Waste not.

• Author: Kaback, Hoffer
• Position: Quiddities - A board's accountability for the wasting of corporate assets - Column

A board should be held accountable for wasting corporate assets even if its 'due consideration' is cosmetically pristine.

The phrase "corporate waste" does not refer to efflux from an industrial plant but to the legal and governance principle (known in full as "waste of corporate assets") that a board may not, with impunity, throw corporate property down the toilet.

Inextricably bound up with the notion of waste is the business judgment rule. Yet settled law in Delaware is that directors are liable for waste only if they approve an exchange that "is so one-sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration." In its Principles of Corporate Governance, the American Law Institute (ALI) puts forward a similar formulation.

The highly publicized suit challenging Disney's large payout to former executive Michael Ovitz involved allegations of waste, but the Delaware Chancery Court's recent decision in that case centered on other legal aspects. It's fruitful, instead, to consider a 1990 case, Sullivan v. Hammer, involving that unusual business personality Armand Hammer. (The late Dr. Hammer, Occidental Petroleum's founder and long-time chairman, also figures in the Q&A on page 16.)

The stock market viewed Hammer as mercurial and unpredictable, and as running Oxy more like a private fiefdom than a public company. Whenever there were market rumors that Hammer had had a heart attack, Oxy stock went up.

Sullivan v. Hammer shows why. It reveals how Hammer and the Oxy board operated.

A special committee of the board approved Oxy's doing the following beneficent acts for the Armand Hammer Museum of Art and Cultural Center: funding $50 million of construction costs; granting a 30-year, rent-free lease; funding an annuity for the museum at an after-tax cost of $24 million; and granting it an option to purchase the museum complex at the end of 30 years.

Suit - and settlement discussions - followed. Unhappy with the proposed settlement and the whole situation but feeling constrained by the business judgment rule, Delaware Vice Chancellor Hartnett wrote as follows:

"If the Court was [an Oxy] stockholder it might vote for new directors, if it was on the Board it might vote for new management and if it was a member of the Special Committee it might vote against the Museum project.... The business judgment rule...stands as an almost impenetrable barrier to the plaintiffs... The [board]...