A recent decision of the Delaware Chancery Court breathes new life into the hoary corporate law theory of “waste of assets,” which from time to time has been used with some degree of mischief against large corporations.
The general concept of “waste of assets” refers to transactions and other kinds of financial relationships, where the consideration received by the corporation “is so disproportionately small” that the arrangement could be seen as a “gift in part.” In that regard, “waste” has been held to be the equivalent of “bad faith,” with the associated pleading barriers.
The “waste of assets” theory has historically served to empower courts to “scrutinize corporate transactions that did not clearly violate fiduciary duties, but also did not appear to be the products of careful business judgment or disinterested decision-making.” In the past, this was an attractive theory to those seeking to challenge expansive transactional strategies and compensation arrangements of very large nonprofit corporations.
In the latest case—a derivative action—the plaintiffs argued that compensation payable to the company’s controlling stockholder and Chairman Emeritus amounted to corporate waste when the Chairman Emeritus was allegedly in a debilitated and incapacitated state and unable to make any contributions to corporate affairs. Recognizing that “it takes an extreme factual scenario for a plaintiff to state a claim for ...waste,” the Court nevertheless concluded that the compensation arrangement was sufficiently unusual as to state a claim for relief, especially when, as alleged, the board knew he could not provide the bargained for services.
