Date Submitted: January 23, 2015
Joel Friedlander, Esquire Christopher M. Foulds, Esquire
Brian C. Ralston, Esquire Potter Anderson & Corroon LLP
Raymond J. DiCamillo, Esquire Richards, Layton & Finger, P.A.
It is hard to look at the facts of this case without going away troubled. A compensation committee with various ties to the controlling shareholder family awarded considerable executive compensation and benefits to the patriarch of that family and his son. Additionally, a board dominated by members of the controlling family approved non-executive director compensation, which accrued to three family-member directors with qualifications and attendance records that have been called into question. Nonetheless, compensation decisions are not the expertise of trial judges, and the Court should not second-guess an independent compensation committee's business decisions that are not irrational. The Court also lacks a principled way to evaluate a director's decision to accept a position and her performance as a director. Although the amount of compensation and board composition raise some concern, that concern does not justify judicial intervention into that thicket here.
Plaintiff Julie Friedman ("Friedman" or the "Plaintiff") is and has been a shareholder of Nominal Defendant Cablevision Systems Corporation ("Cablevision" or the "Company") at all times relevant to this litigation. Cablevision, "a telecommunications and media company . . . . [serving] millions of households and businesses in the New York metropolitan area, " was founded by Defendant Charles F. Dolan ("Charles"). Charles has been Executive Chairman of Cablevision since 1985 and "is focused on 'setting the strategic direction of the Company.'" He is also Executive Chairman of AMC Networks, Inc., a publicly traded company controlled by the Dolan family. His son, Defendant James L. Dolan ("James"), has been Cablevision's Chief Executive Officer ("CEO") since 1995 and a director since 1991. As CEO, James "is responsible for the day-to-day management of the Company." He also serves as Executive Chairman of The Madison Square Garden Company ("MSG")-another company under the Dolan family's control-and sings in a band that "travels extensively" for performances.
Charles's daughters, Defendants Kathleen M. Dolan ("Kathleen"), Deborah Dolan-Sweeney ("Deborah"), and Marianne Dolan Weber ("Maryanne, " and collectively, the "Dolan Daughters" and, with their father and brother, the "Dolan Defendants"), serve on Cablevision's board as non-employee directors. In Cablevision's 2013 annual proxy statement, the Dolan Daughters were said to be qualified as directors based on work at Dolan-family charitable foundations and a community center, as well as "'experience as . . . member[s] of Cablevision's founding family.'"
Defendants Thomas V. Reifenheiser ("Reifenheiser"), John R. Ryan ("Ryan"), and Vincent Tese ("Tese, " and collectively, the "Compensation Committee Defendants") comprise Cablevision's compensation committee. Committee chair Tese, seventy years old at the time of the complaint, has been a Cablevision director since 1996 and has been on the compensation committee since 2004. He also serves as a director for MSG (where his brother works), but is retired and does not maintain full-time employment. Reifenheiser, seventy-seven years old at the time of filing, has been a member of the board since 2002 and the compensation committee since 2007. He, too, is retired and does not maintain fulltime employment. Finally, Ryan has been a director since 2002 and a compensation committee member since 2009. The compensation committee has been the subject of criticism over the years, from advisory firms and shareholders alike. A majority of Class A votes cast in 2010 and 2012 elections withheld support for the Compensation Committee Defendants. In 2013, a majority of Class A votes opposed Tese's election, 38.9% opposed Ryan's, and 49.4% opposed Reifenheiser's.
Members of the Dolan family hold 100% of Cablevision's Class B stock and approximately 73% of Cablevision's voting power. Class B holders have ten votes per share on matters put to common vote and can elect 75% of Cablevision's directors as a class (as opposed to one vote per share and 25% of directors for Class A holders). They are also party to an agreement "that had the effect of causing the voting power of the Class B stockholders to be cast as a bloc" on matters subject to their class vote. "Cablevision has identified itself as a 'controlled company' under [New York Stock Exchange] rules" since adopting this agreement. As such, Cablevision does not have (or need) a nominating committee, and the incumbent directors serve that function under Cablevision's Corporate Governance Guidelines. Despite receiving substantial withhold votes (including a majority of votes cast in 2010 and 2012), the Compensation Committee Defendants have continued to nominate themselves, and the full board has continued to approve those nominations.
The pending litigation asserts claims related to compensation awarded to the Dolan Defendants. From fiscal years 2010 through 2012, Cablevision paid James and Charles compensation worth $41.18 million and $40.27 million, respectively.The executive compensation packages for James and Charles included "a base salary, perquisites, annual cash bonuses, and long-term incentive awards." The perquisites, including a company car and driver and a security program, were valued at $476, 000 and $792, 000. Also included was a March 2012 "'special' one-time grant of stock options, " awarding James and Charles options valued at $6.85 and $7.09 million. These awards were purportedly needed to "incentivize and retain" officers and employees because a failure to meet certain targets was expected to affect performance awards. Furthermore, on February 27, 2013, James signed a letter agreement that renewed certain terms of his employment and increased his compensation. The employment agreement retained a modified single-trigger provision. In other words, Cablevision "will pay James severance if he chooses to terminate his employment for any reason within a certain period of time after a change in control."
The Compensation Committee Defendants set James's compensation in a process that "allowed James to 'assist the Compensation Committee and its compensation consultant in determining the Company's core peer group and the peer group comparisons.'" The Compensation Committee Defendants considered James's suggestions and purportedly "selected fourteen publicly traded companies in the same general industry or industries as the Company as well as companies of similar size and business mix." An additional selection of peer companies by Institutional Shareholder Service, Inc. ("ISS") yields a pool of twenty-six companies for comparison. Of these "peer group" companies, eighteen had market capitalizations of over $10 billion (as of January 2014), and the group's average total revenue (over fiscal years 2010 through 2012) was $30.87 billion. By comparison, Cablevision had a market capitalization of $4.39 billion and $19.58 billion in revenue. Its stockholder returns were also comparatively low. Of the seventeen peer companies with less than $30 billion in market capitalization, only two paid their CEOs more than Cablevision did.
To set Charles's compensation, the Compensation Committee Defendants decided "that as a result of [Charles's] important role . . ., an appropriate general guideline for [Charles's] target total direct compensation . . . was slightly below the target total direct compensation of the Chief Executive Officer of the Company." Even Charles earned more than fourteen (of seventeen) CEOs at the peer companies with a market capitalization below $30 billion.
In contrast, the entire board set the compensation for Cablevision's non-employee directors (including the Dolan Daughters). Total compensation for fiscal years 2011 and 2012 consisted of a base fee, restricted stock, sums for attendance (whether in-person or by telephone) at meetings, and perquisites. The Company's Corporate Governance Guidelines encourage directors to "make every effort to attend meetings" and include commitment to board matters as a nomination criterion. However, Kathleen received compensation valued at $340, 544 over those two years, corresponding to participation in three (of six) meetings, by telephone, in fiscal year 2012. Deborah received $367, 863 and Marianne received $374, 455 ...