I’ve written a number of articles and blogs about some sticky issues that can surface in the context of setting pay for public company non-employee directors (here, here, here, and here).
On March 6th the parties to the In re Investors Bancorp, Inc. Stockholder Litigation, filed a settlement agreement with the Delaware Chancery Court. By way of background, the Investors Bancorp decision limited the shareholder ratification defense for non-employee director equity awards that were granted on a discretionary basis. The equity plan at issue in In re Investors Bancorp, which had been approved by the company’s shareholders, provided that the maximum number of shares that could be delivered to all non-employee directors, in the aggregate, would be capped at 30% of all option or restricted stock unit or restricted stock awards available for grant under the plan. Unlike prior director compensation decisions where plans included limits on the number of shares available for grant, the Delaware Supreme Court in this case held that, because the shareholders ratified only the underlying plan but did not ratify the specific director awards being challenged, the plaintiffs breach of fiduciary lawsuit should be analyzed under a plaintiff friendly “entire fairness” standard of review (as opposed to the more deferential “business judgment” standard of review).
Key provisions of the proposed settlement agreement, are as follows:
There is a hearing scheduled for May 23rd, during which the Chancery Court will decided whether to approve the settlement agreement.
The Delaware Supreme Court decision in this case, along with this proposed settlement, make it fairly clear that adding a separate limit on non-employee director awards may not, by itself, be enough to subject director compensation decisions to the “business judgment” standard of review. While we believe establishing meaningful limits on director pay still makes sense (and according to FW Cook, 55% of the 300 public company’s surveyed in their 2018 Director Compensation Report did so), we continue to believe that public companies, to the extent they have not already done so, should consider the following additional steps in setting director pay: