One of the topics we discussed in our eLunch last week, "A Busy 2013 for Executive Compensation," was recent (June 2) Delaware Chancery Court ruling against Simon Properties Group, Inc. No plaintiff has won a lawsuit against a corporation and its directors alleging excessive or improper executive compensation in decades. Thus, the Court's ruling against Simon Properties and its directors was unusual. To be clear, this was not a final decision on the merits of the case. It is only a decision to allow the plaintiffs to proceed to trial with their claims. However, each step in the litigation process increases the costs, time commitments, risks, and headaches to the company – and trial is the most costly and time consuming of all.
The Louisiana Municipal Police Employees Retirement System and Delaware County Employees' Retirement Fund were the nominal plaintiffs in this shareholder derivative suit. Because this was a bench ruling, no written opinion is available for this derivative action. However, the transcript of the oral argument is highly entertaining (if you can slog through all 103 pages). The Court's decision came down to a relatively narrow issue of whether the Company's amendment of its stock incentive plan to allow a slightly different type of award required stockholder approval. However, the transcript of the bench ruling includes several hints of the possibility of a dramatic shift in Delaware courts' attitudes toward executive compensation lawsuits. (Hopefully I am just reading too much into it.)
Many lawsuits over the years have been based on the premise that the company had announced and emphasized a "pay-for-performance" philosophy, but the actual compensation or awards were inconsistent with that philosophy. None has succeeded.
Indeed, the Court acknowledged that the Company's total shareholder return was up almost 600% in the last ten years vs. an increase of 172 % for the Morgan Stanley REIT index and only 58% for the S&P. The Company's market cap since the award alone had gone from $33 billion to $57 billion.
However, in this lawsuit, plaintiffs added a claim that the Simon Properties directors had exceeded their authority under the Company's stock incentive plan by granting time-based restricted stock units pursuant to an amendment of the plan – because the amendment did not received stockholder approval as [allegedly] required by the New York Stock Exchange rules. This, despite an email from the NYSE to the Company's counsel in which an NYSE lawyer agreed with counsel's interpretation that the amendment did not require shareholder approval.
The court may have been correct in its narrow ruling: "when you tell stockholders up front that they're voting on a plan that has performance units based on performance goals, and that they get to vote on any material changes, and then by board action alone, the performance units are turned into simply an aspect of the recipient's salary package, I cannot conclude on a pleading stage motion that that is not a material change."
However, the judge seemed to have made his decision before the oral agreement started, and would not change it despite several factors raised by defense counsel, which is what I found ominous for the future.
I will return to the most worrisome elements of this case after Independence Day. However, I did want to quote this surreal exchange from the transcript, reminiscent of one of the many iconic scenes in the classic film Dr. Strangelove:*
THE COURT: I'm never going to say that I don't care about the views of ISS or Gretchen Morgenson on the record, and I would never say it off the record because I don't believe that. I think that, you know, you should respect them, Mr. Rowe.
MR. ROWE: Well, I respect them.
THE COURT: And Floyd, I respect Floyd too.
MR. ROWE: Yes.
THE COURT: And Glass Lewis. I try to respect everyone.
MR. ROWE: That's fair. We respect them all.
* [President Merkin Muffley] "I'm sorry, too, Dmitri... I'm very sorry... All right, you're sorrier than I am, but I am as sorry as well... I am as sorry as you are, Dmitri! Don't say that you're more sorry than I am, because I'm capable of being just as sorry as you are... So we're both sorry, all right?... All right.'