Vice Chancellor Dismisses Shareholder Claim against CEO for Alleged Compensation Conflict in $18B Merger

(CN) – The Delaware Chancery Court dismissed a class action in its entirety after shareholders failed to state a claim for breach of fiduciary duty in challenging an $18 billion merger between Tower Watson & Co. and Willis Group Holdings PLC because of a potential conflict in the compensation of Tower’s CEO.

Shareholders and analysts initially objected to the merger when it appeared that it would be a “windfall” for Willis, leading the Tower board to postpone a shareholder vote, according to the 31-page ruling.

The class claimed John K. Haley, Tower’s CEO and lead negotiator of the merger, had a material conflict that arose out of an undisclosed proposal that the CEO would receive a materially greater compensation post-merger through retaining his position as CEO of the combined company. The class argued that the combined company would be much larger which would entitle Haley to greater compensation.

“The Plaintiffs say that this proposal misaligned the CEO’s incentives at a critical juncture in the negotiations, inspiring him to ask for no more of a dividend than he believed necessary to secure Tower’s stockholder approval,” the ruling states.

Vice Chancellor Kathaleen S. McCormick found that despite knowing about the alleged “material conflict,” the board appointed the CEO as lead negotiator anyway but the board was still informed of the merger negotiations.

“The compensation proposal was a proposal only; it reflected a theory of compensation and upside potential in the event of pie-in-the-sky outcomes unconnected to any business plan of forecast,” McCormick wrote. “Given what the board already knew, and the nature of the compensation proposal at issue, a reasonable board member would not have regarded the proposal as significant when evaluating the proposed transaction.”

Under that reasoning, the McCormick concluded that the business judgment rule applied and granted the motion to dismiss the claim in its entirety.

%d bloggers like this: