A Viacom Inc. (VIAB) investor lost a bid to revive a lawsuit claiming Chairman Sumner Redstone and two top executives were overpaid, when a U.S. appeals court refused to “second guess” the judgment of the company’s board.
The shareholder, Robert Freedman, claimed the company improperly used subjective criteria in setting compensation, which led to overpaying the executives by more than $36.6 million from 2008 to 2011 and a loss of tax deductibility on the alleged excess.
“It’s not surprising,” Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, said in a phone interview. “The courts rarely involve themselves in compensation disputes” of this sort, although shareholders “are getting a lot more say on pay.”
The U.S. Court of Appeals in Philadelphia, upholding a 2013 dismissal of the case by a lower-court judge, said today that a board’s choice in executive compensation “is entitled to great deference.” While Freedman may disagree with the board’s decision, it didn’t exceed its authority, the appeals court ruled.
“The decision to sacrifice some tax savings in order to retain flexibility in compensation decisions is a classic exercise of business judgment,” the unanimous appeals panel said, citing a Delaware Supreme Court decision.
Redstone, 91, is the chairman of both Viacom, owner of Comedy Central and MTV, and CBS Corp. (CBS), the most-watched TV network in the U.S. Redstone almost doubled his annual compensation last year at CBS to $57.2 million, according to an April 11 regulatory filing. At Viacom, he received $36.2 million in 2013, up 77 percent from a year earlier.
Freedman accused Viacom’s board of violating the company’s 2007 executive-pay plan with compensation for Redstone, Chief Executive Officer Philippe Dauman and Chief Operating Officer Thomas Dooley. A separate alleged violation was barring Class B shareholders from voting on the pay plan.
A federal judge dismissed Freedman’s lawsuit in July, ruling he had failed to make claims that cast doubt on the board’s decision. The judge also rejected his claims that federal tax laws allow shareholders with non-voting shares to vote on pay plans that could have been tax deductible.
The appeals court agreed.
“Freedman purchased only non-voting shares; he cannot now use federal tax law as a back door through which he may pass to obtain rights that as a shareholder he does not possess,” the appeals panel ruled. “Delaware law expressly grants corporations the right to issue stock with limitations, including limitations on voting rights.”
The case is Freedman v. Redstone, 13-3372, U.S. Court of Appeals for the Third Circuit (Philadelphia)
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