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Law School Case Brief

Valeant Pharm. Int'l v. Jerney - 921 A.2d 732 (Del. Ch. 2007)

Rule:

Where self-compensation involves directors or officers paying themselves bonuses, the court is particularly cognizant to the need for careful scrutiny. Self-interested compensation decisions made without independent protections are subject to the same entire fairness review as any other interested transaction. To avoid this high level of judicial scrutiny, an independent compensation committee can be employed to award salaries and bonuses to officers.

Facts:

Plaintiff corporation filed claims against defendants, who were the former director and president of a company and other board members, arising out of the payment of large cash bonuses in connection with a later-aborted corporate restructuring. The court found that the bonus transaction did not satisfy the fear dealing and fair price components of entire fairness review under Del. Code Ann. tit. 8, § 144. The court rendered judgment in favor of the corporation and found that the bonus transaction did not satisfy the fear dealing and fair price components of entire fairness review as required by the law.

Issue:

Did the defendant former president-director comply with the requirements of the entire fairness review when the board of directors agreed to pay cash bonuses based on a corporate restructuring?

Answer:

No.

Conclusion:

The court entered judgment in favor of the corporation and against defendant director-president. A review of the compensation committee meeting minutes confirmed conclusion from other evidence that the process the committee followed was designed simply to justify a predetermined outcome dictated by a former chairman and the corporate management. The committee did not examine afresh the question of whether any bonus arrangement was appropriate and, if so, how much and what form of bonus to award. The transaction was structured so that everyone, including even the board members and the members of the compensation committee, would receive a bonus, and the structure was not negotiated. The bonuses were based on an inflated valuation of the corporation, a potential value that could be achieved after a period of positive results.

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