A Shareholder Action Against the Board of Directors

Last October 23rd, a shareholder action was initiated against the board of Skechers – you know, the slip-on comfortable shoe company.

It was somewhat unique because while it was brought against the directors, it was due to the behavior of the CEO, Robert Greenberg, and his two sons, both senior Sketchers’ execs.

Shareholder Suit

The suit brought by a shareholder against the Manhattan Beach, Calif., Company’s board of directors claims there were no limits placed on CEO Robert Greenberg and his two sons.

Using Corporate Assets for Private Use

The suit claims that the Greenberg’s used Sketchers’ corporate jets to take trips to “tropical vacations in Fiji, Bora Bora, and Hawaii,” among many other exotic locations in the Caribbean and Europe.

The planes, a pair of twin-engine eight-seat Bombardier Global Express jets, cost more than $4,400 per hour to operate, according to the action.

The plaintiff calculated that in 2020, 56% of one of the Bombardier jet’s flight time consisted solely of the Greenberg’s personal use and went up in 2021 during the height of COVID to “a whopping 64% for one of the planes.”

Bloomberg reported that the Skechers’ executives “incurred costs of as much as $1.1 million each on personal travel in recent years.” Bloomberg also reported, as repeated in the complaint, that “Most similar companies cap jet use well below those levels . . . the average corporate plane expenses among S&P 500 executives was about $54,000.”

The Shareholder Complaint

The complaint was brought against the Greenberg’s and the Sketchers’ Board of Directors. While noting that “private jet access is a prerequisite granted under the Skechers managers’ compensation plans, the [executives] personal use of the planes was way beyond excessive.”

The complaint was brought against the directors due to their ‘lack of oversight’ of the Greenberg’s “private jet use” which “is costing the company significant money.”

In other words, the Greenberg’s are abusing the benefit, and the board is not only fully aware of this but is doing nothing to stop it.

The complaint claimed:

  • Count I: the Greenberg’s breached their fiduciary duties “by expropriating [Sketchers’] assets” for their own personal use.
  • Count II: asserted a claim for waste against the directors for failing to prevent the allegedly excessive personal airplane use.
  • Count III: asserted claims for breaches of the duties of disclosure and candor for causing Sketchers to issue a Proxy allegedly omitting material information and including materially false or misleading information about the Management Defendants’ personal airplane use.
  • Count IV: asserted that the Defendants breached their employment agreements through “unreasonable” personal use of the airplanes.

About The Perk

Use of the Plane is Part of Executive Compensation.

Again, the use of the planes was a part of the executive compensation package as long as the use was “reasonable.” From the employment agreements:

Employee will be entitled [sic] to reasonable use of the Company’s private airplane, subject to availability determined by the Company’s business needs and the ranking of Company employees who are entitled to use the airplane. Use of the airplane solely for business purposes will not be treated as compensation to Employee. Use of the airplane with a guest or for other personal matters will be treated as compensation to Employee, and will be reported on an IRS W-2 Form issued to Employee. The Compensation Committee of the Company’s Board of Directors will have sole discretion (i) to determine whether or not Employee’s use of the airplane will be treated as compensation to Employee, (ii) to determine the amount of compensation that will be attributed to Employee, in accordance with IRS regulations, and (iii) to put limitations on Employee’s use of the airplane for purposes treated as compensation to Employee.4 If the Management Defendants do not reimburse Sketchers for their personal airplane travel, their use is treated as taxable personal income.

Briefly, the personal use of the planes was to be treated as part of their compensation and taxed as such.

Case Dismissed

Holding Directors Liable for Not Doing Something is a No Go

This case was dismissed in February. The judge had expressed his reservations when the case was filed with, “It makes me nervous to be asked to hold directors liable solely because they may have chosen not to do something.” Especially, it may be added, when that ‘something’ had to do with limiting executives’ contractual rights.

In the end, though, the judge took the path of least resistance to dismiss the case: the plaintiff never made a demand to the board that they take action. He went straight to court instead.

Here’s how it’s supposed to work:

A derivative complaint must “allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and the reasons for the plaintiff’s failure to obtain the action or for not making the effort.”

A stockholder may pursue a derivative claim on behalf of a corporation only if either: “(a) she has first demanded that the directors pursue the corporate claim and they have wrongfully refused to do so; or (b) such demand is excused because the directors are deemed incapable of making an impartial decision regarding the pursuit of the litigation.”

That simple step was an absolute necessity – but it should not be assumed in any way that it would have resulted in the case going forward or a positive result at trial. While dismissing the case, the judge also took the time to note that the case had numerous holes.