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By Yin Wilczek
Oct. 7 — An investor Oct. 5 lost her challenge of a $35 million stock grant made by Freeport-McMoRan Inc.'s board to chief executive officer Richard Adkerson in the wake of the company's 2012 merger.
The Delaware Chancery Court rejected shareholder plaintiff Victoria Shaev's arguments that the Freeport board breached its fiduciary duty and acted in bad faith by granting Adkerson the restricted stock units.
The board hired a compensation consultant, met multiple times over the issue, and finalized an agreement that actually reduced and deferred the potential outlay the company may have had to pay Adkerson, wrote Vice Chancellor John W. Noble.
In addition, the board managed to retain Adkerson as CEO, the court said. “Thus, the directors did not act in bad faith with regard to their decision to grant one million RSUs to Adkerson.”
The lawsuit sprang from a $9 billion deal in 2012 in which Freeport acquired Plains Exploration and Production Co. (PXP) and McMoRan Exploration Co. As part of the transaction, the Freeport board limited Adkerson's authority as CEO to the mining business, while former PXP CEO James Flores was named CEO of the combined entity's oil and gas business. The board also adopted certain bylaw amendments that subjected both CEOs to the authority of board chairman James Moffett.
In 2008, Adkerson signed an employment agreement with Freeport in which he could terminate his employment “for good reason” and receive a $46 million severance package. The “good reason” included any action that resulted in a loss of his authority, position or pay. Fearing that the merger changes triggered the “good reason” clause, the Freeport board consulted with a compensation consultant and ultimately agreed to award Adkerson the RSUs.
Shaev sued, alleging that the grant was improper.
Among other holdings, the court rejected Shaev's argument that the employment clause was not implicated because Adkerson's authority was not diminished. It found that Adkerson's “good reason” claim was “at least `arguable,'” thus invoking the business judgment rule, “which protects the board's RSU grant so long as it can be `attributed to any rational business purpose.'” Here, the board's decision to retain Adkerson as CEO and to avoid litigation “clears this low hurdle,” the court said.
The court also rejected the plaintiff's argument that she was not subject to presuit demand requirements because the stock grant to Adkerson was a legal decision and thus not protected by the business judgment rule.
While “a decision regarding the validity of a contract may be a legal decision not subject to the protections of the business judgment rule, the decision to grant a severance payment, or, as here, a payment in lieu thereof, is a business decision and accordingly remains subject to applicable demand futility requirements,” the court said.
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