Corporate Governance

Hampshire Group, Limited v. Kuttner: A Tee Hee Analysis (Cute in a Non-Praiseworthy Sense)

By J Robert Brown Jr.

The company, in bringing the action against the officers, asserted that they had violated their fiduciary obligations in connection with their approval of expenses made by the CEO.  The company asserted that because of ties to the CEO, the officers were not independent and the standard of review ought to be the duty of loyalty, essentially shifting to the officers the obligation to show the proprietary of their behavior. 

The Vice Chancellor did not like the argument, labeling it "amazing" and "cute in a non-praiseworthy sense." 

• In a rather amazing argument, [the company] attempts to suggest that [the officers] must prove, as to their processing of [the CEO's] expenses, that they did not commit a breach of the duty of loyalty because they were [the CEO's] managerial subordinates. As [the CEO's] subordinates, [the officers], [the company] says, owed their primary source of living to [the CEO's] good graces, and they also had outside business dealings with him.  Therefore, by analogy to directors, they say that [the officers] were not 'independent.'

It is hard to see why this argument deserves the label "cute in a non-praiseworthy sort of way."  It looks to be a facts and circumstances argument.  The plaintiff focused on the nature of the relationship (subordinates), the materiality of the payments (primary source of living), and the outside business dealings with the CEO.   

The court, however, characterized the argument as one where, if accepted, "every subordinate would have to prove his loyalty when accused of disloyalty if the underlying matter also implicated the CEO's interests."  But that is not what plaintiff appears to be arguing.  Here it is not just the hierarchical nature of the relationship but also the outside business dealings with the CEO.  Moreover, some subordinates may earn an immaterial amount as salary (materiality is, after all, in Delaware, a subjective determination) but in this case the officers were beholden to the CEO for their "primary source of living."

It is possible, as this court in fact concludes, that the officers in this case were not sufficiently beholden to the CEO to be subjected to the duty of loyalty.  But the argument seems entitled to more credibility than "cute in a non-praiseworthy sort of way."  

The opinion in Hampshire Group Limited v. Kuttner is posted on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on August 11, 2010 (boomark / email).