May 19, 2005

Delaware Chauncery Court Rejects Fairchild’s Exec Comp Settlement!

Think the courts are not getting serious about executive compensation? Today’s Washington Post has this article about how Vice Chancellor Leo Strine rejected a recent settlement between Fairchild Corp. and investors over allegations that the CEO and other senior managers received excessive and improper pay.

The Vice Chancellor stated that the settlement was inadequate – or more aptly put in this quote from the article: If the allegations in the lawsuit are true, the judge said from the bench, the proposed settlement amounted to a “cosmetic whimper.” This is remarkable as Delaware courts typically reduce legal fees as a cure for an inadequate settlement; they don’t reject the settlements outright as has been done in this case.

Among other things, the rejected terms of the settlement included:

– CEO would have cut his $2.5 million salary by 20%, another executive (who is the CEO’s son) would have taken a 15% salary cut – and there would have been shorter terms under amended employment agreements for these two executives

– CEO would have paid $1.5 million through an advance from a retirement plan

– two executive would have had to pay back millions of dollars of golden parachute or “change of control” payments that were paid due to a prior subsidiary sale

Also challenged were interest-free loans, advances on retirement payments, payments for an apartment in Paris and Steiner-affiliated aircraft, and legal costs paid for senior manager’s defense of a lawsuit in France.

If you wish to see the original complaint that alleges breaches of fiduciary duty and disclosure regarding the way the CEO and other executives were being compensated, it is still posted in the “Compensation Litigation” Portal on

Annette Nazareth: Next Commissioner?

Not for several decades has there been a SEC Staffer who was promoted to SEC Commissioner to work alongside his or her former bosses. But that is what will happen if Market Reg Director Annette Nazareth replaces outgoing Commissioner Harvey Goldschmid, as was rumored in the WSJ and NY Times yesterday.

The WSJ reported that “Senate Minority Leader Harry Reid (D., Nev.) is expected to write Mr. Bush today recommending Annette Nazareth for the opening on the five-member SEC. He deferred to Sen. Charles Schumer, a Democrat who represents New York, home to much of the U.S. securities industry, to make the recommendation. Ms. Nazareth “is just the person the SEC needs,” Mr. Schumer said through a spokesman.”

Back in the ’50s, ’60s and ’70s, it was not uncommon for Staffers to become Commissioners. In fact, some of the best Commissioners came directly from the Staff, including Irving Pollack (Enforcement Director), Byron Woodside (Corp Fin Director), Manny Cohen (Corp Fin Director) and Phil Loomis (General Counsel).

Harvey Goldschmid was the SEC’s General Counsel in the late 1990s – but the Commission composition turned over by the time he became Commissioner in 2002.

Most Recent Monthly Columns

The May column for Carl’s Corner is entitled: Shareholder Rights’ Agreements: Voting Rights, Board Structure and Assuring Distributions.

And on, Steve Glover’s May column is “Spin-Off Basics – Part 2.”