## Facts

- Valeant Pharmaceuticals International (formerly ICN Pharmaceuticals, Inc.) pursued a complex restructuring involving a proposed spinoff and IPO that was later abandoned.
- The board adopted a cash bonus plan tied to the anticipated restructuring, creating a bonus pool of roughly $50–55 million; the CEO was to receive nearly $30 million and director/officer Adam Jerney about $3 million.
- The compensation committee overseeing the plan consisted of three directors who would all receive bonuses; two had long-standing personal relationships with the CEO and had discussed potential consulting arrangements with him.
- A compensation consultant was used, but it had been previously engaged by interested management (including a bonus recipient) and had already indicated the bonuses were reasonable.
- Shortly before the expected IPO, underwriters reduced the anticipated offering price; outside counsel advised reconsideration and reduction of the bonuses.
- The board approved the lower IPO price but did not revisit or reduce the bonuses; the bonuses were paid despite changed economic assumptions and despite the restructuring not being completed as initially envisioned.
- Stockholders sued derivatively; after a change in board control and an SLC recommendation, the corporation took over the action and ultimately proceeded to judgment against Jerney as the remaining defendant.

## Issues

1. Whether a director/officer who voted for and received a large bonus in a conflicted process breached the fiduciary duty of loyalty.
2. Whether the bonus decision satisfied Delaware’s entire fairness standard (fair dealing and fair price) given conflicts, domination by an interested fiduciary, and lack of arm’s-length bargaining.
3. Whether reliance on counsel and compensation consultants shielded the director from liability for an unfair, self-interested compensation decision.

## Decision

- The Court of Chancery held the bonus decision failed entire fairness as to both process and amount.
- The court found Jerney breached the duty of loyalty by participating in approving, and personally receiving, unfair self-interested compensation.
- The court rejected Jerney’s reliance-on-experts defense because the process lacked independence and the advisory input did not cleanse the conflicts.
- The court ordered Jerney to disgorge his entire $3 million bonus plus interest and imposed additional monetary liability associated with the unfair bonus scheme.
- The Delaware Supreme Court affirmed, leaving the judgment intact.

## Legal Principles

- When fiduciaries approve material compensation for themselves in a conflicted setting, the transaction is reviewed for entire fairness rather than under the business judgment rule.
- Entire fairness requires proof of both fair dealing (process) and fair price (substance); a self-interested, dominated process weighs heavily against a fairness finding.
- Advisor involvement does not restore deference or negate loyalty liability when advisors are effectively aligned with interested management and the decision-making structure is conflicted.
- A fiduciary who personally benefits from an unfair self-dealing compensation decision may be required to disgorge the full benefit, typically with interest, and may face additional monetary liability.

## Conclusion

The court held that self-approved, extravagant bonuses adopted through a conflicted and dominated process were not entirely fair, and it imposed personal loyalty-breach liability on a director/officer who voted for and received the compensation, including full disgorgement plus interest.


Valeant Pharms. Int’l v. Jerney, 921 A.2d 732 (Del. Ch. 2007)