Trends in Executive Compensation Litigation

Practical Law Article w-023-5082 (Approx. 13 pages)

Trends in Executive Compensation Litigation

by Practical Law Employee Benefits & Executive Compensation

SEC Actions Regarding Failure to Disclose Executive Perquisites and Other Benefits

Executive perquisite disclosure has recently become a significant focus of Securities and Exchange Commission (SEC) investigations. The SEC can impose severe penalties for failing to adequately disclose the perquisite information required by Item 402, so public companies should pay close attention to these cases.

In addition to requiring disclosure of items, such as base salary, bonuses, and equity compensation, Item 402 requires reporting companies to disclose the value of an NEO's perquisites if the NEO's perquisites and personal benefits for the relevant year are valued at $10,000 or more. If this $10,000 threshold is met, the perquisites and personal benefits must be reported and identified in the "All Other Compensation" column of the Summary Compensation Table in the company's proxy statement (Item 402(c)(2)(ix)).

Under Item 402, the following standard is used to determine whether or not an item is a perquisite requiring disclosure:

An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive's duties.
An item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect without regard to whether it may be provided for some business reason or for convenience of the company, unless it is generally available on a non-discriminatory basis for all employees.

For more information on executive perquisites, including information on perquisite disclosure, see Practice Note, Executive Perquisites. For more information on executive and director compensation disclosure generally, see Practice Note, Preparing the Executive and Director Compensation Disclosure for the Proxy Statement and Form 10-K.

The Argo Group Settlement

In June 2020, Argo Group International Holdings, Ltd. (Argo) settled an action brought by the SEC regarding Argo's failure to disclose approximately $5 million in perquisites and benefits paid to its chief executive officer (CEO) from 2014 through 2018. In proxy statements filed in 2015 through 2019, Argo disclosed approximately $1.22 million of CEO perquisites and personal benefits, including:

401(k) plan and retirement contributions.
The imputed value of insurance coverage.
Supplemental executive retirement plan benefits.
Housing and home leave allowances.
Medical premiums.
Financial planning services.

However, these proxy statements failed to disclose more than $5.3 million worth of additional perquisites and personal benefits provided to the CEO, including, but not limited to:

Expenses associated with the CEO's personal use of Argo's corporate aircraft.
Helicopter trips.
Club and concierge service memberships.
Tickets and transportation to sporting, fashion, and other entertainment events.
Watercraft-related costs.

After receiving a subpoena from the SEC, Argo conducted an internal investigation and determined that it:

Incorrectly recorded payments for the benefit of and reimbursements to the CEO as business expenses rather than compensation.
Failed to devise and maintain internal controls relating to CEO payments and reimbursements.

Argo took remedial actions, including replacing its CEO and engaging a third-party consultant to assist in reviewing and revising Argo's executive compensation processes, policies, and controls. The SEC took these remedial actions into account in reaching a settlement with Argo. The settlement required Argo to:

Pay a $900,000 civil monetary penalty.
Cooperate fully with SEC investigations, litigations, and other proceedings relating to Argo's failure to disclose the executive perquisites.

For more information on the Argo settlement, see Legal Update, Insurance Company Settles with SEC for Failing to Disclose Executive Perquisites.

The Hilton Settlement

In September 2020, the SEC agreed to a settlement with Hilton Worldwide Holdings Inc. (Hilton) regarding Hilton's failure to disclose approximately $1.7 million worth of travel-related benefits and perquisites paid to its CEO and other NEOs from 2015 through 2018. In proxy statements filed from 2016 through 2019, Hilton disclosed approximately $587,000 of compensation provided to its NEOs in the "All Other Compensation" column of the Summary Compensation Table in its proxy statements, including:

401(k) contributions.
Insurance premiums.
Tax reimbursements.
Certain personal travel and lodging costs.

However, Hilton failed to disclose an additional approximately $1.7 million worth of travel-related perquisites and personal benefits provided to its NEOs, including:

Expenses associated with the CEO's personal use of Hilton's corporate aircraft.
Expenses associated with NEOs' hotel stays.

After receiving an information request from the SEC, Hilton conducted an internal review of its perquisite disclosures and its system for identifying, tracking, and calculating perquisites. On April 24, 2020, Hilton filed a definitive proxy statement providing, among other things, revised disclosures regarding the perquisites and personal benefits provided to its NEOs in 2017 and 2018.

Hilton's settlement with the SEC required Hilton to:

Pay a $600,000 civil monetary penalty.
Cooperate with SEC investigations into the matter.

Company Takeaways

These investigations highlight the SEC's continued focus on the disclosure of executive perquisites and personal benefits. Public companies that provide perquisites to their executives should:

Ensure that they:
- implement appropriate policies and procedures for determining whether and to what extent perquisites should be disclosed in their annual proxy statements; and
- establish an appropriate methodology for valuing perquisites to ensure adequate disclosure.
Be aware that failing to accurately disclose executive perquisites and personal benefits can lead to significant civil penalties and costs related to internal investigations and cooperation with SEC investigations.

Controlling Shareholder Compensation Litigation

Several recent, high-profile decisions by the Delaware Court of Chancery have underscored the importance of establishing formal procedures for granting compensation to controlling shareholders. Companies with a controlling shareholder also serving as an executive or director should be aware of the recent litigation and consider reviewing their policies and procedures in light of the decisions.

Elon Musk Litigation

In an unpublished opinion in September 2019, the Delaware Chancery Court held that the entire fairness standard of review applied at the motion to dismiss stage to a decision by the board of directors of Tesla, Inc. to grant an allegedly excessive incentive compensation award to Elon Musk, the company's CEO, who was also the controlling shareholder (Tornetta v. Musk, et al., (Del. Ch. Sept. 20, 2019)).

Musk Background

In January 2018, Tesla's board of directors approved an incentive-based compensation package for Musk, at a time when he was both:

Tesla's CEO and chief product architect.
The controlling shareholder, owning almost 22% of Tesla's common stock.

Musk's compensation package consisted of stock options vesting in 12 tranches, with vesting tied to Tesla reaching certain "capitalization and operational milestones" while Musk served either as CEO or both executive chairman and chief product officer. Any options that do not vest within ten years are forfeited. If all the milestones are met, however, the value of the vested options may be as high as $55.8 billion. Tesla estimated the options' preliminary aggregate fair value at $2.615 billion in its proxy statement.

Grant of the award was contingent on a favorable vote by a majority of disinterested shares voting at a March 2018 special meeting of Tesla shareholders. Of the disinterested shares at the March 2018 special meeting, 73% voted to approve the award (which equaled about 47% of all the outstanding disinterested shares).

After the approval was announced, the plaintiff, a Tesla shareholder, sued Musk, Tesla, and the directors, asserting:

Direct and derivative claims for breach of fiduciary duties against Musk and the directors.
A direct and derivative claim for unjust enrichment.
A derivative claim for waste against the directors.

The defendants filed a motion to dismiss.

Musk Outcome

The court granted in part and denied in part the motion to dismiss. Regarding the breach of fiduciary duty claims, the court first addressed the threshold issue of whether it should review Musk's award under the business judgement rule or the entire fairness standard for purposes of resolving the motion to dismiss. In concluding that entire fairness was the appropriate standard of review, the court acknowledged that:

A board's grant of executive compensation is typically entitled to "great deference" under Delaware law.
A ratifying shareholder vote usually entitles the defendants to business judgment review.

However, the court reasoned that this situation is different because it involves a "conflicted controller" or a conflict of interest transaction where the controlling shareholder is a party. In cases involving conflicted controllers, the court noted that:

Board transactions are generally subject to the entire fairness standard of review.
The shareholder vote cannot ratify the board's decision if there was evidence that the structure or circumstance of the vote was coercive.

According to the court, the option award raised coercion concerns because it benefitted the company's controlling shareholder, so the minority shareholders had reason to fear controller retribution if they voted against the award. The court also found that the plaintiff adequately alleged that the board's and compensation committee's decision-making processes involved a coercive influence. Therefore, the court determined that it should review the award under the entire fairness standard.

The court noted that the defendants could have received business judgment deference if they had preconditioned the controlling stockholder's compensation package on the dual protections set out in In re MFW Shareholders Litigation, 67 A.3d 496 (Del. Ch. 2013). In MFW, the Delaware Chancery Court held that transactions involving a conflicted controller are subject to the more deferential business judgment review if the transaction is conditioned upfront on the approval of both:

An independent, fully functioning special committee of the board.
An uncoerced and informed vote by a majority of the minority shareholders.

For the timing component of MFW to be met, the dual protections must be included upfront before any "substantive economic negotiations" take place.

Having determined that entire fairness applied, the court then held that the plaintiff's allegations were sufficient to state a claim for breach of fiduciary duty.

The court also denied the defendants' motion to dismiss with respect to the unjust enrichment claim, but dismissed the plaintiff's waste claim.

For more information on the Musk decision, see Legal Update, In Tornetta v. Musk, Delaware Chancery Court Applies Entire Fairness Review to Board's Grant of Incentive Compensation Award to Controlling Shareholder.

Sumner Redstone Litigation

In Feuer v. Redstone, the plaintiff, a shareholder of CBS Corporation, filed a derivative suit against the CBS board of directors alleging that the salary and bonus payments made to controlling shareholder, board member, and former chairman Sumner Redstone, after Redstone had become incapacitated, constituted a waste of corporate assets by the board and unjust enrichment of Redstone ( (Del. Ch. Apr. 19, 2018)). The plaintiff did not make a pre-suit demand on the board to pursue the claims, arguing that demand was futile because the directors were themselves exposed to liability for making the payments.

The Delaware Chancery Court granted in part and denied in part the defendants' motion to dismiss the complaint under Court of Chancery Rules 23.1 and 12(b)(6), ruling that the plaintiff had:

Alleged an "extreme factual scenario" that excused him from making a pre-suit demand on the board to pursue most of his claims.
Stated claims for breach of fiduciary duty and unjust enrichment.

This decision is notable for its rare finding of potential waste of corporate assets by a board of directors. Waste is one of the more difficult standards to meet in Delaware law, particularly when challenging board decisions concerning executive compensation, which fall under the board's purview and business judgment.

Redstone Background

Through his trust and investment vehicle, Redstone was the controlling shareholder of CBS. After CBS split from Viacom Inc. in 2006, Redstone served as executive chairman of CBS until February 2016. Redstone's employment at CBS was governed by an agreement originally entered into in December 2005 and amended in 2007 and 2008. The employment agreement was terminable by either party at will.

The 13-member board of directors of CBS delegated responsibility for compensation-related matters to a compensation committee consisting of four directors. Under Redstone's employment agreement, in addition to his base salary, he was entitled to:

An annual bonus based on achievement of performance goals established by the compensation committee.
Cash bonuses under the company's senior executive short-term incentive plan, which required the compensation committee to determine which senior executives were eligible for the program and to set performance goals based on financial targets.

In February 2014, the compensation committee approved a set of goals for Redstone. Beginning in the spring of that year, however, Redstone's health began declining rapidly. Redstone's participation in board meetings was minimal in 2014, frequently consisting of little more than welcoming participants to the meeting. Despite this, in January 2015, the compensation committee approved a $9 million bonus for Redstone, in addition to his $1.75 million base salary (which could not be reduced under the terms of his employment agreement), for 2014.

In each of February 2015 and January 2016, the compensation committee decided that Redstone was not to receive an annual bonus, but was to continue to receive his base salary of $1.75 million. In 2015:

The board re-nominated Redstone as a director.
Redstone only participated in board meetings by phone and did not speak at three of the four board meetings.

Throughout this period, members of the board learned of Redstone's poor health through personal interaction, communication with Redstone's acquaintances, media coverage, or a lawsuit alleging elder abuse. However, no mention of Redstone's health was made in the minutes of the board and compensation committee meetings in late 2014 and in 2015.

In February 2016, following a psychiatric evaluation that found Redstone lacked mental capacity, Redstone resigned as CBS executive chairman. The board accepted the resignation and appointed him chairman emeritus; the compensation committee approved an annual salary of $1 million for Redstone in his new role.

In July 2016, the plaintiff shareholder brought a derivative action against the board of directors alleging that as a result of Redstone's $9 million bonus for 2014, his annual base salary of $1.75 million as executive chairman for each of 2014 and 2015, and his annual base salary of $1 million as chairman emeritus for 2016:

The defendant directors (other than Redstone) breached their fiduciary duties through waste of corporate assets by agreeing to Redstone's compensation for virtually no service in return.
Redstone was unjustly enriched by the compensation he received throughout the relevant period.

In February 2017, the defendants filed a motion to dismiss.

Redstone Outcome

To bring a shareholder derivative suit under Delaware law, a plaintiff must either:

Make a pre-suit demand by presenting allegations of wrongdoing to the corporation's directors, request that they bring suit, and show they wrongfully refused to do so.
Plead facts showing that a pre-suit demand on the board was futile.

In this case, the plaintiff did not make a pre-suit demand on the board, arguing that defendant directors were not likely to have pursued the claims on the behalf of the corporation given their own likely liability for breach of fiduciary duty.

The Delaware Chancery Court analyzed the plaintiff's pleading of demand futility under the Rales test, in which the plaintiff must plead facts with particularity that "create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand" (Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993)). (The court analyzed the plaintiff's claims under Rales and not the Aronson standard (for more on this standard, see Lululemon Outcome) because Rales governs accusations of board inaction and applies in derivative suits challenging decisions approved by a board committee consisting of less than half of the members of the board.)

Regarding the $9 million bonus Redstone received, the court held that demand was not excused because the disinterest of a majority of the board had not been impugned concerning this payment. The decision to award the bonus was made solely by the four members of the compensation committee (as is appropriate under Section 141(c) of the DGCL), meaning that eight members of the 13-member board did not participate in the decision at all. Accordingly, a majority of the board did not face the prospect of personal liability for the bonus payment. The board therefore could have evaluated the allegation of waste concerning the bonus payment had the plaintiff brought it to the board.

Regarding the continued payment of Redstone's $1.75 million salary, the court held that the defendant directors faced a substantial threat of personal liability for breach of fiduciary duty and (in the case of Redstone) unjust enrichment for agreeing to them and that the plaintiff's claims concerning these payments could therefore proceed. The court held that the facts in the plaintiff's complaint described with particularity a situation where the board members face a substantial threat of liability for claims of waste and bad faith by virtue of their failure to even consider terminating Redstone's employment agreement in spite of their knowledge of Redstone's failing health and the fact that he provided no meaningful service to the company throughout the relevant period. Although the compensation committee (comprising a minority of the board) was empowered by the board to terminate the employment agreement, the defendants agreed that the full board had the concurrent right to terminate it as well. The failure to do so was therefore equally ascribable to the full board.

The court also ruled that demand was excused for the plaintiff's claim regarding Redstone's compensation as chairman emeritus. Although the decision to award the $1 million salary was made by the compensation committee and not the full board, the court reasoned that the defendant directors could not be expected to faithfully challenge the committee's decision to pay that salary, as any arguments against it would undermine their own defense regarding the 2014 and 2015 base salary payments to Redstone.

Because demand was excused for these payments, the plaintiff also met the lower standard for surviving a Court of Chancery Rule 12(b)(6) motion to dismiss.

The court also held that the plaintiff's breach of fiduciary duty claims survived the motion to dismiss, but the court dismissed the plaintiff's unjust enrichment claims.

For more information about the Redstone decision, see Legal Update, Delaware Court of Chancery Excuses Pre-Suit Demand for Derivative Claim Alleging Wasteful Compensation.

Company Takeaways

Both the Musk and Redstone decisions were at the motion to dismiss stage, so neither case was evaluated on its merits. However, both rulings serve as an important reminder to companies that courts more closely scrutinize a board's executive or director compensation decisions when the compensation is being awarded to a controlling shareholder.

Specifically, the Musk ruling is another indication that Delaware courts will review conflicted compensation decisions under the entire fairness standard instead of the more deferential business judgment standard unless certain procedural safeguards are met. While grants of compensation to executives or board members who are also controlling shareholders may not be common, companies making these grants should:

Consider establishing formal procedures that must be followed in connection with any grants, which should include preconditioning the approval for the grants upfront (before any substantive economic negotiations take place between the executive or the director and the company) on both:
- the negotiation and approval of the award by an independent, fully functioning special committee of the board; and
- the subsequent approval by the fully informed vote of the holders of a majority of the disinterested shares.
Consult with their outside counsel before making any of these grants.

The Redstone decision represents the rare case in which the Delaware Chancery Court allowed a claim of waste of corporate assets to survive a motion to dismiss. That this comes in a case regarding executive compensation is particularly notable because determining executive and director compensation levels is a core function of boards of directors and courts usually defer to the boards' decisions on those matters.

Although the facts in the Redstone case are extreme, companies and their advisors should consider looking to it as a reminder of the importance of taking detailed minutes and keeping good records of board discussions and considerations of compensation matters in cases where the directors are not disinterested.

Litigation Relating to Executive Misconduct

Lululemon CEO

On April 2, 2020, the Delaware Chancery Court granted a motion to dismiss a shareholder derivative complaint against the board of directors of lululemon athletica inc. (Lululemon), alleging breach of the directors' fiduciary duties (Shabbouei v. Potdevin, (Del. Ch. Apr. 2, 2020)).

Lululemon Background

Laurent Potdevin, the CEO of Lululemon from 2014 to February 5, 2018, allegedly engaged in a romantic relationship with an employee of Lululemon while he was serving as the CEO. Potdevin is also alleged to have violated Lululemon's global code of business conduct and ethics by:

Creating a toxic culture at work.
Engaging in sexual harassment and favoritism.
Taking illicit drugs with other Lululemon employees while he was CEO.

Following certain incidents, which are not spelled out in the decision, the board launched an investigation into Potdevin's behavior, which was conducted by outside counsel. After receiving outside counsel's report on the misconduct, the board terminated Potdevin's employment without cause and negotiated an agreement to pay him $5 million in exchange for a full release of claims and a quiet departure. Lululemon and Potdevin executed a separation agreement on February 2, 2018.

In November 2018, the plaintiff, a Lululemon shareholder, filed a derivative complaint alleging that:

The defendant directors breached their fiduciary duties by approving Potdevin's separation agreement rather than terminating his employment for cause.
The separation agreement constituted waste of corporate assets.
Potdevin was unjustly enriched by the separation agreement.

The plaintiff did not make a pre-suit demand on the board before filing the complaint. Defendants moved to dismiss the complaint under Court of Chancery Rule 23.1, alleging that the plaintiff failed to prove that filing the pre-suit demand would have been futile.

Lululemon Outcome

The court granted the defendants' motion to dismiss, applying the Aronson standard and determining that the plaintiff had not shown demand futility. The Aronson standard requires plaintiffs to show demand futility in a derivative lawsuit concerning an action the board took on the corporation's behalf by pleading facts supporting a reasonable inference that either:

A majority of the board was interested in the challenged decision.
The challenged decision was not the product of a valid exercise of business judgment.

(Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984).)

To meet the first prong, the plaintiff must plead particularized facts supporting a reasonable inference that at least five of the ten directors were interested because they either:

Appeared on both sides of the separation agreement.
Derived a personal benefit from the company's entering into the separation agreement.
Were beholden to an interested person.

The court found that the plaintiff did not meet this prong, rejecting the plaintiff's argument that the board was interested in the separation agreement as a means to hide board-level oversight failures (the plaintiff had not even attempted to plead an oversight claim or allege that the board faced a substantial likelihood of liability for that claim).

The court also found that the plaintiff did not meet the "heavy burden" of the second prong by pleading particularized facts that support a reasonable inference that the board's decision to enter into the separation agreement was "so egregious on its face" that it was not a product of a valid exercise of business judgment.

McDonald's CEO

On February 2, 2021, the Delaware Chancery Court denied a motion to dismiss made by Stephen Easterbrook, the former CEO of McDonald's Corporation (McDonald's), who is being sued by the company for breach of his fiduciary duties and for fraudulent inducement relating to his separation agreement with the company (McDonald's Corp. v. Easterbrook, (Del. Ch. Feb. 2, 2021)). The court held that:

Venue is proper.
The company's claims are not barred by the integration clause in its separation agreement with Easterbrook.
The company can plead justifiable reliance on Easterbrook's allegedly false statements regarding his sexual relationships with several McDonald's employees.

Background

Plaintiff McDonald's employed defendant Easterbrook as CEO from March 2015 until November 2019.

In October 2019, following an allegation of wrongdoing, an independent investigation by outside counsel found that Easterbrook had engaged in an inappropriate relationship with a McDonald's employee. During the investigation:

Both Easterbrook and the employee claimed the relationship was consensual and non-physical, mainly involving text messages and video calls.
Easterbrook affirmatively denied ever engaging in any sexual relationship with any other McDonald's employee.
The investigators searched Easterbrook's cell phone and found no evidence to contradict his statements.

Based on Easterbrook's misconduct, which violated the company's standards of business conduct, the McDonald's board of directors decided to pursue a negotiated termination of Easterbrook without cause, due to concerns that terminating him for cause may lead to lengthy and costly litigation in which the company must prove that Easterbrook's conduct constituted dishonesty, fraud, illegality, or moral turpitude.

Under the separation agreement negotiated by the parties, which took effect on November 1, 2019, Easterbrook's employment was terminated without cause, which required McDonald's to provide him significant compensation under the company's severance plan.

Among other things, the separation agreement:

Incorporated certain provisions of agreements governing Easterbrook's 2018 and 2019 equity and option awards (the equity agreements).
Required Easterbrook to release any and all claims he had against the company but did not require the company to release any claims against Easterbrook.
Contained a standard integration clause.

In July 2020, McDonald's learned that Easterbrook had engaged in sexual relationships with three other employees while he was CEO. The company discovered photographic evidence of those relationships and also discovered that Easterbrook enabled a special grant of restricted stock units to one of those employees during their relationship.

In light of the July 2020 revelations, McDonald's filed suit against Easterbrook in August 2020, alleging:

Breach of fiduciary duty for violating the company's standards of business conduct by having relationships with several employees and making decisions about the compensation of one of those employees.
Fraud in the inducement, for inducing the company to enter into the separation agreement by telling "deliberate falsehoods" to conceal the extent of his wrongdoing (McDonald's argued that the board was not likely to have agreed to the separation agreement if Easterbrook had not lied about the wrongdoing and instead was likely to have terminated Easterbrook for cause).

Easterbrook moved to dismiss the complaint under:

Court of Chancery Rule 12(b)(3), arguing that the Delaware Chancery Court is an improper venue because the equity agreements between the parties provide that disputes concerning Easterbrook's compensation, including his severance compensation, should be litigated in the courts of Illinois.
Court of Chancery Rule 12(b)(6), arguing that:
- the claims are barred by the separation agreement's anti-reliance clause; and
- the company cannot plead justifiable reliance or causation because it conducted a limited investigation before entering into the separation agreement.

Outcome

The court denied Easterbrook's motion to dismiss, holding that:

The forum selection clauses in the equity agreements were not incorporated into the separation agreement.
The integration clause in the separation agreement does not contain an anti-reliance clause and does not prevent McDonald's from suing Easterbrook for his alleged false statements.
McDonald's pleaded a reasonably conceivable basis for a court to find that it justifiably relied on Easterbrook's alleged falsehoods to its detriment.

Although the equity agreements include a forum selection clause making Illinois the forum for any litigation arising directly or indirectly from the parties' relationship, the court found that Easterbrook had failed to demonstrate an intent of both parties to incorporate the equity agreements' forum selection clause into the separation agreement. The separation agreement explicitly incorporated other provisions of the equity agreements, but not the forum selection clause.

Regarding the integration clause claim, the separation agreement's integration clause provides that the agreement contains the "full agreement" between Easterbrook and McDonald's and "completely supersedes any prior written or oral agreements or representations concerning the subject matter thereof." Easterbrook argued that this provision is an anti-reliance clause that prevents both parties from asserting claims based on extra-contractual promises or statements. The court rejected this argument because under Delaware case law a standard integration clause alone does not preclude all reliance on extra-contractual representations and statements. In Delaware, anti-reliance language in an integration provision must be "explicit and comprehensive."

The court held that for purposes of the complaint, McDonald's pleaded a reasonably conceivable basis to conclude that it relied on Easterbrook's statements when deciding to terminate him without "cause" and that it detrimentally relied on those statements.

Company Takeaways

Companies and their counsel should be mindful of the Delaware Chancery Court's decisions in the McDonald's and Lululemon cases. These cases suggests that companies should review their procedures for investigating incidents of executive misconduct. Companies should consider:

Ensuring they have in place a code of ethics or business conduct that addresses executive misconduct, including harassment and inappropriate relationships.
Creating a list of steps to take in response to allegations of executive misconduct, potentially including:
- conducting thorough investigations, either internally or by hiring outside counsel (see Article, Expert Q&A on Conducting Sexual Harassment Investigations);
- reviewing cell phones and e-mail servers in situations involving allegations of harassment or inappropriate relationships;
- carefully considering whether it is in the company's best interest to enter into a separation agreement including severance to obtain an executive's release of claims and quiet exit from the company; and
- ensuring any integration clauses in separation agreements do not include explicit anti-reliance provisions if the company is relying on executive statements that are not set out in the agreement.

Trends in Executive Compensation Litigation | Practical Law