February 24, 2015 Articles

Meaningful Limits on Director Compensation

The Delaware Court of Chancery has created a new legal standard for this controversial issue

By Thomas Welk and Peter Adams

“A cardinal precept of the General Corporation Law of the State of Delaware is that directors, rather than shareholders, manage the business affairs of the corporation.” Orman v. Cullman, 794 A.2d 5, 19 (Del. Ch. 2002). This deference to directors and their decision making is reflected in the business judgment rule, which is the default standard of judicial review for director conduct. Under the business judgment rule, a reviewing court presumes that “in making a business decision the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interest of the company.” In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 52 (Del. 2006) (quoting Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984)). For that reason, the rule “operates to preclude a court from imposing itself unreasonably on the business and affairs of a corporation.” Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 360 (Del. 1993).

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