Freedman v. Adams
Delaware Supreme Court
58 A.3d 414 (Del. 2013)
Section 162(m) of the Internal Revenue Code provides that compensation a corporation pays to its officers in excess of $1 million each year is tax deductible for the corporation if the compensation is paid pursuant to a qualified § 162(m) plan. The board of directors of XTO Energy, Inc. (XTO) knew of the availability of a § 162(m) plan, but had decided that its compensation decisions should not be constrained by such a plan: “the [compensation] committee does not believe that compensation decisions should be constrained necessarily by how much compensation is deductible for federal tax purposes, and the committee is not limited to paying compensation under plans that are qualified under Section 162(m).” As a result, over a period of three years, XTO paid its officers in excess of $130 million, but none of those payments were tax deductible for XTO. Shareholder Susan Freedman (plaintiff) brought a shareholder derivative suit in the Delaware Court of Chancery, claiming that the XTO board committed waste by not adopting a § 162(m) plan. Freedman claimed that XTO could have saved $40 million if the bonuses paid over this time period were tax deductible. The trial court ruled against Freedman. Freedman appealed.
Rule of Law
Holding and Reasoning (Berger, J.)
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