Robert Freedman v. Sumner Redstone
753 F.3d 416
3rd Cir.2014Background
- Viacom (Delaware corp.) adopted a shareholder‑approved 2007 Senior Executive Short‑Term Incentive Plan to make large executive bonuses potentially tax‑deductible under 26 U.S.C. § 162(m), tying awards to objective performance metrics but allowing the Compensation Committee discretionary adjustments.
- Between 2008–2011 Viacom paid over $100 million in bonuses to three executives (Redstone, Dauman, Dooley); plaintiff Freedman alleges ~$36.6 million was "excess" because ~20% of awards were based on subjective qualitative factors.
- Treasury rules require shareholder approval of such plans every five years; Viacom re‑submitted the plan in 2012 and only Class A (voting) shares voted; Class B shares are non‑voting under Viacom’s certificate of incorporation.
- Freedman sued derivatively (on behalf of Viacom) claiming the Board breached fiduciary duties by violating the 2007 Plan and directly claiming the 2012 shareholder approval was invalid because § 162(m) requires all shareholders be able to vote.
- The District Court dismissed both claims: (1) derivative claim for failure to make a pre‑suit demand and failure to plead demand futility with particularity; (2) direct claim because § 162(m) does not create shareholder voting rights or preempt Delaware corporate law.
- The Third Circuit affirmed, holding Freedman failed to plead particularized facts to excuse demand and that federal tax law did not preempt state corporate law to enfranchise non‑voting shares.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether pre‑suit demand was excused (demand futility) | Freedman: Board was either interested or lacked independence (esp. Alan Greenberg) and the Compensation Committee violated the 2007 Plan so business judgment protection is lost | Defendants: Majority of independent directors approved awards; no particularized facts show lack of independence or an intentional plan violation | Demand was not excused; derivative claim dismissed for failure to plead particularized demand‑futility facts |
| Whether Board’s use of subjective factors breached the 2007 Plan and defeated business judgment protection | Freedman: Committee used subjective, positive discretion to increase awards, violating the Plan and § 162(m) | Defendants: Plan permitted discretionary adjustments (primarily downward); proxy and Plan language show Committee acted within authority | Court held business judgment rule applies; plaintiff failed to plead specific, knowing breach of the Plan |
| Whether 26 U.S.C. § 162(m) grants voting rights to non‑voting shareholders or preempts Delaware law | Freedman: § 162(m) requires shareholder approval by ‘‘majority of the vote’’ — must include all shareholders, so federal law enfranchises Class B holders | Defendants: § 162(m) governs tax deductibility only; it contains no voting‑rights grant and does not override state corporate law allowing non‑voting shares | Held that § 162(m) does not confer voting rights or preempt Delaware law; direct claim dismissed |
| Whether federal preemption (field or conflict) applies to require inclusion of non‑voting shares in § 162(m) votes | Freedman: Tax Code occupies the field or conflicts with Delaware law because § 162(m)’s purpose is frustrated if non‑voting holders are excluded | Defendants: Corporate governance is a state law area; no clear congressional intent to preempt; compliance with both laws is possible | No preemption; presumption against preemption in corporate law controls |
Key Cases Cited
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (test for excusing demand: director interest/independence or lack of business judgment)
- Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040 (Del. 2004) (directors presumed faithful to fiduciary duties; plaintiff must overcome presumption)
- Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (heavy burden to overcome business judgment rule, especially where independent directors approved compensation)
- Levine v. Smith, 591 A.2d 194 (Del. 1991) (management decisions are board responsibilities; business judgment rule protects directors)
- White v. Panic, 783 A.2d 543 (Del. 2001) (plaintiff must show reasonable doubt that challenged action was a valid exercise of business judgment)
- CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69 (1987) (presumption against federal preemption in areas of traditional state regulation such as corporate law)
- Wyeth v. Levine, 555 U.S. 555 (2009) (Congressional intent is the ultimate touchstone for preemption analysis)