Can a Shareholder Hold a Corporate Liable for Excessive Executive Compensation?
How much should a corporation pay its executives? The answer is “it depends.” What constitutes appropriate compensation is highly case-specific. That being said, there are certainly some circumstances in which a corporation may pay its executives so much that it constitutes unreasonable excessive compensation. It could give rise to a claim by shareholders. Here, our West Palm Beach shareholder rights attorney explains the key things to know about holding a corporation liable for excessive executive compensation.
A Shareholder Can Sue for Excessive Compensation
Shareholders are owners of a company. They play an important role in ensuring that a company is operated properly—including keeping an eye on the salaries and bonuses given to top executives. In some cases, a shareholder or group of shareholders may believe that an executive is being paid excessively—meaning they are being offered materially more than fair market value would dictate. When this occurs, shareholders have the right to take legal action.
These Claims are Generally Filed as Shareholder Derivative Lawsuits
When shareholders decide to take legal action over excessive executive compensation, they usually do this through a specific type of lawsuit called a ‘shareholder derivative lawsuit’. In this kind of lawsuit, a shareholder files the suit on behalf of the company against the responsible parties—most often the board of directors or individual executives.
Proving the Executive Compensation is Excessive
Corporations are protected from many shareholder lawsuits under the “business judgment rule.” Companies have broad discretion to determine executive compensation. They can make their own judgment. That being said, there are limitations. Excessive executive compensation claim in Florida tend to fall into to two broad categories:
- Not Aligning With Best Interests of Company (Corporate Waste): Shareholders may prove that the executive pay is so unreasonably high that they amount to a waste of the company’s assets. This means showing that the compensation has no business justification and does not align with the best interests of the company. An example would be paying a CEO a huge sum of money while the company is struggling financially.
- Self-Dealing (Conflict of Interests): In cases of self-dealing, the focus is on proving that the executives, often with the help of board members, set their compensation in a way that benefits themselves at the expense of the company. This might include situations where executives receive huge bonuses or stock options not because of their performance, but because they have undue influence over the board. A conflict of interest among the board and/or corporate executives put shareholders at risk.
Call Our West Palm Beach Shareholder Litigation Lawyers Today
At Pike & Lustig, LLP, our West Palm Beach shareholder rights attorneys are standing by, ready to protect your rights and your interests. If you have any questions about excessive executive compensation cases, we are more than ready to help. Give us a phone call now or contact us online for a completely private case review. Our law firm provides shareholder litigation services in Palm Beach County, Broward County, Miami-Dade County, and beyond.