USA Law and Practice Contributed by: Matt Hurd, Melissa Sawyer and Scott Crofton, Sullivan & Cromwell LLP
business judgement review is the default stand - ard for courts to review board action. If a plain - tiff satisfies the burden of rebutting a presump - tion underpinning the business judgement rule, courts in most states apply “entire fairness” , the most onerous standard of review, to board action, which requires the board to establish that a transaction was a product of fair dealing and fair price. Courts in certain states, such as Delaware, apply enhanced scrutiny (which is an intermediate standard of review) to board action in certain circumstances, regardless of whether the pre - sumptions underlying the business judgement rule have been satisfied, such as a board’s deci - sion to enter into a transaction constituting a change of control of the corporation or to adopt a defensive action in response to a threat, such as adopting a poison pill. In circumstances where enhanced scrutiny applies, boards are required to take certain actions that they would not oth - erwise be required to take, such as seeking a transaction offering the best value reasonably available to stockholders in a change-of-control scenario. Breaches of Corporate Governance Requirements In addition to the core fiduciary duties of care and loyalty, Delaware and many other states rec - ognise certain other corporate law doctrines that can support claims against directors or officers for breaches of corporate governance require - ments. For example, in Delaware, board action that is intended primarily to interfere with the stockholder “franchise” ie, core rights incident to share ownership, such as voting rights – must be justified by demonstrating a compelling justi - fication for taking such action. Another example is the corporate waste doctrine, under which directors have a duty not to approve “wasteful”
transaction, which no person of ordinarily sound business judgement would find fair or accept - able. Delaware law also imposes on directors a duty to disclose all material information in certain cir - cumstances, including self-dealing transactions. For a discussion of limitations on director and officer liabilities, see 4.6 Legal Duties of Direc- tors/Officers . 4.10 Approvals and Restrictions Concerning Payments to Directors/ Officers Compensation for executive officers and direc - tors of US corporations generally must be determined by the board of directors, and this responsibility is often delegated to compensa - tion committees (or nominating and corporate governance committees, in the case of director compensation). In Delaware, the board’s deci - sions regarding executive compensation are generally protected by the more deferential busi - ness judgement rule. However, a conflict of inter - est resulting in application of the entire fairness standard may arise where directors approve compensation arrangements for themselves or for officers that are also controlling stockholders of the corporation. The federal securities laws require public compa - nies to convene a stockholder vote to approve, on an advisory basis, the compensation of the company’s named executive officers (generally, for corporations, the CEO, CFO and three other most highly compensated executive officers), commonly referred to as the “say-on-pay” vote, at least once every three years and a separate vote to determine how often the say-on-pay vote will be held ( “say-when-on-pay” ) at least once every six years.
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