June 17, 2014
Third Circuit Court of Appeals Upholds Dismissal of Viacom’s Section 162(m) Suit
– by Broc Romanek
Here’s news from the weekly newsletter from the Society of Corporate Secretaries:
The U.S. Court of Appeals in Philadelphia upheld a federal judge’s dismissal of a shareholder derivative suit claiming Viacom’s chairman and two top executives were overpaid. In its dismissal, the appeals court cited a Delaware Supreme Court decision stating that “[T]he decision to sacrifice some tax savings in order to retain flexibility in compensation decisions is a classic exercise of business judgment.” The shareholder had argued that the Board improperly used subjective performance criteria in a shareholder approved plan to set compensation, leading the executives to be overpaid, and to a subsequent loss of tax deductibility on the purported excess.
The ruling also considered a company’s right, through its certificate of incorporation, to exclude a class or classes of shareholders from participating in a vote to approve an executive compensation plan. In addition to the derivative claim noted above, the plaintiff made a direct claim that the vote to approve the plan under which the executives were paid was invalid, given Class B non-voting shareholders did not have the right to vote on the plan. The court found the plaintiff’s “argument to be without merit: ยง 162(m) does not create shareholder voting rights, nor does it preempt long-established Delaware corporate law allowing corporations to issue non-voting shares. Freedman purchased only non-voting shares; he cannot now use federal tax law as a backdoor through which he may pass to obtain rights that as a shareholder he does not possess.”