We have previously discussed the critical need to follow corporate formality when adopting or amending an executive compensation agreement (see Ethics, Conflicts, Fiduciary Duty, and Corporate Formalities: Former CFO Who Tried to Amend SERP Cannot Receive Enhanced Benefits). In that 2010 blog post, I discussed the case of Kelly v. Handy & Harman, out of the federal court for the Southern District of New York, which ruled that the board of directors of Handy & Harman had not formally adopted an amendment of the H&H Supplemental Executive Retirement Plan (SERP) some seven years earlier, and therefore, the plaintiffs (former officers of H&H) were not entitled to increased benefits under the amendment. From the facts the court gave in its opinion, it was impossible to tell whether this was merely a foot fault failure to complete the corporate formalities necessary to adopt the SERP amendment, or, as the defendant (an acquirer of H&H) alleged, inappropriate conduct by the H&H officers.

A March 2018 case out of the Federal District Court for the Eastern District of Kentucky, Taylor v. University of the Cumberlands, led me to address this issue again. Dr. Taylor was employed as President of the University of the Cumberlands for 35 years. Following his retirement from that position, and after serving as Chancellor of the University for a short time, Dr. Taylor attempted to enforce a contract (which the court and the parties refer to as the “Disputed Agreement”). The university refused to honor the terms of the Disputed Agreement, which, among other benefits, provided Dr. Taylor with compensation for life following his retirement from the position of President. The university “vehemently” argued that the Disputed Agreement was never properly and fully submitted for Board ratification. In depositions, several trustees claimed the board never took up the Disputed Agreement for consideration. Dr. Taylor produced meeting minutes showing that the Disputed Agreement was read to and approved by the Board. But the University disputed the authenticity of the minutes. The court decided to leave to a jury the question of material fact of whether the board actually ratified the Disputed Agreement.

The issue before the court was whether the university had “manifested in Jim Oaks, the then-Chairman of the Board of Trustees, the authority to bind the University to the terms of the Disputed Agreement.” Dr. Taylor claimed his position alone was enough of a manifestation to bind the university, which would be correct in most circumstances. However, the university argued that it maintained a specific process for approving contracts, and that Oaks’ apparent authority to enter into contracts was not sufficient to bind it. On this issue, the court found in favor of the university.

Among the deciding factors was the fact that Dr. Taylor was intimately familiar with the university’s practices and procedures due to his longtime tenure as President. “Dr. Taylor knew well the importance of procedure and the need to have Bylaws amended in order to implement certain hierarchical changes.” The bylaws, as amended in 2009, while Dr. Taylor was President, contained a provision that explicitly limited the chairman’s ability to execute contracts. Additionally, the minutes of the Executive Session of the Board meeting in which Dr. Taylor claimed the Disputed Agreement was approved “contains absolutely no details concerning the terms of the Disputed Agreement.”

In the H&H case referenced above, the two facts that were not disputed were that (a) only the board of directors of H&H could amend the SERP, and (b) the board had agreed “in concept” to the amendment, but never formally adopted it. Unlike in H&H, the court’s opinion in Taylor makes no reference to the possibility of improper conduct by the executive or board members involved .

Regardless of what the parties’ intentions may have been in this case (and the H&H case), for the rest of us, the facts of and decision in the case contain an important lesson. Always take care to follow corporate formalities through to completion when preparing and implementing a compensation plan or agreement, or an amendment of the same. Courts generally apply a higher standard of scrutiny to executives’ actions that benefit themselves.