Freedman v. Adams
Delaware Supreme Court
58 A.3d 414 (Del. 2013)
XTO Energy's board knowingly declined to adopt an IRS Section 162(m) qualified compensation plan that would have preserved tax deductibility for executive pay above $1 million, explicitly stating it did not want its compensation decisions constrained by deductibility concerns. Over three years, XTO paid over $130 million in officer compensation, none of it tax-deductible as a result. Shareholder Freedman (plaintiff) brought a derivative suit alleging the board's failure to adopt a qualifying plan constituted corporate waste, claiming XTO could have saved roughly $40 million in taxes. The trial court ruled against Freedman, who appealed.
Whether a claim of corporate waste arises from a board's deliberate decision not to structure executive compensation to preserve tax deductibility, resulting in the loss of a substantial tax deduction.