Key Business Court Decisions

A Director’s Compensation Is Presumed To Be Fair, But Only To A Point

Despite the Legislature’s latest amendment pronouncing a director’s compensation “for services in any capacity” to be presumptively fair, the presumption only applies to compensation given a director in her capacity as a director.  Ehmann v. Medflow, Inc., 2019 NCBC 9 (J. Gale).  A director’s compensation for other services rendered to the company is not entitled to the business judgment rule, but instead must be shown to be fair to the company.

Plaintiffs Troneburg, Ehman and Schiffli were three members of the four-member senior executive team of Medflow, Inc. (“Company”).  Each plaintiff was either an officer or former officer of the Company, and Ehmann was the Company’s sole director.  After the ouster of the Company’s president, the senior executive team recommended retaining each of the plaintiffs with an employment agreements.  Ehmann, as the sole director of the Company, negotiated Troneburg’s agreement on behalf of the Company.  Troneburg then negotiated Ehman’s and Schiffli’s agreement.  Ehman’s agreement compensated him solely for his employment services and not for any services provided as a director.  The three agreements were not reviewed by the Company’s outside law firm or submitted to the Company’s shareholders for approval.  When the Company subsequently refused to pay Plaintiffs the benefits set forth in the employment agreements, the Plaintiffs filed a lawsuit.   Plaintiffs contended that the agreements were entitled to a presumption of validity under the business judgment rule and that, in particular to Ehman, his agreement was protected by G.S. §58-8-11. The Company contended the agreements were conflict-of-interest transactions that, because they had not been properly approved, were unenforceable and fell outside the purview of the business judgment rule.  Both parties filed motions for summary judgment, which the Business Court denied.  In its denial, the Business Court found that Ehman’s agreement fell outside the protections of G.S. §58-8-11.  Plaintiffs filed an appeal.

While the matter was pending appeal, the North Carolina Legislature amended G.S. §58-8-11, from allowing a company’s board of directors to “..fix the compensation of directors for services as a director” to now allowing a company’s board of directors, “…without regard to personal interest, [to] fix the compensation of directors for services in any capacity…[and] is presumed to be fair to the corporation…”  Based upon this change, Ehman argued his employment agreement was now protected.

The Business Court disagreed.  After reviewing sources external to the statute and to its legislative history, the Business Court ultimately concluded that the phrase “services in any capacity” did not apply to services a director provided to the company other than her director-related services.  Because Ehman’s agreement did not involve director-related services, the agreement was not afforded a presumption of being fair. Based upon this ruling, businesses and their directors should remember that any agreement involving services that a director provides other than her director-related services will not be afforded the presumption of being fair, unless other steps are taken.

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