The Delaware Court of Chancery recently rejected as inadequate a proposed settlement in a derivative action brought against directors and officers of the Fairchild Corporation. This Update highlights the key issues in the Court's rejection and offers practical guidance.

The Plaintiffs' Allegations

The plaintiffs had alleged that Fairchild excessively compensated CEO Jeffrey Steiner, certain of his family members and other top executives, providing them with benefits such as interest-free loans and advances on retirement payments. The plaintiffs also alleged that Fairchild made payments of millions of dollars to charter planes and helicopters from Jeffrey Steiner-controlled entities, paid more than $5 million in expenses and a fine in connection with an alleged misuse of funds by a former official of another company and paid millions of dollars in golden parachute benefits in connection with the sale of a subsidiary, even though the officers retained their positions at Fairchild.

The Proposed Settlement Agreement

The monetary value of the proposed settlement agreement totaled approximately $2.9 million. Under the proposed settlement agreement:

• Jeffrey Steiner would pay $1.5 million to Fairchild (advanced from his Supplemental Executive Retirement Plan) as reimbursement for a part of the $5 million in expenses advanced on his behalf in connection with French litigation alleged to involve matters unrelated to his position at Fairchild.
  
  
• A new bylaw would be adopted by Fairchild's board requiring transactions between Fairchild and any director, officer, or entity controlled by a director or officer to be submitted for approval to a new Conflict Committee, composed of three disinterested directors of Fairchild who are not officers or employees of Fairchild.
  
  
• Jeffrey Steiner's employment agreement would be amended to shorten his term of employment from 5 years to 2.5 years and his base salary would be decreased by 20% from $2.5 million to $2 million. Eric Steiner's (Jeffrey Steiner’s son and director and President of Fairchild) employment agreement would be amended to shorten his term of employment from 3 years to 2 years and his base salary would be decreased by 15% from $725,000 to $616,250. Fairchild would retain the power to renew the employment agreements when they expired.
  
  
• Fairchild's board would reconfirm its policy to no longer lease aircraft or helicopters from Jeffrey Steiner-controlled entities.
  
  
• Fairchild's obligations regarding Jeffrey Steiner's life insurance policy would be released (one year's premium equaled $150,000).

The Court's Rejection

At the May 18 hearing, Vice Chancellor Leo E. Strine, Jr. rejected the proposed settlement as inadequate, on the ground that it did not do enough to protect shareholders from "a grotesque lack of control [in] a company that has no profits." The court told lawyers for the parties to "get something real" and "put in place . . . real structural protections that may involve a real infusion of some backbone into the board."

In refusing to approve the settlement, Vice Chancellor Strine cited to a lack of board control over Jeffrey Steiner's personal expenditures, a payroll burdened with family members and Fairchild's decade-long lack of profitability. Vice Chancellor Strine characterized the complaint as saying "you've got a bottom decimal performer and a company paying top decimal wages, with lots of personal expenditures." Vice Chancellor Strine did not make a determination about any of the allegations in the suit, but he said that if the accusations against Fairchild and its board were true, the suit deserved a settlement that amounted to more than "a sort of cosmetic whimper."

Additional Information

This Update highlights key issues in the Delaware Chancery Court's rejection of the proposed settlement in In re The Fairchild Corporation Shareholder Derivative Litigation. You can find discussion of other recent cases and other topics of interest on our website.