In Friedman v. Adams, et al., No. 230, 2012 (decided January 14, 2013), the Delaware Supreme Court invoked the Business Judgment Rule to reject a shareholder's derivative complaint that challenged the decision of the XTO Energy Inc's corporate board to pay certain executive bonuses without adopting a plan that could make those bonuses tax deductible. Specifically, the shareholder maintained that compensation awarded to corporate officers in excess of $1 million per year is tax deductible only if paid pursuant to §162(m) of the Internal Revenue Code. Over a 4-year period, XTO paid executive bonuses totaling more than $130 million, and those payments were not tax deductible. The court noted that waste claims usually involve a transaction where a corporation allegedly exchanges assets for disproportionately low consideration, and that to state such a claim a stockholder must allege, with particularity, that the board authorized action that no reasonable person would consider fair.
The court found that plaintiff failed to state a claim as the complaint did not allege that any of the bonuses paid to XTO's executives actually would have been deductible under such a plan, and inasmuch as the board believed that a Section 162(m) plan would constrain the compensation committee in its determination of appropriate bonuses. The court concluded that the decision to sacrifice some tax savings in order to retain flexibility in compensation decisions is a classic exercise of business judgment. Accordingly, even if the decision was a poor one for the reasons alleged by the shareholder, it was not unconscionable or irrational, and therefore not actionable by reason of the Business Judgment Rule.