Recent Corporate Aircraft Litigation Raises SEC Perquisite Disclosure Issues

A recent shareholder derivative action alleges that the directors of Chesapeake Energy breached their fiduciary duties to shareholders by, among other things, misleading shareholders about the true extent and true cost of personal use of the company's aircraft. The complaint raises questions about disclosure practices that could affect how public companies determine the aggregate cost of perquisites on proxy statements. It appears that the plaintiffs' bar is already targeting potential plaintiffs for similar cases using the lure of whistleblower recoveries.

Alleged Basis for Claim

The complaint filed against the company and its directors alleged that the amount of personal use of the aircraft was significantly higher than the figures disclosed in the company's proxy statement and that such use constituted a "significant" portion of the total use of the aircraft. The complaint also alleged that the total aggregate cost disclosed to shareholders as compensation in the Summary Compensation Table should have included a portion of the company's fixed costs, including the purchase price for fractional ownership of the aircraft as well as the non-variable monthly fees. The plaintiff further claimed that the additional aggregate incremental cost to the company associated with the directors travelling on corporate aircraft to board meetings should also have been reported as compensation.

Determining the Amount to Disclose as a Perquisite

SEC rules under Item 402 of Regulation S-K require registrants to calculate and disclose the "aggregate incremental costs" of providing perquisites. Unfortunately, there is virtually no guidance as to how exactly to determine what expenses should be treated as part of the aggregate incremental cost attributable to personal travel. Typically, incremental costs are considered to be the increase of costs due to a particular activity.

The predominant practice at public companies is to only include the variable costs for a particular personal flight, such as fuel, hanger fees and pilot overtime, as aggregate incremental costs for personal use of corporate aircraft. For example, if the company owns the entire plane or a fractional interest in the plane, the actual cost of purchasing the airplane or fractional interest, as well as other fixed monthly costs, is typically not included, because those are considered as not changing due to the addition of the executive's personal flights.

Disclosure Practices Attacked by the...