Delaware Chancery Court Dismisses Suit Challenging Board Compensation Awards Under A Stockholder-Approved Compensation Plan

by Shearman & Sterling LLP
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On April 5, 2017, Vice Chancellor Joseph R. Slights of the Delaware Court of Chancery granted defendants’ motion to dismiss a stockholder derivative suit against the directors of Investors Bancorp, Inc., which had asserted a claim for breach of fiduciary duty in connection with the directors’ decision to grant themselves restricted stock and stock options under an equity compensation plan previously approved by a stockholder vote.  In re Investors Bancorp, Inc. Stockholder Litigation, C.A. No. 12327-VCS (Del. Ch. Apr. 5, 2017).  Plaintiffs, Investors Bancorp stockholders, had challenged the awards as “grossly excessive compensation” and also alleged that stockholder approval of the equity compensation plan was ineffective because the plan did not contain “meaningful limits” and, in any event, the disclosures in connection with the vote were materially misleading.  But the Court found that the plan—even as alleged—did contain “director-specific limits” on equity compensation, the awards were within those limits, and the stockholder vote was fully informed.  Therefore, the Court held that the stockholder approval constituted “ratification of the awards,” rendering them subject to the “business judgment rule’s presumptive protection” and reviewable only as “waste,” which plaintiffs did not plead.

In the first half of 2015, the board of Investors Bancorp adopted an equity compensation plan, which reserved a set amount of shares of the company’s stock for restricted stock awards and stock options for the company’s officers, employees, and non-employee directors.  The plan also set separate limits on the numbers of shares that may be awarded to any one employee and to non-employee directors.  Pursuant to a proxy filed on April 30, 2015, the plan was put to a stockholder vote on June 9, 2015.  Of the shares voted, 96.25% voted to approve the plan (representing 79.1% of the total shares outstanding). 

Beginning on June 12, 2015, the compensation committee of the board held four meetings that ultimately resulted board approval of substantial stock option and restricted stock awards to all of the company’s directors, including the two employee directors, the CEO and COO, whose grants were valued at more than $16 million and $13 million, respectively. The awards were announced on April 14, 2016.  Plaintiffs filed suit shortly thereafter, asserting claims for breach of fiduciary duty and unjust enrichment.   

Vice Chancellor Slights explained that the “key issue” is “whether the stockholder approval of the [plan] will be deemed ratification of the awards under the plan.”  In this regard, the Court declined to accept plaintiffs’ argument that the only circumstance in which a stockholder vote could prospectively ratify a board’s decision to approve equity awards to directors is when the plan is “completely self-executing” in that it provides a fixed amount of compensation or “specifically impose[s] meaningful limits on the directors’ ability to compensate themselves.”  Instead, the Court held that “approval of plans with ‘specific limits’ . . . will be deemed as ratification of awards that are consistent with those limits,” and “this plan included director-specific limits that differed from the limits that applied to awards to other beneficiaries under the plan.”  The Court also rejected plaintiffs’ contentions that the disclosures in connection with the vote were insufficient, finding plaintiffs had only “pointed to omissions that are not material as a matter of law or . . . selectively referred to portions of the Proxy without providing full context.”   Thus, the Court held, “[b]ecause the [plan] (with director-specific limits) was approved by a fully informed stockholder vote and Plaintiffs have not pled a claim for waste, Plaintiffs have failed to plead a claim of breach of fiduciary duty against Defendants relating to subsequent awards issued under the [plan].”

The Court also dismissed plaintiffs’ claim for unjust enrichment as duplicative of the deficient fiduciary duty claim.  Additionally, as an alternative ground for dismissing the claim with respect to the two executives, the Court found that plaintiffs did not demonstrate that demand on the board would have been futile (as required for stockholder derivative claims pursuant to Court of Chancery Rule 23.1) because the complaint did not raise reasonable doubt as to the independence or disinterestedness of a majority of the board.   

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