Director Compensation - Plan Limits and Shareholder Approval
As discussed under Director Compensation Litigation (with links to cases), two Delaware decisions - notably 2012's Seinfeld v. Slager and 2015's Calma v. Templeton (re Citrix) -- have opened the door for shareholder derivative litigation alleging excessive director compensation. Both decisions refused to dismiss such claims, holding that the highly-deferential business judgment rule did not apply because directors are self-interested in their compensation. That standard would have applied, however, if directors had set their compensation within a "meaningful" limit that had previously received shareholder approval, per In re 3COM Corp. S’holders Litig., No. C.A. 16721, 1999 WL 1009210, at *1 (Del. Ch. Oct. 25, 1999), as amplified by subsequent Delaware decisions. See the entry below for 2016.Oct.30 re "meaningful" limits.
In response, it is becoming common for public companies to include a limit on director compensation when they propose new equity award plans for shareholder approval. See Director Comp Survey Data for a recent report that 3% of Fortune 500 companies have received shareholder approval for a total pay limit, with 25% of stock plans including a dollar or number limit on awards to directors. See this Frederic W. Cook Survey from Nov. 2016 for these well-taken insights supported by survey data:
LIMITATIONS ON TOTAL DIRECTOR COMPENSATION:
2016.Oct.30 Equilar Data Highlights "Meaningful Limit" Risk. As the following quote indicates (from this Equilar survey), more and more plans are including shareholder-approved limits on director compensation. Those limits need to be reasonable, however, in order to defuse litigation risks alleging directors paid themselves excessive compensation. Companies may need to be more careful about the limits they choose, because the Equilar report includes a table showing that plan-imposed dollar limits on director compensation have skyrocketed compared to median director pay. In general, shareholder-approved limits should reflect consideration of independent survey data focused on total director compensation. A limit reflecting a low multiple of current director compensation (2x to 3x per this Reuters article) would seem safely reasonable under the case law, but the issues are more nuanced and the best companies make these decisions only after thoughtful deliberations that are carefully recorded.
2015.Dec.16 Jacobs Engineering - proxy statement's proposed amendment to 1999 Outside Director Stock Plan:
Notwithstanding anything to the contrary herein, no Outside Director shall receive in excess of $600,000 of compensation in any calendar year, determined by adding (i) all cash compensation to such Outside Director and (ii) the fair market value of all Awards granted to such Outside Director in such calendar year, based on the fair market value of such Awards on the Grant Date (as determined in a manner consistent with that used for Director compensation for proxy statement disclosure purposes in the year in which the Award occurs). The foregoing limit on Outside Director compensation only applies to compensation for customary Board services, and does not apply to compensation for special Board services, e.g. chairing the Board, which shall be subject to the limit set forth in the next sentence of this paragraph. The Board may make exceptions to this limit for individual Outside Directors in extraordinary circumstances, so long as this paragraph would not be violated if the $600,000 figure were instead $750,000, as the Board may determine in its sole discretion, provided that the Outside Director receiving such additional compensation may not participate in the decision to award such compensation or in other contemporaneous compensation decisions involving Outside Directors.
2015.Jun.08 Caladrius - proxy statement's proposed 2015 Equity Incentive Plan:
LIMITATIONS ON STOCK AWARDS ONLY:
2017.04.10 Director Pay Litigation - Dismissed due to Plan Limit. In a comprehensively reasoned decision, Delaware's Chancery Court has endorsed the following plan provision as a shareholder-approved limit that would result in the high level of judicial deference -- afforded under the business judgment rule -- to equity awards directors made to themselves within that limit:
See Director Compensation Litigation under 2017.04.10 for further discussion of the In re Investors Bancorp case, including precautions boards should take when taking actions that relate to their compensation.
2016.09.09 Settlement of Citrix Director Compensation Litigation. Law360 reports that a Delaware Chancery Judge approved the settlement of shareholder derivative litigation under which Citrix agreed to limit annual stock awards to directors to $795,000 (roughly two times the highest past levels). Further info atDirector Compensation Litigation.
2015. Intel - proxy statement's proposed amendment of 2006 Equity Plan provision:
Each year, each non-employee director may be granted awards for a number of shares established by the Board, but the number of shares subject to such awards may not exceed 100,000 shares each fiscal year. This limit is subject to adjustment to reflect stock splits and similar changes in Intel’s capitalization. Subject to limits in the plan terms, the Board has the discretion to determine the form and terms of awards to non- employee directors. Our current practice is to grant each non-employee director a mix of RSUs and OSUs each January with target value of approximately $220,000.
2015.Apr.27 GoPro - proxy statement's proposed Equity Plan provision:
The aggregate number of Shares subject to Awards granted to a Non- Employee Director pursuant to this Section 12 in any calendar year shall not exceed 1,000,000.
2015.Apr.22 Walmart - proxy statement's proposal for 2015 Stock Incentive Plan:
Notwithstanding the foregoing, no Non-Management Director may be granted a Plan Award denominated in Shares with respect to a number of Shares in any one Fiscal Year which when added to the Shares subject to any other Plan Award denominated in Shares granted to such Non-Management Director in the same Fiscal Year would exceed a Share value of $500,000; provided, however, that if the Performance Period applicable to a Plan Award granted to a Non-Management Director exceeds twelve months, the $500,000 limit shall apply to each 12-month period in the Performance Period. For sake of clarity, the $500,000 annual limit on Shares subject to any Plan Award granted to a Non-Management Director applies to Options granted under Section 6.1, Stock granted under Section 7.1, Restricted Stock granted under Section 7.2, Restricted Stock Units granted under Section 8.1, Stock Appreciation Rights granted under Section 9.1, and Performance Units granted under Section 10.1, but shall not include any Shares granted in lieu of cash compensation earned by a Non-Management Director or any Shares received by a Non-Management Director in settlement a Plan Award pursuant to Sections 6.3, 7.4, 8.3, 9.5, and 10.6.
2015.Apr.10 Wintrust Financial - proxy statement's proposed 2015 Stock Incentive Plan:
The aggregate grant date fair value of shares of Common Stock that may be granted under the Plan during any fiscal year of the Corporation to any Director shall not exceed $300,000; provided, however, that (i) the limit set forth in this sentence shall be multiplied by two in the year in which a Director commences service on the Board and (ii) the limit set forth in this sentence shall not apply to Awards made pursuant an election to receive the Award in lieu of all or a portion of fees received for service on the Board or any committee thereunder.2015.Mar.27 Timken Company -- proxy statement's proposed LTIP provision:
No Nonemployee Director will be granted, in any period of one calendar year, awards in excess of 6,000 Restricted Shares, 7,500 Common Shares, 7,500 Restricted Stock Units and 9,000 Option Rights.
2015.Mar.27 Eaton -- proxy statement's proposed 2015 Stock Plan:
6. Non-employee Director Awards
The Governance Committee may grant restricted shares, restricted share units or other share-based awards to non-employee directors of the Company at such times and subject to such terms and conditions as may be set forth in an Award Agreement as approved by the Governance Committee. Notwithstanding the foregoing, in no event will the grant date fair value (as determined for financial accounting purposes) of the awards granted to any one director in any one calendar year exceed the value of two-times the annual cash retainer in effect on the date of grant. Restricted shares are actual shares issued to the non-employee directors which are subject to the terms and conditions set forth in the Award Agreement as approved by the Governance Committee. Restricted share units are rights to receive shares (or cash equal to the fair market value of the underlying shares) at the end of a specified restricted period, subject to the terms and conditions set forth in the Award Agreement as approved by the Governance Committee. Notwithstanding anything to the contrary herein, no non-employee director shall receive any award under the Plan for a particular year if that director receives such a grant under any other stock plan of the Company.
2015.Mar.12 Cabot Corp - proxy statement's proposed 2015 Directors' Stock Compensation Plan (proposal 3):
The maximum grant date fair market value of common stock that may be granted under the Directors’ Plan in any calendar year during any part of which any non-employee director is eligible to receive an award is $400,000. The limit for a non-employee chairman of the board or a lead director is $500,000. In each case these limits are determined based on the fair market value of a share of common stock on the date the shares are issued under the Directors’ Plan.
2013.May.21 Shareholder Approval of Director Compensation. Digirad's 2013 proxy statement sought shareholder approval for its director compensation, with a 61% approval vote being the result (just below its say-on-pay approval level, per 8-K).
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