Opinion ID: 2558869
Heading Depth: 1
Heading Rank: 4

Heading: The Chancery Court's Decision

Text: By an order and comprehensive letter opinion dated October 31, 2007, the Chancery Court dismissed Seidman's claims in respect of the 2005 Plan for failure to meet the burden of proof[.] It summarized succinctly the acrimony generated in this case: Plaintiff and defendants agree on very little in this matter, except that this litigation is about greed. Plaintiff alleges this is a story about officers and directors who took a bank half way through conversion in order to benefit themselves at the expense of shareholders and investors. The defendants argue it is the activist investor who wishes to see the bank fully converted so he and his type can cash out and take the cream from the bank in the process. From the opening statement and especially during the expert testimonies, as the basis for the experts' opinions on the subject of stock allowances, plaintiff kept emphasizing the directors['] and officers' age[s]. Defendants suggest that perhaps Seidman is driven by a discriminatory attitude towards older workers. Both sides used words such as rewards and entitlements sometimes pejoratively and occasionally to represent a valid concept. The testimonies demonstrated the clash of opposing banking philosophies. The Chancery Court explained that [t]o prove waste, plaintiff must show that compensation is `so one sided that no business person of ordinary[, sound] judgment could conclude that the corporation has received adequate consideration.' (quoting Brehm v. Eisner, 746 A. 2d 244, 263 (Del.2000)). Relying on Delaware precedent, it quoted at length a passage from Lewis v. Vogelstein, 699 A. 2d 327 (Del.Ch.1997); in its original version, that passage reads as follows: The judicial standard for determination of corporate waste is well developed. Roughly, a waste entails an exchange of corporate assets for consideration so disproportionately small as to lie beyond the range at which any reasonable person might be willing to trade. Most often the claim is associated with a transfer of corporate assets that serves no corporate purpose; or for which no consideration at all is received. Such a transfer is in effect a gift. If, however, there is any substantial consideration received by the corporation, and if there is a good faith judgment that in the circumstances the transaction is worthwhile, there should be no finding of waste, even if the fact finder would conclude a post that the transaction was unreasonably risky. Any other rule would deter corporate boards from the optimal rational acceptance of risk, for reasons explained elsewhere. Courts are ill-fitted to attempt to weigh the adequacy of consideration under the waste standard or, ex post, to judge appropriate degrees of business risk. [ Id. at 336 (citations omitted).] The trial court's decision underscored that [t]he standard for a waste claim is high and the test is `extreme . . . very rarely satisfied by a shareholder plaintiff.' (quoting In re 3COM Corp. S'holders Litig., 1999 WL 1009210, , 1999 Del. Ch. LEXIS 215,  (Del. Ch. Oct. 25, 1999) (released for publication by the Court on Nov. 9, 1999; footnote omitted)). It continued: To state a claim for waste, the plaintiff must allege facts to establish that the [corporate] directors authorized an exchange that was so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration. The transfer must either serve no corporate purpose or be so completely bereft of consideration that such transfer is in effect a gift. [ (quoting id. at , 1999 Del. Ch. LEXIS 215 at  (footnotes, internal quotation marks and editing marks omitted)).] It further stated that [t]he cases in Delaware and New Jersey are consistent in holding that to prove a waste claim, a shareholder plaintiff has to establish that an expense served absolutely no corporate benefit whatsoever. (citation and internal quotation marks omitted). It summed up by insisting that [c]onsistently, the [c]ourts have held `waste' is subject to a stringent proof standard [and t]rial [c]ourts are admonished not to substitute their judgment but to look to the business judgment rule as it applies to the action of the Boards. Applying those standards, the Chancery Court determined that, in respect of Seidman's challenge to the 2005 Plan, one must look to the plaintiff's burden in establishing `waste.' It reasoned that, if plaintiff satisfied that burden, then the burden shifts [to Bancorp] to prove by clear and convincing evidence that [its] actions were not a result of self-dealing or a breach of fiduciary duty. Reviewing the proofs presented at trial in support of Bancorp's implementation of the 2005 Plan, it concluded that the [d]irectors who testified before this Court lacked a certain amount of sophistication and ability to explain their actions. It noted that [t]he [d]irectors took the maximum awards available to be allocated to them with the exception of the allocation they provided to [the chairman of Bancorp's board of directors]. . . because they felt that was what he would `like them to do.' Although the Chancery Court concluded that plaintiff set out a prima facie case of `waste' at the end of his case[, and that] defendants needed to persuade this Court that their actions went above self-dealing[,] it ultimately concluded that the 2005 Plan was approved by the shareholders, and more than the individually named directors and officers benefited from the award allocations. It reasoned that [t]hose awards[,] while appearing unreasonable to the plaintiff[,] have a basis in the [e]quity [i]ncentive [p]lans of peer group[ ] institutions and are not so far outside the norm as to require this Court to step in and modify them. Focusing on the adoption and implementation of the 2005 Plan, the Chancery Court determined that the trial testimony grounded the allocation[s under the 2005 Plan] in the alignment of interest principle. It concluded that the 2005 Plan does establish a community of interest between the shareholders and the Board of Directors. It remarked that [o]wnership would encourage the Board and its officers to see that the bank moves more steadily towards profitability. It ruled that [p]laintiff has been unable to sustain that the directors and the officers have acted in any way intentionally to injure the bank and its shareholders[, and that p]laintiff has failed to establish that there has been `conscious disregard for one's responsibilities. . . for determining whether fiduciaries have acted in good faith.' (quoting In re Walt Disney Co. Derivative Litig., 907 A. 2d 693, 775 (Del.Ch.2005)). Recognizing that [p]lainitff may disagree with actions of the Board of Directors or the speed of its progress towards profitability for this institution[,] it ultimately ruled that plaintiff has failed to establish that this Board and these awards and compensations in any way deviate from the historic pattern of this institution. Conceding that the awards might be on the fringe of some peer groups with regard to its compensation packages, it held that the awards by the [c]ompensation [c]ommittee are consistent with similar institutions. Granting the deference due under the business judgment rule and exercising proper restraint, it concluded: This may not be the best action for the institution, but it is a sustainable position.