Does A Director Have A Contractual Right To Compensation?

Yesterday, I wrote about stockholder challenges to director compensation.  Today’s post considers what happens when a director joins a board.  When someone is invited to join a board, she may ask about compensation.  The company may refer the candidate to the disclosure regarding compensation in the company’s proxy statement.  When the candidate agrees to join the board, does that create a contract?

It so happens that this precise issue was litigated a few years back in Race v. Bally Techs., Inc., 2008 U.S. Dist. LEXIS 98362 (N.D. Cal. Nov. 25, 2008).  The defendant in that case was a Nevada corporation and it argued that the unpaid director could not pursue a breach of contract claim because NRS 78.140 (which was discussed in yesterday’s post) vests the board of directors with the authority to determine director compensation.

Judge Claudia Ann Wilkin noted that neither party had cited “any case brought by a corporate director to recover compensation he or she claimed was owed in exchange for his or her service on the board.”  Thus, she turned to ordinary principles of California contract law.   Why is a bit of a mystery because the defendant was incorporated in Nevada and Judge Wilkin provided no choice of law analysis.  In any event, she found that nothing in her analysis of California contract law to be repugnant to Nevada law.

Board resolutions don’t usually provide the same degree of specificity of a written agreement.  Thus, it is not surprising that the parties disputed the terms of the contract.  The plaintiff argued that options granted at the annual stockholders’ meeting were compensation for service in the prior year while the corporation argued that they were compensation for the ensuing year.  Judge Wilkin didn’t decide this issue because she was ruling on motions for summary judgment.  Thus, her decision was limited to whether there was a triable issue of fact (she found that there was).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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