Valeant Pharmaceuticals International v. Jerney

Delaware Court of Chancery · 2007 · Corporations

Corporationsdirector self-compensationentire fairnessfiduciary duty of loyaltyDelawareChanceryduty of loyaltyself-dealing

Facts

ICN’s board unanimously approved a large cash bonus pool for directors, officers, and other employees in connection with the planned Ribapharm IPO and spin-off, and Jerney voted in favor and received a $3 million bonus. The process was dominated by CEO Milan Panic, involved a compensation committee whose members were themselves interested and at least partly non-independent, and relied on management-controlled and inflated valuation assumptions. The board converted a proposed option plan into a cash plan to avoid investor opposition, then failed to reconsider the amount after the IPO was repriced sharply downward. Comparable support for bonuses of that magnitude was lacking, and the resulting payments were found grossly excessive.

Issue

Whether Jerney, as an interested director who voted for and received a large cash bonus, proved that the self-interested compensation transaction was entirely fair to ICN. If not, whether his reliance on expert advice protected him, and what remedy and damages were appropriate.

Rule

Self-interested compensation decisions by directors or officers made without independent protections are reviewed for entire fairness, and the interested fiduciary bears the burden of proving both fair dealing and fair price. Reasonable reliance on expert advice may be a pertinent factor, but it is not outcome-determinative and does not provide a defense to an entire fairness claim by an interested director. When an unfair self-dealing payment is received by the fiduciary, the corporation may rescind the transaction and require disgorgement of the full amount received, in addition to other damages caused by the breach of loyalty.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Summit Biologics, a Delaware corporation based in San Diego, planned a major asset separation. Its board approved cash retention awards for senior officers and directors, and every compensation committee member was also scheduled to receive part of the pool. No disinterested committee or stockholder vote approved the plan, and director-officer Lena Ortiz voted for the awards and took $1.2 million.

If Summit later sues Ortiz for breach of fiduciary duty, which standard and burden most likely apply to her defense of the payment?

Explanation. When directors or officers participate in self-compensation without independent protections, the transaction is reviewed for entire fairness. The interested fiduciary who stood on both sides of the transaction bears the burden of proving both fair dealing and fair price. The majority opinion treated self-interested bonus approvals this way, especially where the approving committee was not independent.