As reported in a prior blog post, public company employers that are adopting or amending equity-based compensation plans should consider adding a separate annual limit on director equity awards.  In a recent Delaware Chancery Court opinion (Calma v. Templeton), the Chancery Court refused to grant the board of directors of Citrix Systems, Inc. the protection afforded by the business judgment rule when they approved equity awards to themselves under the Company’s 2005 shareholder-approved equity compensation plan. The Chancery Court’s failure to review the director equity awards using the business judgment rule meant that the shareholder derivative action in Calma could proceed to trial under a more plaintiff-friendly “entire fairness” standard of review.

The equity compensation plan at issue provided that the maximum number of shares that could be awarded to any one participant (including any director) at any given time under the plan was 1,000,000. The plan did not impose a separate sublimit on director equity awards and, based on Citrix’s stock price at the time plaintiffs brought suit in Calma, the Chancery Court noted that the board could have awarded each director $55,000,000 worth of restricted stock unit awards.

In reaching its decision, the Court drew upon the principles set forth in its 2012 ruling in Seinfeld v. Slager.  Even though the Citrix equity plan was approved by the Citrix shareholders, Citrix did not ask its shareholders to take “any action bearing specifically on the magnitude of compensation for the Company’s non-employee directors.” The Citrix equity plan did not set forth any “director-specific ceilings” on the amounts the directors could receive under the equity plan independent from the generic annual limits applicable to other equity plan participants.  In light of Seinfeld v. Slager and this more recent decision in Calma v. Templeton, employers interested in the deferential standard or review afforded by the business judgment rule may wish to consider (1) adding a separate, meaningful annual limit for director equity awards, and (2) asking the shareholders to approve the director-specific limit.