Zucker v. Andreesen: Court of Chancery Dismisses Complaint Challenging Hewlett-Packard CEO’s Severance Package and the Board’s Failure to Plan for CEO Succession

September 5, 2012

Publication| Corporate Transactions| Corporate & Chancery Litigation

In Zucker v. Andreessen, 2012 WL 2366448 (Del. Ch. June 21, 2012), the Court of Chancery applied the heightened pleading burden under Court of Chancery Rule 23.1 and dismissed a derivative complaint for failure properly to allege demand futility.

The derivative plaintiff in Zucker challenged the Hewlett-Packard Co. (“HP”) board’s payment of severance benefits to the company’s CEO, Mark Hurd (“Hurd”). The board determined to terminate Hurd after an internal investigation revealed that his conduct had fallen short of HP’s standards of business conduct. The board appointed HP’s chief financial officer to serve as interim CEO while it worked to locate a permanent replacement. The plaintiff claimed that HP’s directors breached their fiduciary duty of care by failing to adopt a long-term succession plan to provide for leadership in the event of Hurd’s departure as CEO. In addition, the plaintiff alleged that the severance agreement, which provided Hurd with over $40 million in benefits, constituted a waste of corporate assets.

The derivative plaintiff conceded that HP’s directors were independent of Hurd and had no interest in the severance agreement. As a result, in order to avoid dismissal under the standard articulated in Aronson v. Lewis, 473 A.2d 805 (Del. 1984), the plaintiff must have alleged “particularized facts that raise a reasonable doubt that the Severance Agreement was the product of a valid exercise of business judgment.” The Court explained that this standard was particularly difficult in the context of a waste claim, which requires a showing that the board’s decision was so egregious or irrational that it could not have been based on a valid assessment of the corporation’s best interests. In reviewing the complaint under this standard, the Court noted that HP received certain consideration in exchange for the severance payments, including, among other things, a release of any claims Hurd may have had against HP, an agreement to extend his confidentiality obligations to HP, and an agreement to assist the company in several areas post-termination. The Court further found that the board’s decision to approve the severance agreement may also have benefitted the company in other ways, including by avoiding the costs and negative publicity that could have resulted from a dispute with Hurd. Also, under Delaware law, executive compensation may be based on successful past performance. The complaint failed to allege that Hurd’s tenure at HP was not successful; therefore, the severance payment could also have been rational compensation for past performance. For these reasons, the Court found that the complaint failed to include particularized allegations raising a reasonable doubt that the severance agreement was a good faith business judgment.

The Court addressed the board’s alleged inaction, i.e., its failure to adopt a succession plan, under the standard stated in Rales v. Blasband 634 A.2d 927, 934 (Del. 1993). This standard requires a plaintiff to plead particularized facts that create a reasonable doubt regarding whether the board could have exercised its independent and disinterested business judgment when responding to a stockholder demand.

The Court noted that unless the alleged failure to have an appropriate succession plan in place represented a bad faith breach of the directors’ duties, the HP directors would not be deemed to suffer a disabling likelihood of personal liability. The Court concluded that directors are not under a per se obligation to implement a succession plan, and hence the HP directors could not have consciously disregarded a known duty. Thus, because the plaintiff failed to allege demand futility adequately under either Aronson or Rales, the amended complaint was dismissed.

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