Robert Freedman v. Sumner Redstone

PRECEDENTIAL

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
______________

No. 13-3372
________________

ROBERT FREEDMAN,

Appellant

v.

SUMNER M. REDSTONE; PHILIPPE P. DAUMAN;
THOMAS E. DOOLEY; GEORGE S. ABRAMS;
ALAN C. GREENBERG; SHARI REDSTONE;
FREDERIC V. SALERNO; BLYTHE J. MCGARVIE;
CHARLES E. PHILLIPS, JR.; WILLIAM SCHWARTZ;
ROBERT K. KRAFT; VIACOM, INC.

________________

On Appeal from the United States District Court
for the District of Delaware
(D.C. Civ. No. 1-12-cv-01052)
District Judge: Honorable Sue L. Robinson
________________

Argued March 25, 2014
 BEFORE: FUENTES, GREENBERG, and
VAN ANTWERPEN, Circuit Judges

(Filed: May 30, 2014)
______________

Daniel E. Bacine, Esq.
Barrack, Rodos & Bacine
2001 Market Street
3300 Two Commerce Square
Philadelphia, PA 19103

A. Arnold Gershon, Esq. (Argued)
Barrack, Rodos & Bacine
425 Park Avenue
Suite 3100
New York, NY 10022

Brian E. Farnan, Esq.
Joseph J. Farnan, Jr., Esq.
Joseph J. Farnan, III, Esq.
Rosemary J. Piergiovanni, Esq.
Farnan Law
919 North Market Street, 12th Floor
Wilmington, DE 19801

Counsel for Appellant

Jaculin Aaron, Esq.
Stuart J. Baskin, Esq. (Argued)
Shearman & Sterling

2
599 Lexington Avenue
New York, NY 10022

John P. DiTomo, Esq.
Jon Abramczyk, Esq.
Morris, Nichols, Arsht & Tunnell
1201 North Market Street
P.O. Box 1347
Wilmington, DE 19899

Counsel for Appellees

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OPINION OF THE COURT
______________

GREENBERG, Circuit Judge.

I. INTRODUCTION

Between 2008 and 2011, Viacom Inc. paid three of its
senior executives—Board chairman Sumner Redstone, President
and CEO Philippe Dauman, and COO Thomas Dooley—more
than $100 million in bonus or incentive compensation.
Although the compensation exceeding $1 million paid by a
corporation to senior executives is not typically a deductible
business expense under federal tax law, a corporate taxpayer
may deduct an executive’s otherwise nondeductible
compensation over $1 million if an independent committee of
the corporation’s board of directors approves the compensation

3
on the basis of objective performance standards and the
compensation is “approved by a majority of the vote in a
separate shareholder vote” before the compensation is paid. In
2007, a majority of Viacom’s voting shareholders approved such
a plan with the intent to render the excess compensation paid by
Viacom tax deductible (the “2007 Plan”). One shareholder,
appellant Robert Freedman, now claims that Viacom’s Board of
Directors (the “Board”) failed to comply with the terms of the
2007 Plan. Freedman contends that, instead of using
quantitative performance measures, the Board partially based its
bonus awards on qualitative, subjective factors, thus destroying
the basis for their tax deductibility. Freedman alleges that this
misconduct caused the Board to award its executives more than
$36 million of excess compensation. Freedman sued Viacom
and all eleven members of its Board derivatively on behalf of
Viacom for not complying with the 2007 Plan, and directly for
allowing an allegedly invalid shareholder vote reauthorizing the
2007 Plan in 2012. On defendants’ motion, the District Court
dismissed both claims by order entered on July 16, 2013. See
Freedman v. Redstone, Civ. No. 12-1052-SLR, 2013 WL
3753426 (D. Del. July 16, 2013). Freedman has appealed from
that order but we will affirm.

At the outset we summarize the issues involved in this
case and set forth our conclusions. In a requirement familiar to
corporate litigators, before bringing a derivative suit on behalf
of a corporation a plaintiff must demand that the corporation’s
board of directors bring the suit itself. If the plaintiff does not
make such a demand, the suit may proceed only if the plaintiff
shows why a demand would have been futile, either because the
board was interested in the challenged transaction or because the

4
board acted outside the protection of the business judgment rule
in dealing with the matter in issue. As Freedman did not make a
pre-suit demand or present sufficient allegations explaining why
a demand would have been futile, the District Court correctly
dismissed his derivative claim.

Freedman on his direct claim contends that, as a
condition for allowing certain executive compensation in excess
of $1 million to be tax deductible, federal tax law requires that
the compensation be awarded pursuant to a plan approved in a
vote of all the shareholders, even those otherwise without voting
rights, thus preempting to this limited extent Delaware law
authorizing corporations to issue non-voting shares as Viacom
has done. Because we find that federal tax law does not confer
voting rights on shareholders not otherwise authorized to vote or
affect long-settled Delaware corporation law which permits
corporations to issue shares without voting rights, we conclude
that Freedman has failed to state a direct claim on which relief
may be granted.

II. BACKGROUND

Viacom is a publicly traded entertainment corporation,
incorporated in Delaware, with its principal place of business in
New York, New York. Viacom’s Board of Directors has eleven
members, all of whom are defendants in this case. During the
2011 fiscal year, Viacom earned more than $2 billion, and
returned a substantial portion of those profits to its stockholders
through cash dividends and stock buyback programs.

5
 As we have indicated, Freedman’s allegations center on
the award of millions of dollars of incentive compensation to
three Viacom executives. We reiterate that typically executive
compensation exceeding $1 million is not tax deductible, but
that 26 U.S.C. § 162(m) provides an exception to the rule of
nondeductibility where the corporation pays the compensation as
a reward for performance measured by established, objective
criteria and an independent compensation committee of the
corporation’s directors administers the compensation plan. 26
U.S.C. § 162(m)(4)(C)(i); 26 C.F.R. § 1.162-27(e)(2)(i). In
order for compensation paid pursuant to the exception to qualify
for the favorable tax treatment, the taxpayer must disclose to its
shareholders its plan to award such compensation and the plan
must be “approved by a majority of the vote in a separate
shareholder vote.” 26 U.S.C. § 162(m)(4)(C)(ii).

On May 30, 2007, Viacom’s shareholders approved this
type of plan—the Senior Executive Short-Term Incentive Plan.
The 2007 Plan capped the awards, limiting each executive’s
eligibility for awards to the lesser of either eight times his salary
or $51.2 million per year. As these bonuses vastly exceeded §
162(m)’s $1 million threshold, to ensure that the awards were
tax deductible the 2007 Plan included provisions tying bonus
awards to the achievement of specific, objective goals relating to
Viacom’s financial performance. The plan directed the
Compensation Committee of Viacom’s Board to establish a
performance period, designate which executives would
participate, select which performance goals to use from a list
included in the 2007 Plan, and set a performance target within
each goal. At the end of the performance period, the Committee
was to certify “whether the performance targets have been

6
achieved in the manner required by Section 162(m).” A. 63. If
the targets were satisfied, then the executives earned the award,
although the Committee could, “in its sole discretion, reduce the
amount of any Award to reflect” its assessment of a particular
executive’s “individual performance or for any other reason.”
A. 63-64.

The Committee selected several performance measures
from the 2007 Plan and then set a range of performance goals
for each measure. Each executive was eligible to receive a
bonus of different amounts, depending on where on the range
Viacom’s performance ultimately fell. Each executive was
assigned a “target” bonus and, depending on Viacom’s actual
performance, an executive’s bonus could be anywhere from
25% to 200% of the target. Because the Committee selected
more than one performance measure, the Committee weighted
each measure and then combined the weighted percentage with
Viacom’s performance to calculate each executive’s award.

According to Freedman, the Committee failed to comply
with the foregoing procedure. He contends that, in addition to
the objective performance measures drawn from the 2007 Plan,
“the Committee also used subjective, non-financial qualitative
factors to determine approximately 20% of the bonus awarded to
each Officer,” and “wrongfully arrogated to itself the positive
discretion to provide additional compensation based on the
accomplishments of each executive in a particular year.” A. 41-
42. The Committee allegedly used “positive discretion” to
increase the executives’ bonuses, resulting in an “excess” award
of $36,645,750. A. 42-47.

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 The complaint quantifies the difference between the
“earned” bonus and the actual bonus for each executive in each
of the three years at issue (2008, 2009, and 2010). For example,
in 2008 the Committee set Dauman’s “target bonus” at $9.5
million (significantly less than the maximum bonus awards
authorized by the 2007 Plan). The Committee selected two
performance goals: Operating Income, weighted at 34%, and
Free Cash Flow, weighted at 29%. It also assigned 20% weight
to qualitative factors.

The Committee then used these weighted factors—all of which
were satisfied—to reduce Dauman’s actual bonus to $7,885,000
(83% of the target). Freedman argues that the 20% of the
ultimate award attributable to qualitative factors was improper,
and thus Dauman received $1.9 million in excess compensation.
A. 42-43. Freedman characterizes this metric as a violation of
both the 2007 Plan and 26 U.S.C. § 162(m), and calculates the
total amount of excess compensation awarded to the three
executives to be $36 million.

Treasury Regulations require corporations to obtain
stockholder approval of executive compensation plans every
five years, 26 C.F.R. § 1.162-27(e)(4)(vi), and Viacom thus
sought stockholder approval of its compensation plan in 2012
(the “2012 Plan”). Viacom’s certificate of incorporation
established two classes of stock: Class A shares, which have one
vote per share, and Class B shares, which are not “entitled to any
votes upon any questions presented” to Viacom’s stockholders.
A. 156 (Certificate of Incorporation). Because Redstone owns
79.5% of Class A shares and obviously favored adoption of the
plan, Freedman reasonably contends that the passage of the 2012

8
Plan was guaranteed “no matter what the other stockholders
wanted.”1 A. 50. On March 8, 2012, the Class A shareholders
voted to approve the 2012 Plan.

On August 17, 2012, in response to the adoption and
implementation of the plan, Freedman filed a complaint in the
District of Delaware against all eleven Board members and
Viacom, asserting both a derivative and a direct claim. The
derivative claim alleged that the Board wrongfully authorized
the payment of excessive compensation. Freedman contended
that this authorization was an act of disloyalty and waste, and
unjustly enriched the recipients of the compensation. Therefore,
in Freedman’s view, the authorization was not the product of a
valid exercise of business judgment. The direct claim asserted
that the shareholder vote on the 2012 Plan violated 26 U.S.C. §
162(m) because Class B shareholders could not participate in the
vote. Freedman reads § 162(m) as requiring that all
shareholders be eligible to vote on plans to award tax-deductible
compensation, thus, to that limited extent, preempting Delaware
law which permits corporations to issue non-voting shares.
Under this reading, Viacom, by excluding Class B shareholders

1
Redstone also owns a large block of Class B shares but that
point is immaterial.
2
Freedman contends that the District Court also had federal
question and supplemental jurisdiction, see 28 U.S.C. §§ 1331,
1340, and 1367, but we need not address this possibility.
3
The five independent directors are current and former members
of the Compensation Committee. The five directors who are not
independent include the three executives receiving the
compensation at issue (Redstone, Dauman, and Dooley), as well

9
from the shareholder vote, did not satisfy federal law insofar as
the vote was intended to render the excess compensation tax
deductible. Freedman sought more than $36 million in
damages, injunctive relief preventing enforcement of the 2012
Plan, and a new vote—that would include Class B
shareholders—to approve or reject the 2012 Plan.

Defendants moved to dismiss the complaint under
Federal Rule of Civil Procedure 23.1 because Freedman had not
made a pre-suit demand on the Board, and under Rule 12(b)(6)
because his complaint failed to state a valid claim. On July 16,
2013, the District Court granted defendants’ motion to dismiss.
Freedman, 2013 WL 3753426, at *11. The Court concluded that
Freedman had failed to show that pre-suit demand on Viacom
would have been futile, and had not sufficiently alleged facts
that created a reasonable doubt that the Board took its
challenged actions after its valid exercise of business judgment.
Therefore, the Court dismissed the derivative claim. In
dismissing Freedman’s direct claim, the Court rejected
Freedman’s argument that 26 U.S.C. § 162(m) preempted
Delaware corporation law with respect to shareholder approval
of the compensation plan. Freedman has appealed from both
aspects of the July 16, 2013 order.

III. JURISDICTION AND STANDARD OF REVIEW

The District Court had diversity of citizenship
jurisdiction over Freedman’s state law claims under 18 U.S.C. §

10
1332(a)(1), and we have jurisdiction under 28 U.S.C. § 1291.2
We review a district court’s ruling on demand futility for abuse
of discretion. Kanter v. Barella, 489 F.3d 170, 175 (3d Cir.
2007). But to the extent that a party challenges the legal
precepts employed by a district court, we apply plenary review.
Blasband v. Rales, 971 F.2d 1034, 1040 (3d Cir. 1992). We also
apply plenary review to the District Court’s dismissal of
Freedman’s complaint under Federal Rule of Civil Procedure
12(b)(6). See Jones v. ABN Amro Mortg. Grp., Inc., 606 F.3d
119, 123 (3d Cir. 2010). We accept all of Freedman’s factual
allegations in the complaint as true and construe the complaint
in the light most favorable to him. Id. In making our
determination, we may consider “‘an indisputably authentic
document that a defendant attaches as an exhibit to a motion to
dismiss if the plaintiff’s claims are based on the document.’”
Steinhard Grp. Inc. v. Citicorp., 126 F.3d 144, 145 (3d Cir.
1997) (quoting Pension Benefit Guar. Corp. v. White Consol.
Indus., Inc., 998 F.2d 1192, 1196 (3d Cir. 1993)); see also In re
Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d
Cir. 1997) (explaining that courts may rely on documents
extrinsic to the complaint on which the complaint is based).
Like the District Court, we therefore consider the 2007 Plan,
Viacom’s 2012 proxy statement, and Viacom’s certificate of
incorporation.

2
Freedman contends that the District Court also had federal
question and supplemental jurisdiction, see 28 U.S.C. §§ 1331,
1340, and 1367, but we need not address this possibility.

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 IV. DISCUSSION

We reiterate that Freedman’s complaint alleged both a
derivative and a direct claim and we agree with the District
Court’s order dismissing both claims. First, the derivative claim
fails because Freedman did not meet the requirements to excuse
him from making a demand on the Board to bring the action on
the theory that it would have been futile to make the demand. In
this regard, Freedman did not comply with Rule 23.1, which
requires plaintiffs to plead with particularity their efforts to
obtain the desired action from the directors or the reasons for
not obtaining the action or making the effort to obtain that
action. Inasmuch as the complaint did not set forth any such
facts, the requirement that Freedman make a demand was not
excused. Second, the Court properly dismissed the direct claim
under Rule 12(b)(6) because the claim failed to state a cause of
action.

A. Freedman’s Derivative Claim

As we have indicated, before bringing a derivative suit, a
shareholder must make a pre-suit demand on the company’s
board of directors to give the board an opportunity to bring the
suit on behalf of the corporation. In re Merck & Co., Sec.,
Derivative & ERISA Litig., 493 F.3d 393, 399 (3d Cir. 2007);
see also Fed. R. Civ. P. 23.1(b)(3) (requiring derivative
complaints to “state with particularity” any attempted demand or
the reasons for not making the demand, i.e. why a demand
would have been futile); Del. Ch. Ct. R. 23.1 (same). Although
Federal Rule of Civil Procedure 23.1 provides the procedural
vehicle for addressing the adequacy of a derivative plaintiff’s

12
pleadings, “[t]he substantive requirements of demand are a
matter of state law.” Blasband, 971 F.2d at 1047-48. The
decision whether to bring a lawsuit is “a decision concerning the
management of the corporation and consequently is the
responsibility of the directors.” Id. at 1048 (citing Levine v.
Smith, 591 A.2d 194, 200 (Del. 1991)). Because a derivative
suit potentially could intrude into the sphere of managerial
control, the demand requirement balances the interest of
shareholders in pursuing valid claims against the interests of the
board in managing the corporation. Id.

But a court may excuse a plaintiff from satisfying the pre-
suit demand requirement if the demand would have been futile
because the board could not make an independent decision on
the question of whether to bring the suit. In general, “directors
are entitled to a presumption that they were faithful to their
fiduciary duties,” and the putative plaintiff bears the burden of
overcoming this presumption. Beam ex. rel. Martha Stewart
Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1048-49
(Del. 2004) (emphasis omitted); see also Levine, 591 A.2d at
205-06. To meet that burden under Delaware law, a complaint
must include particularized facts creating reasonable doubt
either that (1) “the directors are disinterested and independent,”
or that (2) “the challenged transaction was otherwise the product
of a valid exercise of business judgment.” Aronson v. Lewis,
473 A.2d 805, 814 (Del. 1984). “[I]f either prong is satisfied,
demand is excused.” Brehm v. Eisner, 746 A.2d 244, 256 (Del.
2000).

1. Interest and Independence of Viacom’s Board

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 As we set forth at the outset, Viacom’s Board of
Directors has eleven members, and all are defendants and
appellees in this case. The parties agree that five of the directors
are independent, and that five are not.3 Accordingly, to the
extent that the case turns on the independence of the Viacom
Board of Directors, the critical question is whether the eleventh
director, Alan Greenberg, was independent. Viacom classified
Greenberg as an independent director under its Corporate
Governance Guidelines and the NASDAQ listing standards.
However, the complaint alleges that Greenberg is not
independent because he “is a long-time close personal friend and
an adviser to Sumner Redstone.” A. 48 (Complaint ¶ 49).
Freedman supports this allegation by citing In re Viacom Inc.
Shareholder Derivative Litigation, No. 602527/05, 2006 N.Y.
Misc. LEXIS 2891, at *10-12 (Sup. Ct. June 26, 2006) (In re:
Viacom), in which a New York judge determined that the
plaintiffs’ complaint contained allegations sufficient to create a
reasonable doubt that Greenberg was interested in the
transaction at issue.4 Freedman argues that this 2006 New York

3
The five independent directors are current and former members
of the Compensation Committee. The five directors who are not
independent include the three executives receiving the
compensation at issue (Redstone, Dauman, and Dooley), as well
as Redstone’s daughter, Shari Redstone, and George Abrams.
We do not focus on the distinction between the Board as a
whole and the Compensation Committee as Freedman does not
contend that either body usurped a function of the other.

4
In re: Viacom has a subsequent case history but we need not
discuss it as it is not material to our result. See In re: Viacom,

14
Supreme Court case conclusively decided that Greenberg is not
independent, and that appellees thus are precluded from
relitigating his independence under the doctrine of collateral
estoppel.

Collateral estoppel bars relitigation where “the identical
issue necessarily [was] decided in the prior action and [is]
decisive of the present action,” and “the party to be precluded
from relitigating the issue . . . had a full and fair opportunity to
contest the prior determination.” Kaufman v. Eli Lilly & Co.,
482 N.E.2d 63, 67 (N.Y. 1985).5 The party, in this case
Freedman, asserting that another party is collaterally estopped
on a particular point has the burden of demonstrating that the
issue on which he contends that other party is estopped was
raised in the prior proceeding and was identical to the issue in
the present proceeding.6 Howard v. Stature Elec., Inc., 986

No. M-6074, 2006 N.Y. App. Div. LEXIS 14718 (N.Y. App.
Div. Nov. 30, 2006).
5
The law of the state of the issuing court—here, New York
law—determines the preclusive effects of a judgment.
Paramount Aviation Corp. v. Agusta, 178 F.3d 132, 145 (3d Cir.
1999).
6
Freedman attempts to shift the burden on the issue to
appellees. He incorrectly claims that a prior determination “is
preclusive in the second case, unless there is an affirmative
showing of changed circumstances.” Appellant’s br. at 13. The
New York Court of Appeals, in assessing whether a prior
determination that directors were independent precluded

15
N.E.2d 911, 914 (N.Y. 2013). In demand futility cases, a prior
ruling on a director’s independence does not necessarily apply in
a future proceeding addressing the same topic.7 See Bansbach
v. Zinn, 801 N.E.2d 395, 402 (N.Y. 2003) (explaining that prior
ruling on directors’ independence in demand futility context did
not apply “for all time and in all circumstances”). A
determination of a director’s independence thus is concerned
with a possibly fluid relationship and, accordingly, differs from
the determination of a fixed historical fact in the first litigation
such as a determination of which automobile went through a red
light in an automobile accident case.

We find that Freedman has failed to carry his burden to
show that the issue here is identical with the issue that the New
York Supreme Court decided in In re: Viacom. In re: Viacom

plaintiffs from claiming they were not independent, placed the
burden on the party asserting that collateral estoppel was
applicable to show the identity of the issues in the successive
litigation and did not automatically assume that the result in the
prior case was preclusive in the latter case. Bansbach v. Zinn,
801 N.E.2d 395, 402 (N.Y. 2003). We thus will decline
Freedman’s invitation to overturn the long-settled principle that
the party asserting collateral estoppel must show the identity of
issues in order to invoke it. See, e.g., Kaufman, 482 N.E.2d at
67 (“The party seeking the benefit of collateral estoppel has the
burden of demonstrating the identity of the issues….”).
7
In his brief, Freedman indicates that “[t]he sole basis for
Greenberg’s alleged lack of independence is issue preclusion.”
Appellant’s br. at 21.

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was a derivative action that various shareholders brought in
2006 against Viacom’s Board of Directors. The plaintiffs in that
case alleged that the Board breached its fiduciary duty by
approving excessive compensation packages—totaling more
than $159 million in one year—to three Viacom executives,
including Redstone. 2006 N.Y. Misc. LEXIS 2891, at *2, *6-7.
Greenberg was one of the Board members approving the
compensation. The complaint alleged that Greenberg had a
“long-standing close business and personal relationship with
Redstone,” id. at *10 (internal quotation marks omitted), and, as
Redstone’s personal investment banker, that Greenberg directly
advised him on two large acquisitions in 1993 and 1994 and on
the unwinding of one acquisition in 2004. Id. at *11. Based on
these facts—that Greenberg had “advised Redstone in his
personal affairs in two large acquisitions, provided services and
continues to provide services to Viacom”—the court concluded
that plaintiffs had advanced a reasonable claim that Greenberg
was interested in the transaction. Id. at *11-12. The court
explained that the financial benefits Greenberg had received or
potentially would receive as a result of his relationship with
Redstone created an impermissible “taint of interest.” Id. at *12.

But the issues here are not identical with those that the
court considered in In re: Viacom. First, unlike the complaint in
In re: Viacom, Freedman’s complaint does not include any
allegations regarding specific transactions in which Greenberg
participated, and does not claim that Greenberg had received or
in the future could receive financial benefits from Redstone that
could taint his independent view of the executive compensation
package at issue. Second, seven years elapsed between the

17
filing of the In re: Viacom complaint in 2005 and the filing of
Freedman’s complaint in this case in 2012. Because
“[i]ndependence is a fact-specific inquiry made in the context of
a particular case,” Beam, 845 A.2d at 1049, as well as at a
particular time, it would be inappropriate to adopt Freedman’s
suggestion that we assume that the relationship between
Redstone and Greenberg has remained static for seven years.
See Restatement (Second) of Judgments § 27 (cmt. c) (noting
that, in some cases, “the separation in time and other factors
negat[e] any similarity [so] that the first judgment may properly
be given no effect”).

Rather, as appellees point out, In re: Viacom relied on
Greenberg’s involvement through a firm with which he was
associated, Bear Stearns, in specific transactions involving
Viacom and Redstone personally in the 1990s and early 2000s.
But by 2012, Bear Stearns no longer existed, and Greenberg had
become a non-executive officer at JPMorgan Chase, the firm
that acquired Bear Stearns. JPMorgan Chase’s business
dealings with Viacom are limited, and there are no allegations in
the complaint that Greenberg has been involved in any specific
transactions with Redstone or Viacom, or that he continues to be
Redstone’s investment banker. See Appellees’ br. at 24; A. 83
(2012 Proxy Statement) (explaining Greenberg’s role at
JPMorgan and that transactions with Viacom account for less
than 1% of JPMorgan’s revenues). The complaint does not
contain any specific allegations suggesting that Redstone and
Greenberg continue to have a relationship conveying what the
court in In re: Viacom called the “taint of interest.”

Indeed, this case is indistinguishable from Bansbach v.

18
Zinn, in which the New York Court of Appeals would not apply
collateral estoppel where the party asserting it “merely rel[ied]
on the proof they put before the court in” an earlier proceeding,
but did “nothing to substantiate their claims” in the current
proceeding. 801 N.E.2d at 402. Absent concrete allegations
regarding the relationship between Redstone and Greenberg that
suggest some financial benefit or control—like those presented
in In re: Viacom—Freedman has not carried his burden to show
the identity of the issues in the two cases, and thus collateral
estoppel does not apply. As collateral estoppel with respect to
Greenberg’s independence is the only ground on which
Freedman challenges the Board’s independence, the District
Court correctly held that demand was not excused on the basis
of the application of that doctrine. See Freedman, 2013 WL
3753426, at *8. We therefore turn to the second prong of the
demand futility test.

2. Exercise of Valid Business Judgment

Because Freedman failed to prove that the Viacom Board
of Directors was not independent, he “must carry the ‘heavy
burden’ of showing that the well-pleaded allegations in the
complaint create a reasonable doubt that its decisions were ‘the
product of a valid exercise of business judgment.’” White v.
Panic, 783 A.2d 543, 551 (Del. 2001) (quoting Aronson, 473
A.2d at 814). The business judgment rule protects corporate
managers from judicial interference with their informed, good
faith business decisions. When considering corporate litigation,
courts presume that the business judgment rule applies so that
unless a plaintiff presents evidence to the contrary, the court
assumes that “the directors of a corporation acted on an

19
informed basis, in good faith and in the honest belief that the
action taken was in the best interests of the company.” Levine,
591 A.2d at 207 (internal quotation marks and citation omitted),
overruled on other grounds by Brehm, 746 A.2d 244. A
plaintiff bears a particularly heavy burden to overcome this
presumption where, as here, a majority of independent, non-
management directors approved the transaction. Id.; see also
Grobow v. Perot, 539 A.2d 180, 190 (Del. 1988) (explaining
that plaintiff bears a “heavy burden” to avoid pre-suit demand
where majority of independent, disinterested directors approved
transaction), overruled on other grounds by Brehm, 746 A.2d
244. The business judgment rule protects an independent
board’s compensation decisions, even those approving large
compensation packages. See Brehm, 746 A.2d at 262 n.56;
Grimes v. Donald, 673 A.2d 1207, 1215 (Del. 1996) (“If an
independent and informed board, acting in good faith,
determines that the services of a particular individual warrant
large amounts of money . . . the board has made a business
judgment.”).

Freedman argues that the Compensation Committee’s
actions fall outside the protection of the business judgment rule
because its actions violated the terms of the 2007 Plan.
Specifically, Freedman contends that the Committee used
subjective factors to calculate the short-term compensation
awards, thereby contravening the express terms of the 2007 Plan
and rendering the excess compensation not tax deductible.
Freedman correctly notes that in certain circumstances
transactions that violate stockholder-approved plans may not be
protected by the business judgment rule and thus the presence of
those circumstances may excuse a plaintiff’s failure to make

20
demand on the board. See, e.g., Ryan v. Gifford, 918 A.2d 341,
354 (Del. Ch. 2006) (“A board’s knowing and intentional
decision to exceed the shareholders’ grant of express (but
limited) authority raises doubt regarding whether such decision
is a valid exercise of business judgment and is sufficient to
excuse a failure to make demand.”); see also Weiss v. Swanson,
948 A.2d 433, 441 (Del. Ch. 2008) (explaining that business
judgment rule attaches only where board’s grant of stock options
adheres to stockholder-approved plan).

Key to these cases, however—and missing from
Freedman’s complaint—are particularized allegations regarding
violations of a stockholder-approved plan. In Ryan, for
example, the plaintiff provided “specific grants, specific
language in option plans, specific public disclosures, and
supporting empirical analysis to allege knowing and purposeful
violations of shareholder plans and intentionally fraudulent
public disclosures.” 918 A.2d at 355. Freedman’s allegations,
by contrast, do not provide “sufficient particularity” to survive a
motion to dismiss. See Ryan, 918 A.2d at 355.

The 2007 Plan directed the Compensation Committee to
establish performance targets from a list of objective measures,
and, if those targets were met, authorized the Committee to
award the maximum amount—the lesser of $51.2 million or
eight times the executive’s base salary. The 2007 Plan
authorized the Committee “in its sole discretion, [to] reduce the
amount of any Award to reflect the Committee’s assessment of
the [executive’s] individual performance or for any other
reason.” A. 64. Because the objective performance targets were
met in all of the years at issue, the Committee was authorized to

21
award the maximum amount provided in the Plan (the lesser of
$51.2 million or eight times base salary), or to adjust this
amount downward and award less. According to both the 2012
Proxy Statement and appellees, the Committee did use
subjective factors in determining each executive’s
compensation, but only to adjust the award downward, which
both the 2007 Plan and 26 U.S.C. § 162(m) permitted.

Freedman argues that the Committee used subjective
discretion to adjust the awards upward, and that we should
discard any claim that appellees make to the contrary because
the basis for appellees’ claim “comes only from [their] briefs.”
Appellant’s br. at 25. Freedman is mistaken. According to the
plain terms of the 2007 Plan, the only limitations on short-term
executive compensation are that (1) it only may be awarded
based on objective performance targets established by the
Compensation Committee; (2) if the target is not met,
compensation may not be awarded; and (3) if the target is met,
the award may not exceed the maximum authorized amounts.
The allegations in the complaint do not suggest that any of these
provisions were violated, and the 2012 proxy statement supports
appellees’ position that the Compensation Committee followed
the terms of the Plan in awarding short-term compensation.

Moreover, to the extent that the Compensation
Committee did use subjective factors to calculate the amount of
executive compensation awarded, Freedman has failed to
explain why the Committee is not entitled to the protection of
the business judgment rule. As discussed above, the 2007 Plan
authorizes the Committee to use subjective factors in calculating
compensation. In general, “a board’s decision on executive

22
compensation is entitled to great deference,” and “the size and
structure of executive compensation are inherently matters of
judgment.” Brehm, 746 A.2d at 263. And the Delaware
Supreme Court has held that a board does not have the duty to
preserve tax deductibility under § 162(m) when awarding
executive compensation. See Freedman v. Adams, 58 A.3d 414,
417 (Del. 2013) (“The decision to sacrifice some tax savings in
order to retain flexibility in compensation decisions is a classic
exercise of business judgment.”).

Although Freedman may disagree with the Board’s
decision to award Viacom’s executives substantial short-term
incentive compensation, the Board, acting through the
Compensation Committee, did not exceed its powers under
Delaware law, and we may not second guess its exercise of its
business judgment in this matter. Freedman was obligated to
make a pre-suit demand. Because he failed to do so, the District
Court properly dismissed his derivative claim under Rule 23.1.

B. Freedman’s Direct Claim

Freedman also alleged that the vote to approve the 2012
Plan was invalid because it did not include Class B shareholders.
According to Freedman, 26 U.S.C. § 162(m) gives all
stockholders a “binding vote” on performance-based incentive
compensation plans. Appellant’s reply br. at 11. He asserts that
Viacom violated this provision by failing to include all
shareholders in the vote on the 2012 Plan. We find Freedman’s
argument to be without merit: § 162(m) does not create
shareholder voting rights, nor does it preempt long-established
Delaware corporate law allowing corporations to issue non-

23
voting shares. Freedman purchased only non-voting shares; he
cannot now use federal tax law as a backdoor through which he
may pass to obtain rights that as a shareholder he does not
possess.

First, and most fundamentally, 26 U.S.C. § 162(m) does
not provide any voting rights to stockholders. The provision is
one subsection of a tax code provision listing the items that a
taxpayer may deduct as business expenses but specifying that
certain employee compensation exceeding $1 million is not tax
deductible. This restriction on deductibility does not apply to
qualified performance-based compensation, where “the material
terms under which the remuneration is to be paid, including the
performance goals, are disclosed to shareholders and approved
by a majority of the vote in a separate shareholder vote.” 26
U.S.C. § 162(m)(4)(C)(i)-(ii); see also 26 C.F.R. § 1.162-
27(e)(4)(i). Contrary to Freedman’s assertions, § 162(m) does
not mention voting rights or the mechanics of shareholder
voting, or include any language that even hints that Congress
intended to require that a corporation provide for voting rights
of any kind. Given this fact, Freedman has an uphill climb to
show that Congress intended both to require that corporations
grant shareholders certain voting rights, and to do so by
displacing Delaware corporate law.

Delaware law presents an obstacle to Freedman’s attempt
to obtain a judicial result that non-voting shares be allowed to
vote. Delaware law expressly grants corporations the right to
issue stock with limitations, including limitations on voting
rights. See Del. Stat. Ann. tit. 8 § 151(a) (“Every corporation
may issue 1 or more classes of stock . . . which . . . may have

24
such voting powers, full or limited, or no voting powers . . . .”);
see also Lehrman v. Cohen, 222 A.2d 800, 806-07 (Del. 1966)
(explaining that § 151(a) permits flexibility in stockholders’
rights, and confers express authority to issue non-voting stock).
In a provision consistent with this authority, Viacom’s
certificate of incorporation provides for two types of shares,
Class A and Class B. Each share of Class A stock is entitled to
one vote, but the holders of Class B stock are not “entitled to
any votes upon any questions presented to stockholders.” A.
156. Therefore, Viacom was exercising its authority under
Delaware law when it issued non-voting shares and, as a
consequence, excluded the shareholders holding those shares
from voting on the 2012 Plan.

Freedman argues that federal tax law preempts Delaware
law with respect to corporate votes but federal law does no such
thing. There are, broadly speaking, three types of preemption:
express preemption, field preemption, and implied conflict
preemption. Hillsborough Cnty., Fla., v. Automated Med.
Labs., Inc., 471 U.S. 707, 713, 105 S.Ct. 2371, 2375 (1985).
The Supreme Court directs us to two “cornerstones” in our
preemption analysis: first, “the purpose of Congress is the
ultimate touchstone in every preemption case,” and, second, we
must presume that Congress did not intend to preempt state law
absent evidence of a “clear and manifest” intention to do so.
Wyeth v. Levine, 555 U.S. 555, 565, 129 S.Ct. 1187, 1194-95
(2009) (quoting Medtronic, Inc. v. Lohr, 518 U.S. 470, 485, 116
S.Ct. 2240, 2250 (1996)). This presumption against preemption
is heightened in areas traditionally occupied by the states, such
as corporate law, “including the authority to define the voting
rights of shareholders.” CTS Corp. v. Dynamics Corp. of Am.,

25
481 U.S. 69, 89, 107 S.Ct. 1637, 1649 (1987); see also
Armstrong World Indus., Inc. by Wolfson v. Adams, 961 F.2d
405, 418 (3d Cir. 1992) (acknowledging the “states’ prerogative
to define shareholder rights”). Given that corporate law is an
“area of traditional state regulation,” Freedman has a difficult
task when he attempts to show preemption absent evidence of
Congress’s “clear and manifest” intent to supersede state law.
See Bates v. Dow Agrosciences LLC, 544 U.S. 431, 449, 125
S.Ct. 1788, 1801 (2005).

As we discussed above, there is nothing in § 162(m)—
language, structure, or otherwise—suggesting that Congress
intended to confer voting rights on non-voting shares by
preempting state corporate law that permitted the issuance of
non-voting shares. Indeed, § 162(m) is concerned only with the
tax status of various business expenses, and does not implicate
corporate structure or governance. Nonetheless, Freedman
argues that § 162(m) preempts Delaware law under two separate
theories: (1) Congress has occupied the field, and (2) the federal
and Delaware laws conflict, making it impossible for a
corporation to comply with both. Neither argument has merit.

With respect to his first theory, field preemption,
Freedman notes that “the Internal Revenue Code has occupied
the field of federal taxation.” Appellant’s br. at 34. That
occupation, however, as expansive as it may be, does not
include the field of corporate governance and shareholder rights,
matters only tangentially related to tax questions.8 After all, the

8
We have no need in this opinion to refer to even a small sample
of the circumstances in which the application of federal tax law

26
Supreme Court consistently has reiterated that corporate law,
including governance and shareholder rights, is a field
traditionally left to the states. See, e.g., CTS Corp., 481 U.S. at
89, 107 S.Ct. at 1649; Burks v. Lasker, 441 U.S. 471, 478, 99
S.Ct. 1831, 1837 (1979). Indeed, when we faced a preemption
challenge based on the body of federal law most analogous to
corporate law—securities laws—we rejected a field preemption
argument because not even all the “federal securities laws taken
together occupy the field of corporate law.” Green v. Fund
Asset Mgmt., L.P., 245 F.3d 214, 222 n.7 (3d Cir. 2001). We
thus cannot find field preemption in this case.

Freedman’s second theory, conflict preemption, fares no
better. Conflict preemption allows federal law to override state
law if it is impossible for a person to comply with both federal
and state law, or if “state law erects an obstacle to the
accomplishment and execution of the full purposes and
objectives of Congress.” Farina v. Nokia Inc., 625 F.3d 97, 115
(3d Cir. 2010) (quoting Hillsborough Cnty., 471 U.S. at 713,
105 S.Ct. at 2375). Freedman contends that the latter situation
applies here: in his view, the purpose of § 162(m) is to
enfranchise all shareholders—even those holding non-voting
shares—to vote on excess executive compensation, and thus §
162(m) conflicts with Delaware’s law granting corporations
permission to issue non-voting shares.9

depends on rights established by state law.
9
Freedman thinks this case illustrates the effect of the conflict.
Redstone controls the Class A voting shares, and this control

27
 Freedman points to one piece of legislative history to
support his argument. The House of Representatives
Conference Report discussing the Federal Omnibus Tax Bill
explains that compensation exceeding $1 million only can be
deducted if the terms of the plan authorizing the compensation
were disclosed to shareholders and “approved by a majority of
shares voting in a separate vote.” H.R. Conf. Rep. No. 103-213,
1993 WL 302291, at *587 (1993). We fail to grasp how this
report can be taken as evidence that Congress intended to
enfranchise non-voting shareholders as the explanation merely
addresses the need for the approval of the “majority of shares
voting” to authorize compensation exceeding $1 million but
does so without making reference to the shares that can vote. It
seems clear that the more natural reading of the congressional
report is that the reference to “shares voting” means “voting
shares;” it strains credulity to read this report to suggest that
Congress intended to displace longstanding state corporate
law.10

guaranteed that the 2012 Plan would be adopted as he favored
the plan. Freedman claims this circumstance is at odds with
Congress’s intent to provide all shareholders with a say over
how executive compensation is awarded. Yet if a single
shareholder controlled a majority of all of the shares of a
corporation and all the shares had equal voting rights, then
Congress would have allowed that shareholder to decide the
issue individually.
10
Even if this passage did aid Freedman’s case, we would
hesitate to rely on legislative history given that the language of §

28
 Freedman’s other basis to support his claim of conflict
preemption is that the regulations associated with other tax
provisions, concerning incentive stock options and employee
stock purchase plans, expressly mention “voting stock” when
discussing shareholder approval. See 26 C.F.R. § 1.422-3(a)
(“By a majority of the votes cast at a duly held stockholders’
meeting at which a quorum representing a majority of all
outstanding voting stock is, either in person or by proxy, present
and voting on the plan . . . .”); 26 C.F.R. § 1.423-2(c)(1)(i)
(same). Given that Congress thus “understood the difference
between ‘stock’ and ‘voting stock,’” appellant’s br. at 35,
Freedman reads the absence of this language in § 162(m) as an
indication that Congress meant for non-voting stockholders to
have a vote.

Again, Freedman’s argument misses the mark. First, he
does not cite the prefatory language to 26 C.F.R. §§ 1.422-3,
1.423-2(c)(1) which provides: “If the applicable State law does
not prescribe a method and degree of stockholder approval . . . .”
26 C.F.R. §§ 1.422-3(a), 1.423-2(c)(1). Contrary to Freedman’s
contentions, these regulations emphasize that Congress did not
intend the federal tax code to displace existing state law, and
that Congress intended to supplement state law if—and only
if—state law had not provided a mechanism for approving a
particular plan. Second, it is hard to see how the omission of a
particular phrase in implementing regulations indicates a “clear

162(m) unambiguously fails to provide the rights that he claims.
“Where the statutory language is unambiguous, the court should
not consider statutory purpose or legislative history.” In re
Phila. Newspapers, LLC., 599 F.3d 298, 304 (3d Cir. 2010).

29
and manifest” intent to include something in statutory language.
The connection is far too tenuous to overcome the presumption
against preemption.

Rather than displaying a “clear and manifest intention” to
displace state law, all evidence—the unambiguous statutory
language, as well as the legislative history and regulatory
language offered by Freedman—indicates that Congress did not
intend § 162(m) to confer voting rights on non-voting
shareholders or that it even considered that possibility. In our
view, as is often the case, the most straightforward way to read
legislation is correct: § 162(m) is nothing more than what it
purports to be—a statute providing corporations with a
mechanism by which certain otherwise excess nondeductible
executive compensation over $1 million may become tax
deductible. It does not provide voting rights to stockholders
holding non-voting shares, it does not override Viacom’s
certificate of incorporation, and it does not supersede decades of
established Delaware law. Accordingly, we do not conclude
that Congress has preempted Delaware Corporation law and we
therefore hold that the District Court properly dismissed
Freedman’s direct claim.11

11
We note that Freedman does not assert that the Internal
Revenue Service did not allow Viacom to deduct all of the
compensation it paid to the executives. Though we place only
limited significance on this circumstance, the amount of
compensation paid the executives was so large that it well may
have come to the IRS’s attention. See Lexington Nat’l Ins.
Corp. v. Ranger Ins. Co., 326 F.3d 416, 420 (3d Cir. 2003). Yet

30
 V. CONCLUSION

For the foregoing reasons, we find that the District Court
correctly dismissed Freedman’s derivative claim because he
failed to make a pre-suit demand on Viacom’s Board of
Directors, and properly dismissed Freedman’s direct claim as his
complaint did not state a cause of action. We thus will affirm
the District Court’s order of July 16, 2013.

so far as we are aware, the IRS did not challenge the
compensation’s deductibility.

31