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Court of Chancery Voids Bonus Payments

Valeant Pharmaceuticals International v. Jerney, C.A. No. 19947 (Del. Ch. March 1, 2007).

Payment of bonuses to officers and directors often seems so routine that extra care is not required to be sure they are fair. This case shows what can go wrong when fair process and fair amounts are not properly considered.

Because each member of the board was to receive a bonus under the plan in issue, the bonuses were subject to the rigorous entire fairness review by the Court. That involves testing to see if the process used to approve the bonuses was fair in the sense of using appropriate safeguards to protect the corporation's interests and fair in the sense that the amounts involved were within a range of reasonableness. These bonuses failed on both counts.

To begin with, the committee to whom the bonus plan was referred consisted of persons who would receive a bonus and a majority of the committee were closely allied with the CEO who was targeted for a $30 Million bonus under the plan. The consultant they hired came in after the plan was set up and was really only asked to justify the amounts involved.

Second, the amounts were extremely high compared to other bonuses and were for work that had not just been done already before the plan was announced but that had in a sense already been  the subject of prior bonuses. All in all, this was just too much and the Court voided the bonuses.

The opinion is also interesting for its discussion of the affect of Section 141(e) of the Delaware General Corporation Law on the result. That section provides that a board may rely on the advice of experts in making a decision and some have argued that it exculpates a board that receives that advice. The Court rejected that view and held that 141 (e) only is one factor in considering a board's actions and that it is not effective to insulate board action in an entire fairness review, such as involving self-interested transactions. Share


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