The Advisors' Blog

In a rare court challenge to CEO pay, last week the founders and largest shareholders of a publicly traded hedge fund brought a books & records claim in the Delaware Court of Chancery, claiming that the board “may have breached its obligations to the stockholders by granting a series of escalating compensation awards to James Levin — the current Chief Executive Officer (“CEO”) and Chief Investment Officer (“CIO”)” – who is paid separately for those two roles. They’re seeking emails, texts and other records. Here’s more detail from the complaint:

Mr. Levin has been paid in the 99th-percentile of public company executives even while Sculptor’s market capitalization has fallen in the bottom quartile. As Bloomberg recently recognized, the compensation awarded to him reflected “a staggering amount at a firm with a market value then around $1 billion” and which has since sunk below $560 million.1 The same Bloomberg report identified Mr. Levin as the 14th highest-paid CEO in the country in 2021. Sculptor’s annual revenues, which last year were $626 million, cannot possibly justify, much less support, paying a CEO hundreds of millions of dollars a year. The Company can hardly remain financially viable when such stratospheric payouts are directed to a single executive.

As recently as 2019, the Delaware Court of Chancery denied a high-profile Section 220 request that took issue with executive pay decisions at Facebook – see this Wilson Sonsini memo. If the court finds that the plaintiffs here have a “proper purpose” for this demand, that will mean there’s a “credible basis” from which wrongdoing may be inferred. While it won’t be a definitive sign that the the suspected wrongdoing is actionable under Delaware law, it would be a big hit to the deference that courts usually afford to executive pay decisions.

In addition, even at this early stage, these allegations highlight to other compensation committees “what not to do” if you want to stay on the good side of your shareholders. Here are a few more nuggets from the complaint:

The plaintiffs take issue with the peer groups used to support pay decisions, which differed from the peer group identified in the company’s proxy statement, and with the absence of certain details and lack of employment agreement exhibit in the Form 8-K that was filed to report the compensation.

They also allege as evidence of problematic decision-making that the compensation packages and director responsiveness “have been severely criticized by independent third parties, including Institutional Shareholder Services (“ISS”), Institutional Investor, Citigroup Research, and Bloomberg.” As noted in this Bloomberg article, the shareholders are also alleging that the board has failed to conduct proper succession planning that would reduce the CEO’s “key-man” bargaining power.

Earlier this year, one of the hedge fund’s directors (who has ties to one of the founders who filed this complaint) resigned due to his disagreement about the CEO pay decisions – and of course the plaintiffs leverage points from that disagreement in the complaint. Here is the Form 8-K with correspondence related to that event – and the amended Form 8-K that continued the public conversation. The plaintiffs note that since January 2020, seven directors have vacated their seats – including five who resigned before their terms were supposed to end.

– Liz Dunshee