless such individual assumed office pursuant to an actual or threatened proxy contest. Am.Cplt., Ex.3 at 2.4. The last of these definitions, which in context can be seen as placing a large [allegedly $60 million) cash tariff on the shareholder's free exercise of their right to elect the board, raises apparent legal issues. See Guiricich v. Emtrol Corp., Del.Supr., 449 A.2d 232, 239 (1982); Paramount Communications Inc. v. QVC Network, Inc., Del.Supr., 637 A.2d 34, 42 (1993); Blasius Indus. Inc. v. Atlas Corp., Del.Ch., 564 A.2d 651 (1988). As it is not alleged that any party seeks to run a proxy context at this time, and as plaintiff does not otherwise raise any franchise implications of the "incumbent board" (sometimes referred to as "continuing directors") provision in the "Change in Control" definition, there is no occasion for this court to inquire into this subject further at this point.
If a change in control occurs, Donald is entitled under the Long-Term Plan to the cash equivalent of the greater of the "Cumulative Unit Value" of his "Units," or the value of five shares of DSC common stock for each "Unit" held. See Am.Cplt. Ex.3 at § 8.3. The complaint does not allege the monetary value of Donald's "Cumulative Unit Value". It is alleged that DSC common stock was trading at approximately $60 a share immediately prior to this action being brought. Using this figure, Donald, holding 200,000 "Units," would be entitled to sixty million dollars in the event of a change in control as defined in the Employment Agreement and the Long-Term Plan.
The wisdom of these contracts as a business matter is not a question upon which this court is required or qualified to express an opinion.
II. Legal Standard
The legal test applicable to motions to dismiss for failure to state a claim is well settled. In order for such a motion to be granted the movant must show that the plaintiff would not be entitled to relief under any set of facts that could be proven under the allegations made. Rabkin v. Philip A. Hunt Chemical Corp., Del.Supr., 498 A.2d 1099, 1104 (1985). A complaint will not be dismissed "unless it is clearly without merit, either as a matter of law or fact." Id. The facts alleged are accepted as true for this purpose. Rales v. Blasband, Del.Supr., 634 A.2d 927, 931 (1993); Grobow v. Perot, Del.Supr., 539 A.2d 180, 187 n. 6 (1988). Inferences, where fairly disputable on the face of the pleading, will be drawn in the pleader's favor. But it is often said that allegations of fact that are "mere conclusions" will not alone support a claim. Grobow, 539 A.2d at 187 n. 6.
III. Plaintiff's Standing To Litigate DSC Claims
The amended complaint alleges that on September 29, 1993 plaintiff wrote to demand that the board rescind the Donald Agreements. That demand is appended to the Amended Complaint as Exhibit 4 and provides in part, as follows:
Paragraph 2(c) of the Employment Agreement dated as of January 1, 1990, between the Company and Mr. Donald purports to vest in Mr. Donald "the general management of the affairs of the Company." Under Paragraph 1(f)(vii) of the Employment Agreement, Mr. Donald is deemed to have been constructively terminated without cause, if there is "unreasonable interference, in the good-faith judgment of [Mr. Donald], by the Board or a substantial stockholder of the Company, in [Mr. Donald's] carrying out his duties and responsibilities under the Agreement."
Paragraph 1(f)(vii), therefore, purports to put Mr. Donald in a position unilaterally to declare a "constructive termination without cause" whenever he declares that the Board has "unreasonably interfered" with his general management of the affairs of the Company. Other provisions, including, without limitation, Paragraphs 11(d) and 27 of the Employment Agreement and Paragraph 4(b) of the DSC Communications Corporation Executive Income Continuation Plan dated as of January 1, 1990, between the Company and Mr. Donald, would impose drastic costs and burdens on the Company in the event of such a "constructive termination without cause."
The effect of the cited provision is to delegate the duties and responsibilities of the Board of Directors to Mr. Donald. This delegation is contrary to law and inconsistent with the certificate of incorporation and bylaws of the Company.
* * *
The cited provisions of the Employment Agreement are therefore void as a matter of law. Although they are void, they should be abrogated so as to leave no cloud upon the lawful conduct of the Company's affairs. And it should go without saying that the Board must refrain from conducting the business of the Company as if they were valid.
* * *
Accordingly, I hereby demand that the Board of Directors take immediate steps to abrogate Paragraphs 1(f)(vii) and 2(c) of the Employment Agreement dated as of January 1, 1990, between the Company and James L. Donald, and the 1990 Long-Term Incentive Compensation Plan insofar as it applies to Mr. Donald.
As alleged in the Amended Complaint, on November 8, 1993 DSC's general counsel reported to Mr. Grimes, in part as follows:
The Compensation Committee of our Board of Directors, as well as the entire Board, have seriously considered the issues set forth in your letter of September 29. To assist in the review, the Board obtained reports analyzing the relevant issues from the Company's outside benefits consultant, Hirschfeld, Stern, Moyer Ross, Inc. and from the Company's outside legal counsel, Jones, Day, Reaves Pogue. The Compensation Committee and the full Board of Directors believe that a thorough analysis of the applicable provisions of Delaware law necessarily leads to a conclusion that Mr. Donald's duties as described in the Employment Agreement do not constitute an impermissible delegation of the duties of the Board of Directors.
* * *
Accordingly, the provisions relating to the Board's actions set forth in Sections 11(d) and 1(f)(vii) of the Employment Agreement simply relate to the consequences of the Board's unreasonable interference with Mr. Donald's properly delegated duties. These provisions do not limit the Board's right to guide the Company through the formulation of policy or its right to take any other action it desires to take. They simply represent the agreement between the Company and Mr. Donald regarding the circumstances that will create a constructive termination of his employment and the consequences of such an event.
Based on the foregoing, the Board has concluded that the description of Mr. Donald's duties in the Employment Agreement do not constitute an impermissible delegation of the duties of the Board of Directors. Consequently, the Board declines to take any action to abrogate any provision of the Employment Agreement or the 1990 Long-Term Incentive Compensation Plan as you have requested.
* * *
The question raised by the pending motion to dismiss the complaint in this respect is whether Mr. Grimes has standing to litigate the claims that he asserts to the effect that the Donald Agreements are voidable.
It is elementary that under Delaware law, the directors of a corporation rather than its shareholders manage the business and affairs of the corporation. Levine v. Smith, Del.Supr., 591 A.2d 194 (1991); Aronson v. Lewis, Del.Supr., 473 A.2d 805, 811 (1984). As a consequence, it is well established, as well, that it is in the first instance the responsibility of corporate management under the supervision of the board to decide whether to bring a law suit on behalf of the corporation. Zapata Corp. v. Maldonado, Del.Supr., 430 A.2d 779, 782 (1981). In recognition of the directors' managerial authority to make decisions concerning the benefits and detriments of bringing suit, a shareholder who believes that a corporate right of action exists will ordinarily be required to make a demand upon the board of directors to do so. Only if he or she makes such a demand and the board wrongfully refuses to institute suit, or if the board is so implicated in the wrong that it cannot make (or there is reasonable doubt that it can make) a valid business judgment on the question whether to institute suit, is the shareholder authorized to cause the corporation's claims to be adjudicated. See Haber v. Bell, Del.Ch., 465 A.2d 353, 357 (1983). Generally the pre-suit demand requirement of Rule 23.1 is designed "to assure that the stockholder affords the corporation the opportunity to address an alleged wrong without litigation, to decide whether to invest the resources of the corporation in litigation, and to control any litigation which does occur." Spiegel v. Buntrock, Del.Supr., 571 A.2d 767 (1990).
This pre-suit demand is excused however where the plaintiff alleges particularized facts that, if true, would support a reasonable doubt that a majority of the directors upon whom demand would be made lack independence, or are interested or that the "challenged transaction was not [otherwise] the product of a valid exercise of business judgment." Aronson v. Lewis, Del.Supr., 473 A.2d 805 (1984).
In this case, defendants argue either that demand upon DSC's board was not made prior to this action and that such demand is not excused, or, in the alternative, that plaintiff did make a demand upon the board and that such demand was properly refused. Accordingly, defendants conclude that plaintiff is unable to maintain this shareholder's derivative action.
The September 29, 1993 letter from plaintiff, appended to the complaint, clearly demonstrates that demand was made on plaintiff's claim of abdication, though plaintiff's other theories were not raised. Therefore, under Delaware's construction of the effect of a demand, the plaintiff may not now contend that demand was excused. See Spiegel v. Buntrock, supra at 775; Rales v. Blasband, Del.Supr., 634 A.2d 927 (1993).
Applying the legal test outlined above, which is designed to protect the board's ability to make a business judgment, to the amended complaint involves a subtlety. The claim of directorial abdication does not present an issue upon which the board's good faith business judgment could be conclusive. Thus, for this reason, amplified below, I conclude that the board's rejection of plaintiff's demand to seek rescission of the Donald Agreements does not bar this action. With respect to the other theories of recovery urged in the amended complaint (again excluding the proxy claim) I conclude for the reasons stated below that plaintiff is barred from pressing those claims in the name of the corporation at this time.
A.
The abdication claim asserts that corporate directors have authorized a contract that precludes them from meeting their statutory and fiduciary obligations. Such authorization would arguably constitute a violation of Section 141(a) of DGCL and at least a partial repudiation of those fiduciary duties that directors owe directly to the body of shareholders who legally designated them to hold office. Whether these contracts do violate Section 141 is a question of law directly concerning the legal character of the contract and its effect upon the directors. The question whether these contracts are valid or not does not fall into the realm of business judgment; it cannot be definitively determined by the informed, good faith judgment of the board. It must be determined by the court. Cf. Blasius Indus., Inc. v. Atlas Corp., Del.Ch., 564 A.2d 651, 663 (1988). If this does not appear immediately obvious, I suggest that one read Chapin v. Benwood, Del.Ch., 402 A.2d 1205 (1979), aff'd 402 A.2d 1068 (1979) or Abercrombie v. Davis, Del.Ch., 123 A.2d 893 (1956), rev'd on other grounds, Del.Supr., 130 A.2d. 338 (1957) (which are briefly discussed below) and ask what result would have occurred in those cases if the boards involved had been asked to rescind the agreements there in question and had refused to do so on the belief, incorrect as it would have been, that they were valid agreements.
B.
In addition to the claim of abdication of responsibility, plaintiff claims in this suit that the Donald Agreements are the result of negligent inattention, constitute a waste of corporate assets, constitute an impermissible impediment to the emergence of any hostile change in corporate control and contemplate the payment of amounts that would constitute unenforceable penalties. There are obvious ripeness issues with respect to these claims, both as they relate to a possible future declaration of termination and to any possible future change in control transaction. No current obligation for DSC to make any of the payments that are claimed to be excessive has been alleged; nor is there alleged any interest of any person to acquire control of DSC that is impeded by the termination rights that the Donald Agreements contemplates. See Brown v. Ferro. Corp., 763 F.2d 798 (6th Cir.), cert. denied 474 U.S. 947 (1985). See, e.g., Stroud v. Milliken Enterprises, Inc., Del.Supr., 552 A.2d 476 (1989); Schick, Inc. v. Amalgamated Clothing Textile Workers, Del.Ch., 533 A.2d 1235, 1239 (1987). But I pass over these points because I conclude that in making a demand upon the board, but not asserting these additional grounds on which to challenge the Donald Agreements plaintiff has, for the time being, waived them.
If the internal corporate process contemplated by Rule 23.1 is to be engaged, certainly the complaining shareholder should present to the board for its consideration all of the concerns which he or she asserts justify board action. There is little to recommend a process in which a shareholder seeks board consideration of only some aspects of a transaction or puts forward only selected theories for board consideration, while reserving other theories for judicial consideration. Such a process would be neither efficient nor fair. Here plaintiff did not call to the board's attention these claims of waste etc. In making demand upon the board, plaintiff has in effect conceded that the board was in a position to consider and act upon his demand. See Spiegel, 571 A.2d at 775. By failing to present these matters to the board plaintiff has waived his ability to present them to this court. Cf. Deibler v. Olde Dinner Bell Inn, Inc., Del.Supr., ___ A.2d ___ (1995). This failure might be remedied by presenting these theories to the board for its consideration, but as matters now stand I conclude that plaintiff has no standing to raise any matters concerning the Donald Agreements other than the abdication theory and the proxy issue not addressed by this motion.
IV. The Alleged Abdication of Managerial Duties
Plaintiff's central claim is that the DSC board has, through the Donald Agreements, unlawfully abdicated its power to manage the corporation. He alleges that the delegation of power to Donald and the contract obligation to pay Donald substantial sums of money if the board, in Donald's unilateral good faith judgment, "unreasonably interferes" with his management,effectively prohibits any management by the board in violation of Section 141 of the DGCL.
A fundamental precept of Delaware corporation law is that it is the board of directors, and neither shareholders nor managers, that has ultimate responsibility for the management of the enterprise. Cahall v. Lofland, Del.Ch., 114 A. 224 (1921), aff'd 118 A. 1 (1922); Campbell v. Loew's Inc., Del.Ch., 134 A.2d 852 (1957); Mills Acquisition Co. v. Macmillan, Inc., Del.Supr., 559 A.2d 1261 (1989). Of course, given the large, complex organizations through which modern, multi-function business corporations often operate, the law recognizes that corporate boards, comprised as they traditionally have been of persons dedicating less than all of their attention to that role, cannot themselves manage the operations of the firm, but may satisfy their obligations by thoughtfully appointing officers, establishing or approving goals and plans and monitoring performance. Cahall v. Lofland, Del.Ch., 114 A.2d. 224 (1921). Thus Section 141(a) of DGCL expressly permits a board of directors to delegate managerial duties to officers of the corporation, except to the extent that the corporation's certificate of incorporation or bylaws may limit or prohibit such a delegation.
The Amended Complaint alleges that DSC's certificate of incorporation and bylaws prohibit the board from delegating its duty to manage. Plaintiff cites the difference between the language of the statute ("managed by or under the direction of a board of directors") and the language of the certificate and bylaws ("managed and controlled by a board of directors") to support the proposition that DSC specifically does not permit any delegation, even if the board were to dutifully supervise the exercise of the delegated power. (emphasis added) In my opinion the 1974 amendment to DGCL § 141(a) that added the phrase "or under the direction of" was simply a refinement that clarified a point hardly in need of very much clarification. Prior to the amendment it was clear that a board of directors could meet its management responsibilities by appropriately appointing and monitoring, corporate officers and exercising informed business judgment with respect to corporate goals and performance. Cahall v. Lofland, Del.Ch., 114 A. 224, 229 (1921) ("supervision, direction and control"). The 1974 Amendment did not change the substantive law. See 1 R. Franklin Balotti and Jesse A. Finkelstein, The Delaware Law of Corporations and Business Organizations, § 4.8 (2d. ed. 1990, 1995 Supp.). Therefore plaintiffs attempt to state a claim based upon a difference in the DSC certificate and the amended Section 141(a) must fail.
Absent specific restriction in the certificate of incorporation, the board of directors certainly has very broad discretion in fashioning a managerial structure appropriate, in its judgment, to moving the corporation towards the achievement of corporate goals and purposes. In designing and implementing such a structure, the board of course may delegate such powers to the officers of the company as in the board's good faith, informed judgment are appropriate. But this power is not without limit. See, e.g., Field v. Carlisle Corp., Del.Ch., 68 A.2d 817 (1949); Clark Memorial College v. Monoghan Land Co., Del.Ch., 257 A.2d 234 (1969). The board may not either formally or effectively abdicate its statutory power and its fiduciary duty to manage or direct the management of the business and affairs of this corporation. Thus in Abercrombie v. Davis, Del.Ch., 123 A.2d 893 (1956) rev'd on other grounds, Del.Supr., 130 A.2d 338 (1957), this court voided a shareholders' agreement that purported to bind signatories in their director capacity:
[b]ecause [the agreement] tends to limit in a substantial way the freedom of director decisions on matters of management policy, it violates the duty of each director to exercise his own best judgment on matters coming before the board.Id. at 899 (emphasis added). See also Chapin v. Benwood Foundation Inc., Del.Ch., 402 A.2d 1205 (1979) aff'd, Del.Supr., 415 A.2d 1068 (1980). This principle was recently restated by this court in Canal Capital Corp. v. French, Del.Ch., C.A. 11764, Berger, V.C. (July 2, 1992), which repeated a statement from Chapin that the court could not "give legal sanction to agreements which have the effect of removing from directors in a very substantial way their duty to use their own best judgment on management matters." Id.
Thus it is well established that while a board may delegate powers subject to possible review, it may not abdicate them.
Unlike the agreements or arrangements at issue in Abercrombie and Chapin or in Field v. Carlisle Corp. and Clark Memorial College, the Donald Agreements do not, under any circumstances, formally foreclose DSC's directors from exercising their business judgment. The Donald Agreements do not covenant that DSC directors will not "interfere" with Donald's management; rather they trigger rights to be paid if the board does "unreasonably interfere" with Donald's management. In Abercrombie the directors were formally bound to vote as seven out of eight of them agreed. The directors in Chapin were formally bound to elect the person earlier designated as a successor trustee. Under the Donald Agreements, the DSC directors' actions could only be illegally hindered or effectively bound if the amount of money that DSC could owe to Donald in the event that he declared a termination were so great in relation to the wealth of DSC as to preclude reasonable directors from freely exercising their business judgment. Thus, unlike the agreements considered in Abercrombie and Chapin, the Donald Agreements do not formally preclude the DSC board from exercising its statutory powers and fulfilling its fiduciary duty. It is the alleged practical effect of these contracts that is said to constitute the abdication of directorial responsibility.
Subject to his "good faith" requirement and a contractual opportunity to arbitrate any claims of "interference."
I assume for purposes of resolving this dispute that, at least under some circumstances, that such an effect of an employment contract would render it voidable in equity. On that assumption, and accepting the facts alleged as true and permitting all rational inferences in plaintiff's favor, the issue on this motion, with respect to the abdication claim, is whether the financial consequences of a possible termination determination by Mr. Donald might be such to DSC as substantially to deter defendants from exercising their statutory powers and fulfilling their fiduciary duties. The complaint however alleges very little about factual context of the Donald Agreements.
Among such circumstances would be the foreseeability of the effect at the time the contract was approved by the board. An even more difficult case would be presented where the terms of a CEO's employment contract came to have the practical effect of precluding the board from exercising its statutory powers and satisfying its fiduciary duty, but that effect was not reasonably foreseeable at the time the contract rights were negotiated at arm's-length. Such a case would present a clash between a CEO's contract rights and the board's fiduciary duty. Compare Paramount Communications v. QVC Network, Del.Supr., 637 A.2d 34 (1993) (buyers contract right to "lock-up" abrogated); ConAgra, Inc. v. Cargill, Inc., Neb.Supr., 382 N.W.2d 576 (1986).
While the 43 page amended complaint repeatedly expresses the conclusion that the Donald Agreements are "irrevocable as a practical matter, disabling the board from resuming the full exercise of its duty and authority" (¶ 19); constitute "self-disablement" (¶ 25); or constitute an "overwhelming disincentive" to board action (¶ 39), the amended complaint contains little in the way of allegation of financial facts or circumstances that support those conclusions. The document itself does not provide any basis to evaluate how significant the termination payments, which are stated as approximations (Am.Cplt. ¶¶ 26(a)(b), 27, 30, 31), might be to the Company. The figures that are pleaded ( see p. 6 above) show annual direct compensation of approximately one million dollars, which would be continued for 6½ years in the event of termination without cause; show a rather conventional pension formula (3% of Base Salary plus bonuses for highest three years times number of years of service) with payments beginning after the Employment Term concludes; and alleges nothing specifically with respect to the value of the 200,000 long-term plan units except that upon the hypothetical happening of a change in control they might be worth $60 million. See note 10 infra. In all events these Unit rights are almost completely vested already; a declaration of constructive termination would itself do little more than permit the vesting and withdrawal of those sums that are already allocated to this account. Thus they could have little disincentive effect on board monitoring.
What can one make of this, even giving the benefits of all inferences to the pleader? Plaintiff omits to plead facts that if true would raise an issue concerning the financial significance to DSC of a triggering of Donald's termination rights. It is the alleged significance to DSC of the threat of that termination that forms the predicate of plaintiff's abdication theory. Yet he pleads insufficient facts concerning the size of the scope or financial condition of DSC to allege a prima facie case of de facto abandonment of director responsibility. Cf. Haber v. Bell, Del.Ch., 465 A.2d 353, 359 (1983) (motion to dismiss granted where ". . . there [were] no allegations of facts which show that the options are of such gross disparity . . . as to make Board approval appear to be of the type no reasonable businessman could approve").
A close inspection of the attachments to the complaint, however, (in particular the Proxy Statement of March 31, 1994) shows that in 1993 DSC had revenues of $730.8 million and earnings of $81.7 million and that during that year, debt was reduced from $140 million to $70 million. The corporation had 55.7 million shares outstanding as of March 1, 1994 and a market capitalization of approximately $2.8 billion at that time. These facts are dramatic in light of the conclusory contentions made by plaintiff. They corroborate the conclusion that plaintiff has failed to allege a claim upon which relief could be granted. In the light that they throw, one can see that the amended complaint charges that directors of a large public corporation with $81 million in earnings last year will, as a practical matter, face "an overwhelming disincentive" to monitor Mr. Donald's performance because such monitoring might cause Mr. Donald to decide to claim board "interference" and possibly allow a termination of his contract obligations. This, in turn, would occasion an obligation to continue to make annual payments to Donald of something more than a million dollars, for six and one-half years. Assuming the facts alleged were proven (indeed drawing all inferences in plaintiff's favor, one could assume multiples of these numbers without changing the analysis) and assuming that the principle of Abercrombie, Chapin, and other such cases extend to agreements that, as a practical matter rather than formally, have the effect of preventing the board from exercising its power to continue to govern the corporate enterprise, nevertheless, in this instance not enough has been pleaded to possibly permit a fact finder to infer that the financial consequences flowing from the Donald Agreements would be such to DSC as to render the Donald Agreements a de facto abdication of directorial obligation. In these circumstances I conclude that it is appropriate to dismiss this claim.
For cases in which this court and others have on Rule 12(b) referred to documents appended to the complaint see, e.g., Lewis v. Straetz, Del.Ch., C.A. No. 7859, Hartnett, V.C., Mem. Op. at 6-10 (Feb. 12, 1986); Patents Management Corp. v. O'Connor, Del.Ch., C.A. No. 110, Walsh, V.C., Ltr. Op. at 2-3 (June 10, 1985); Homart Dev. Co. v. Sigman, 11th Cir., 868 F.2d 1556 (1989); Durning v. First Boston Corp, 9th Cir., 815 F.2d 1265, 1267, cert. denied, 484 U.S. 944 (1987); Amfac Mortgage Corp. v. Arizona Mall of Tempe, Inc., 583 F.2d 426 (9th Cir. 1978). See also Ch.Ct.R. 10(c) stating that exhibits to a pleading constitute a part of such pleading.
Plaintiff alleges the future payments if they had been triggered in 1993 would have totaled $8,657,864, not including gross-up obligations, which I accept for these purposes. The large number that plaintiff alleges ($60 million) is great indeed but arises only in connection with a change in control of DSC and does not logically relate to the theory of abdication.
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In concluding, I note, however, that the plaintiff's abdication case is given substantial superficial appeal by the foolish use in Section 1(f)(vii) of the Employment Agreement of the concept of "unreasonable interference, in the good faith judgment of the Executive, by the Board . . . in the Executive's carrying out of his duties and responsibilities." This ill-conceived provision does give rise to the inference that the outside corporate directors of DSC, and Mr. Donald, or the professional advisors of both, have fundamentally misunderstood the basic structure and requirements of the law governing corporate organization and governance. Ultimately, it is the responsibility and duty of the elected board to determine corporate goals, to approve of strategies and plans to achieve those goals and to monitor progress towards achieving them. The insertion of the concept of board "interference" into the employment contract of a senior officer clouds that responsibility; it addresses what may be a valid negotiating point — a senior officer's understandable desire that he be accorded substantial freedom in achieving goals set by persons to whom he is accountable — in an unskillful way that raises problems. In this instance the financial consequences (as alleged in the amended complaint) of a contract termination under this language would be such, that, in light of the size, scope and substantial profitability of the enterprise, one could not possibly conclude that the board of directors would be substantially impeded in exercising its statutory authority by the prospects of possibly triggering those consequences. Yet the concept itself is badly flawed and could lead to problems in other settings.
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Thus, for the foregoing reasons, I conclude that with the exception of the claim arising from the March 1994 Proxy Statement, which I do not address, the amended complaint fails to allege facts which if true would entitle plaintiff to any judicial relief.
It is so Ordered.