Shareholder Derivative Litigation
- challenges to Director Compensation
2017.12.19 From Delaware's Supreme Court: Dramatic Change in Shareholder Approval Rule. Gone is Delaware precedent under which the business judgement rule protected directors who made equity awards to themselves within "meaningful limits" that stockholders had previously approved. Delaware's Supreme Court enunciated the following new standard in deciding In re Investors Bancorp:
Overall, only shareholder approval of exact awards will insulate directors from shareholder derivative litigation. Here are steps that are recommended for corporate directors to follow when making decisions about their own compensation:
Overall, directors risk costly litigation if they lose business judgment protection because courts will then apply an entire fairness standard (discussed in several of the cases below) when evaluating shareholder claims alleging director compensation is excessive.
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), to submit that limit to a shareholder vote next year, to make enhanced proxy statement disclosures about the determination of director compensation, and to use an independent consultant to assist with peer data and the annual determination of proper cash and equity-based compensation.
2015.Sept.24 Director Compensation - What to Limit to Defuse Litigation?
In a well-publicized Citrix decision earlier in 2015, Delaware's Chancery Court comprehensively reviewed past shareholder derivative litigation alleging excessive compensation for directors. That decision, Calma v Templeton (4/30/2015), focused on the circumstances under which shareholder approval would either secure highly deferential court review under the business judgement rule, or result in review under an "entire fairness" standard that generally enables such litigation to survive a motion to dismiss. In the wake of the Citrix decision, it has become common for public companies to consider receiving shareholder approval of some director compensation limit when they seek approval for new or amended stock plans. Should approval relate to total compensation, or focus on equity awards.
The safest course involves seeking shareholder approval of a reasonable limit on total compensation - cash plus equity. Any such provision needs careful drafting to avoid precluding a board member from, for example, later collecting special compensation for extraordinary services. A reasonable shareholder-approved limit imposed solely on equity compensation has one notable drawback: any cash compensation could arguably be contested a having made overall compensation excessive. Although the caselaw is nuanced, the message is clear: seek shareholder approval of reasonable limits on director compensation because there is case law momentum that is sure to fuel more shareholder derivative actions. Note we suggested this defensive action almost three years ago, in our Cannons Article reviewing U.S. executive compensation litigation risks.
2014.Jun.26 Delaware Chancery Again Requires "Entire Fairness" . . . in order to justify director compensation. See Cambridge Ret. Sys. v. Bosnjak, 2014 Del. Ch. LEXIS 107 (Del. Ch. June 26, 2014). Law360 reported as follows:
2014.June.9 Director Compensation - FaceBook Struck with Shareholder Litigation.
A Facebook shareholder has launched derivative litigation in Delaware Chancery Court, seeking to recover "unfair excessive compensation" being paid to directors (quoting from this Bloomberg article). The lawsuit alleges corporate waste, breach of fiduciary duties, and unjust enrichment.
2013.Nov.13 Mere Eligibility for Future Stock Awards does not Make Directors "Interested"
An amended complaint in a shareholder derivative action was dismissed with prejudice after revised allegations failed to excuse demand on the board. The court explained in Abrams v Wainscott (D.DE, 11/13/13):
2013.Oct.11 "Spring-loading" of Director Compensation, alleged by Shareholders
The appearance of grant-making based on inside information has fueled past shareholder derivative lawsuits, as well as the adoption of corporate guidelines for the timing of stock option and other awards (and SEC rules requiring their disclosure). Boards should not let their guard down however. Law360 reports that Peregrine Pharma's directors have been sued in a shareholder derivative suit asserting claims that they awarded themselves excessive compensation, quoting from the article:
2012.Jul.09 Delaware Court Permits Claims to Proceed re Director Equity Awards
The typical omnibus stock plan includes non-employee directors among the list of those eligible to receive discretionary stock awards. Shareholder approval of those plans will not alone insulate directors from claims that they have awarded themselves excessive compensation, based on refusal to dismiss such a claim in Seinfeld v. Slager, DE Ch, 6/29/2012.
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