Seatrade Cruise News reports that Frank Del Rio, former president and CEO of Norwegian Cruise Line Holdings (NCLH), is suing NCLH and four past directors. The lawsuit, filed in the Eleventh Judicial Circuit for Miami-Dade County, alleges that to cut executive compensation expenses, NCLH directors pressured Del Rio to retire early. Del Rio negotiated an early retirement agreement to step down in June 2023 and serve as a consultant. As part of the agreement, directors agreed to pay Del Rio $1,000,000 per quarter over 4.5 years (a total of $18,000,000), from July 2023 through the end of 2027.
When Del Rio received the written consulting agreement to sign, instead of 4.5 years and $18,000,000, the terms were for just 2.5 years and $10,000,000. Del Rio claims he was told NCLH could not present the longer and more lucrative consulting agreement to its shareholders because of recent shareholder votes disapproving increases in executive compensation. The lawsuit alleges that the directors believed that they were at risk of being voted out if they informed their shareholders that they offered Del Rio, who was already the highest paid cruise executive in the history of the cruise industry, a 4.5 year consulting contract and $18,000,000.
Del Rio further claims he was told if he signed the shorter agreement, NCLH would honor the additional two-year verbal promise by amending the written agreement before it ended.
After 2025, Del Rio was not paid for the additional two years he expected. It does not appear that Del Rio provided any consulting services to NCLH after he retired.
Causes of Action Alleged in the Lawsuit
Del Rios’ lawsuit alleges fours legal theories: (1) Fraud, (2) Promissory Estoppel, (3) Negligent Misrepresentation, and (4) Civil Conspiracy. You can read the lawsuit here.
The “Say-on-Pay” SEC Rules That Sparked the Secrecy
The scrutiny which Del Rio’s lawsuit claims the board was trying to avoid stems from federal financial regulations. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, public companies must hold a non-binding shareholder vote on executive compensation at least once every three years—a practice known as “Say-on-Pay.”
The Alleged Secret, Verbal Promise
In 2021 and 2022, NCLH shareholders overwhelmingly voted against NCLH’s executive pay packages. Investors and proxy advisory firms were understandably furious that Del Rio received a massive payment of $36,400,000 in 2020 while Norwegian cruise ships were completely grounded by the pandemic, the company was hemorrhaging billions, and thousands of NCL employees were furloughed.
Exorbitant Pay Notwithstanding Corporate Losses and Thousands of Employees Terminated
We reported on these self-inflicted difficulties at the time in a series of articles:
- Nepotism and Employee Firings Plague Norwegian Cruise Line Holdings: Stock Awards During a Deadly Pandemic?
Del Rio’s lawsuit alleges that because the board members were facing massive public embarrassment and reputational damage over these “say-on-pay” votes, they could not risk disclosing another massive, guaranteed $18 million retirement payout, especially to the highest paid cruise executive. To keep investors happy while still pushing Del Rio to retire early, the board allegedly chose to split the true amount—putting $10 million on the public books and leaving $8 million as a secret verbal promise.
In order to succeed with his lawsuit, Del Rio will have to convince a jury that he and the four directors who he is suing, were part of a scheme not to reveal that they agreed to pay him $18,000,000 over a four and one-half year period and that Del Rio was tricked by the directors’ lies. This stretches credulity and defies reason. Del Rio is an experienced, savvy businessman and by far the highest paid cruise executive in the history of the world. Including his compensation in 2015 of nearly $31,000,000, he had earnings of over $175,000,000, including $22,590,000 in 2018, $17,808,000 in 2019, $36,400,000 in 2020, $22,600,000 in 2021, and $21,200,000 in 2022. Del Rio would have to prove that he reasonably relied on the lies told by the four directors that they would pay him for several additional years for services (that he never provided) when the actual written terms of the agreement which he signed say the payments would end years earlier.
The “False Proxy” Allegation:
In the lawsuit, Del Rio contends that NCLH filed a mandatory proxy statement with the Securities and Exchange Commission (SEC) telling shareholders he was being paid as a “valuable resource” for things like industry lobbying and shipbuilding. Del Rio argues that because the company never actually sought his advice once he retired, the directors effectively provided shareholders with an SEC proxy that was “false, deceptive, and misleading”—a direct violation of federal securities disclosure laws
Probable Defenses to the Lawsuit: Parole Evidence, In Pari Delicto, and Unclean Hands:
Parole Evidence:
But first, Del Rio will have to survive a motion to dismiss which will be filed by his former employer and the former directors. They will undoubtedly argue that the “parole evidence rule” prohibits the trier of fact from considering oral testimony outside the four corners of the agreement. Although Del Rio has alleged fraud and civil conspiracy, which are exceptions to the parole evidence rule, the judge will be presented with the argument that Del Rio is a highly experienced corporate leader flanked by high-priced legal counsel. Florida courts routinely rule that if a party signs a contract that clearly and explicitly contradicts a prior oral promise (i.e., signing an agreement for $10 million instead of $18 million), the party has a legal duty to reasonably rely on the oral representations and reasonably inquire. A sophisticated executive cannot blindly claim he “trusted a lie” when the paperwork explicitly states otherwise; doing so is considered an unreasonable or bad-faith blindness to reality.
In Pari Delicto:
NCLH can raise the equitable defense of in pari delicto (“in equal fault”). The premise of this defense is that a court will not grant relief to a plaintiff who basis his claim on his own participation in an improper, deceptive and possibly criminal scheme. NCLH can argue that if the board was lying to shareholders, Del Rio willingly agreed to go along with the deception by signing a public contract he knew was incomplete. Because he allegedly participated in a bad-faith plan to mislead investors, he cannot now ask a court of equity to enforce the “secret” part of that wrongful scheme.
Unclean Hands:
Because Del Rio is seeking damages arising from an alleged civil conspiracy, NCLH can invoke the “unclean hands” doctrine. This equitable defense bars relief to a plaintiff who has acted unethically or in bad faith. NCLH will argue that Del Rio is acting with unclean hands by attempting to enforce an unwritten corporate payout that he admits was intentionally concealed from the company’s shareholders.
Frank Del Rio’s SEC Liability Exposure:
Ironically, by filing this lawsuit to claim his unpaid $8 million, Del Rio may have inadvertently exposed himself to SEC scrutiny and liability.
- The Integration & Certification Trap: As the sitting President and CEO when these early retirement and initial consulting terms were negotiated in late 2022, Del Rio was legally responsible for the accuracy of corporate disclosures.
- Co-Conspirator or Participant Scrutiny: Del Rio’s complaint admits that he knew the written contract was altered to 2.5 years and $10 million specifically so the company could hide the true $18 million footprint from shareholders. In the eyes of federal regulators, agreeing to sign a truncated public contract while relying on a secret “under-the-table” oral agreement can be interpreted as participating in or facilitating a scheme to mislead investors.
- Clawback Risks: If the SEC determines that NCLH’s executive compensation disclosures were fraudulent during his final months, it could trigger clawback mechanisms on the massive executive payouts Del Rio received during his tenure.
Why Isn’t the SEC investigating Del Rio?
Because Del Rio’s lawsuit documents a coordinated effort to keep an executive payout off the books to manipulate shareholder votes, the SEC has full authority to open an independent investigation. If they do, the directors may face potential liability for constructing a false narrative, but Del Rio faces equal if not greater liability for knowingly signing off on a public disclosure that did not reflect the true scope of his financial arrangement.
Conclusion
Del Rio’s latest money-grab is best understood considering that he is by far the highest paid CEO of a cruise company in the history of the cruise industry after collecting over $175,000.000 from January 1, 2015 to June 30, 2023. Del Rio is perhaps best known for the exorbitant income he received in 2020 of $36, 380,000 (closely followed by the $31,000,000 he collected in 2015). In 2020, NCLH lost $4 billion and employee salaries of crew members and shoreside employees were cut by 20% as the cruise company struggled to handle COVID-19-related shutdowns. Not surprisingly, with Del Rio at the helm, NCLH had one of the highest CEO-median crew member ratio typically of over 1,000 to 1.
During Del Rios’ tenure as CEO from January 1, 2015 to June 30, 2023, NCLH’s stock dropped 58.71% from $45.60 when he started to $18.83 when he retired.
However the case goes, at the end of the day, the $8,000,000 “underpayment” Del Rio is claiming is less than 5% of his total income as the CEO from 2015 to June 30, 2023. Is it really worth the risk of a SEC investigation by coming up with a legal theory that he secretly agreed to additional compensation and conspired with the directors to kept the shareholders in the dark in the hopes of collecting another $8,000,000?
We will be following this freak show of a lawsuit closely over the next several months.
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Image credit: CNBC (screen grab) via Shareholders to CEO Del Rio: Thumbs Down to $36,400,000 Compensation