The Advisors' Blog

As personal use of corporate jets is on the rise, scrutiny continues apace. The latest legal challenge involving personal aircraft use & disclosures comes in the form of a derivative suit against Skechers alleging breach of the duty of oversight, waste, breach of contract, and disclosure violations. In Conte v. Greenberg (Del. Ch.; 2/24), Vice Chancellor Zurn granted the defendants’ motions to dismiss on the basis that plaintiff failed to show demand futility.

Plaintiff argued that at one point, “more than 50% of each airplane’s use was for personal travel” by defendants, the company’s CEO/chairman and his two sons, who were also company officers and who collectively controlled 55% of the voting power of the company, and their family members. Plaintiff also argued that “the higher ratio of personal use caused the Company to lose certain favorable tax treatment.” Alleging that the Skechers board failed to impose meaningful restraints on personal use of corporate jets, plaintiff pointed to the compensation committee’s request that management make recommendations for a policy setting reasonable limits on such personal use although no such recommendations were ever presented.

But the opinion concluded that none of the compensation committee members faced a substantial likelihood of liability on any of the claims. Concerning the Caremark claims for inadequate oversight, VC Zurn declined to infer bad faith based on the committee’s inaction since “the magnitude or severity of the risk decreases, more facts are required to support an inference of bad faith.”

Plaintiff has not met his significant burden of pleading that the allegedly excessive compensation was such that a decision not to address it with a formal policy, alone, supports an inference of bad faith. That risk was contained; it was limited to the use of two corporate assets by a discrete group of individuals, as compared to a widespread operational deficiency. The Company was not violating an internal policy or any regulations, which can support an inference of bad faith.

The allegedly excessive personal airplane use was also of a relatively minimal magnitude. In 2021, Skechers’ gross profit exceeded $3 billion and its operating expenses totaled about $2.5 billion. The Management Defendants’ airplane perquisite compensation totaled about $5.3 million over four years; with one exception, it represented between about 0.5% and 4.9% of each of the Management Defendants’ annual compensation during that time. The tax gross-up payments—the only aspect of the airplane perquisite compensation FW Cook identified as problematic—represent even less of that compensation: about $1.6 million over the same period. On average, the tax gross-up payments made up less than 1% of the executives’ total compensation from 2018 through 2021.

While this is seemingly a helpful case for corporates, Tulane Law Prof Ann Lipton pointed out that the opinion “is striking for what it didn’t do” — that is, it didn’t dismiss the Caremark claim “on the grounds that Caremark is limited to violations of law. Instead, [VC Zurn] simply held that under the particular facts of this case, the complaint did not allege that the directors’ failures to act were so egregious as to suggest bad faith.” That, Ann points out, could be “the sound of a potential expansion of Caremark.” TBD.

– Meredith Ervine