Standard of Review for Executive Compensation Awards: In Re Investors Bancorp, Inc. Stockholder Litigation

In the case of In Re Investors Bancorp, Inc. Stockholder Litigation, stockholders filed a derivative complaint on behalf of Investors Bancorp, Inc. (the “Company”) alleging directors breached their fiduciary duties in awarding themselves grossly excessive awards under the Equity Incentive Plan (the “EIP”).

At the outset, the Court of Chancery noted that a Board’s grant of an equity compensation package is an inherently self-dealing transaction, and as such the presumptive standard of review in such cases is entire fairness.  Where, as here, the Board seeks stockholder ratification of the plan, the standard of review is business judgment or waste where there are meaningful limits on the amount of awards that can be conferred and the ratification is fully informed.

At issue in the EIP was additional equity compensation that was awarded to company directors. The EIP contained certain limits on how the stock could be awarded based on both the overall allotment of shares available and the allowed individuals and the respective percentage of shares they were entitled to receive pursuant to the EIP.  The limitations on the awards were fixed for both the employee and non-employee directors.  Pursuant to the proxy that was distributed in seeking ratification of the EIP, “[t]he number, types and terms of awards to be made pursuant to the [EIP] are subject to the discretion of the [Compensation] Committee and have not been determined at this time, and will not be determined until subsequent to stockholder approval.”  The awards contained definitive caps; however, the awards did not consist of specified amounts.

The Court noted that after the EIP “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’ that Citrix found to be essential when determining whether stockholders also approved in advance the specific awards that were subsequently made under the plan.”  Because the EIP placed proper limits on the amount of director equity compensation and the stockholders approved the EIP through a fully informed vote, the stockholders also approved the awards and the correct standard of review was waste.  As the Plaintiff had not pleaded waste, the breach of fiduciary duty count was dismissed.

The stockholders took exception to the Court’s finding that the vote was fully informed.  The stockholders alleged that the timing of the award was to avoid restrictions placed by the Federal Reserve Board (the “FRB”) rules when the Board represented that the compensation package was to serve as compensation for all the Company’s employees.  Additionally, the proxy conceded that the Board timed the EIP to avoid the restrictions implemented by the FRB.  The Court found this information was not material and did not affect the fully informed status of the vote.  Further, Plaintiffs’ allegation that the timing of the Board’s determination that additional equity compensation would be awarded shortly after the stockholder vote did not show the Board had pre-determined the amount of the awards.  The Court noted that the process was a lengthy one involving multiple meetings and discussions with outside experts.  As such, the timing of the determination of additional equity compensation did not thwart the fully informed status of the stockholder vote when the stockholders were aware that the Board would take immediate action following the vote.

The Court also held that the Stockholders inability to satisfy demand futility was also a proper grounds for dismissal.  In support of their belief that demand was futile, Plaintiffs raised a quid pro quo argument.  Essentially, plaintiffs claimed that the employee directors and the non-employee directors colluded to award themselves excessive compensation.  The Court disagreed, finding that even if Plaintiffs do not have to show the non-employee directors needed the votes of the employee directors for the approval of the awards, Plaintiffs still need to show that the non-employee directors received something in return for their vote for the Court to consider the transactions as one interested scheme.  Plaintiffs had not done this. The Court dismissed Plaintiffs’ fiduciary duties claims under 12(b)(6) and failure to allege demand futility. Plaintiffs’ unjust enrichment claim was dismissed as duplicative of the fiduciary duty claim.

Read the full opinion here.

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