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Another Reminder that Director Limits set forth in Equity Plans Allow Director Compensation to be Reviewed under the more Lenient Business Judgment Rule

Earlier this month, in In re Investors Bancorp, Inc. Stockholders Litigation, the Delaware Court of Chancery reiterated its view that placing a meaningful limit on director equity awards to be granted under a stockholder approved equity plan allows the court to determine whether director equity awards are excessive under the more lenient business judgment rule.

The Equity Incentive Plan

In Bancorp, stockholders brought suit over equity grants to directors under the company’s 2015 Equity Incentive Plan (the “Plan”).  The terms of the Plan provided the following limits applicable to the directors:

  1. a maximum of 4,411,613 shares, in the aggregate (25% of the shares available for stock option awards), may be issued or delivered to any one employee pursuant to the exercise of stock options;
  2. a maximum of 3,308,710 shares, in the aggregate (25% of the shares available for restricted stock and restricted stock unit awards), may be issued or delivered to any one employee as a restricted stock or restricted stock unit grant; and
  3. the maximum number of shares that may be issued or delivered to all non-employee directors, in the aggregate, pursuant to the exercise of stock options, restricted stork or restricted stock units shall be 30% of all options or restricted stock shares available for awards, all of which may be granted in any calendar year.

The Plan was approved by stockholders and the Compensation Committee of the Board of Directors subsequently granted awards of restricted stock and stock options to members of the Board of Directors. Several stockholders brought suit alleging that the directors had breached their fiduciary duty by awarding themselves “grossly excessive compensation.”

The Court Confirms the Application of the Business Judgment When Meaningful Limits are Put Into Place

The court reiterated a line of recent cases that have stated that equity grants to directors will be reviewed pursuant to the business judgment rule if the Plan approved by stockholders set forth “meaningful limits” on directors’ ability to compensate themselves.

The court rejected the stockholders’ view and held that “[o]nce the plan sets forth a specific limit on the total amount of options that may be granted under the plan to all directors, whether individually or collectively, it has specified the ‘director-specific ceilings’” and therefore, specific individual award approval by stockholders is not necessary in order for the limits to be deemed meaningful. Once the stockholders have approved meaningful limits, director compensation is not deemed to be “self-dealing” subject to an “entire fairness” review, but instead judged under the same standard as executive compensation approved by a disinterested committee.

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Alexander K. Song is a Mintz Associate whose practice focuses on all aspects of executive compensation, including drafting of equity and incentive compensation plans and award agreements. Alex also handles employment, change-in-control, and severance arrangements for executive officers.