In a case of apparent first impression regarding the impact of the shareholder voting provisions of Internal Revenue Code (“I.R.C.”) § 162(m) on state corporate law, Judge Sue L. Robinson of the U.S. District Court for the District of Delaware recently held that the federal statute did not preempt Delaware law. Freedman v. Redstone, et al., Civ. No. 12-1052-SLR, 2013 WL 3753426, (D. Del. July 16, 2013). Specifically, Judge Robinson held that I.R.C. § 162(m)’s provision that certain executive compensation is tax-deductible only if it is awarded pursuant to a plan approved by shareholders did not preempt Delaware state law that permits a corporation, in its charter, to designate certain classes of shares as non-voting. This ruling has potential ramifications in other cases in which federal law intersects with state law on matters of corporate governance. Judge Robinson also dismissed the plaintiff’s derivative claim that the directors violated their fiduciary duties by awarding compensation not in compliance with the terms of the prior plan and I.R.C. § 162(m).
View full memo, "Delaware Federal Court Issues Significant Ruling Concerning Impact of Executive Compensation Provisions of the Internal Revenue Code on Delaware Corporate Law Governing Shareholder Voting"