Follow-Up on Litigation Over Non-Employee Director Stock Awards

There have not been many new developments on this topic for a while, but I wanted to reassure readers that courts are upholding directors’ decisions regarding their own compensation in situations where the appropriate formalities have been followed, in accordance with previous rulings. Just last week, in In re Investors Bancorp, Inc., the Delaware Chancery Court upheld the decision of Investors Bancorp directors’ to award themselves restricted stock and stock options under a plan previously approved by the company’s stockholders. The company’s equity compensation plan contained explicit limits on awards to non-employee directors and had been disclosed to and approved by shareholders, relying, in part, on the Citrix case.

Critically, this plan included director-specific limits that differed from the limits that applied to awards to other beneficiaries under the plan. Based on settled guidance in this area, particularly In re 3COM Corp. S’holders Litig. and Calma on Behalf of Citrix Systems, Inc. v. Templeton (“Citrix”),[fn] I conclude that the fully informed stockholder vote that approved the plan extended to the awards themselves, which indisputably fell within the limits set by the plan.

However, the Court indicated that it would not automatically waive through all non-employee director awards under shareholder approved equity compensation plans—even plans with limits on awards to non-employee directors. 

In some instances, the court has determined that any purported limit on the total amount of equity compensation allowed under a plan approved by stockholders was, in fact, no limit at all. In these cases, this court has refused to deem approval of the overall plan as approval of any awards directors might give themselves under its terms and has reviewed the awards under the entire fairness standard of review.

So keep up the good drafting.

This entry has been created for information and planning purposes. It is not intended to be, nor should it be substituted for, legal advice, which turns on specific facts.