In February, ruling in a shareholder suit against Citigroup Inc., Chancellor William Chandler III of the Delaware Chancery Court dismissed every claim except one: Citigroup shareholders’ claim that the $68 million golden parachute paid to departing CEO Charles Prince wasted the company’s money. For plaintiffs attorneys, Chandler’s decision helps clear a path into the courthouse for derivative suits over executive compensation.
Executive pay used to be off-limits in shareholder suits. Courts considered it protected by the business judgment rule, which prevents shareholders from second-guessing decisions by executives. “Now courts are more sympathetic to these claims,” asserts Lee Rudy of plaintiffs firm Barroway Topaz Kessler Meltzer & Check. His firm just filed a shareholder claim against Chesapeake Energy Corporation, a natural gas company, for awarding CEO Aubrey McClendon a $75 million pay package last December after the company’s market capitalization dropped $14 billion in 2008. (The company has moved to dismiss.)
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