[Update. This case was overruled on appeal. See our analysis here.]
The Delaware Court of Chancery examined equity grants to directors in In Re Investors Bancorp, Inc. Stockholder Litigation. The equity incentive plan, or EIP, at issue included the following limitations on grants:
- 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;
- A maximum of 3,308,710 shares, in the aggregate (25% of the shares available for restricted stock awards and restricted stock units), may be issued or delivered to any one employee as a restricted stock or restricted stock unit grant; and
- 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 or grants of restricted stock or restricted stock units shall be 30% of all option or restricted stock shares available for awards, “all of which may be granted in any calendar year.”
The EIP was put to a stockholder vote at a subsequent annual meeting. Of the shares voted at the meeting, 96.25% voted to approve the EIP (representing 79.1% of the total shares outstanding).
A series of Board and Compensation Committee meetings were held following stockholder approval. As a result of the meetings, grants were approved for all of the employee directors and non-employee directors within the limits established by the EIP.
Litigation ensued following public disclosure of the grants. The litigation alleged that the directors had breached their fiduciary duties by awarding themselves grossly excessive executive compensation.
The Court noted that since the Board approved the grant of equity awards to themselves, entire fairness was the default standard of review. However, the Defendants raised the affirmative defense of stockholder ratification. If the Defendants defense was evident from the well-pled allegations of the Complaint, then the Court must review the awards under the business judgment rule standard, which defaults to a waste standard.
The Plaintiffs claimed that the awards at issue here were not ratified because the specific parameters of the EIP were such that no award of equity compensation under the EIP could have been approved by stockholders in advance. In other words, according to the Plaintiffs, the awards at issue here were not ratifiable because the Board failed to seek stockholder approval for the specific awards made under the plan.
The opinion notes the Court of Chancery recently performed an exhaustive review of the law of stockholder ratification with regard to director equity compensation in Citrix. The Citrix court noted that there is a distinction between stockholder approval of a plan that features broad parameters and “generic” limits applicable to all plan beneficiaries on the one hand and, on the other hand, a plan that sets “specific limits on the compensation of the particular class of beneficiaries in question.” Approval of broader plans will not extend to subsequent grants of awards made pursuant to that plan; approval of plans with “specific limits,” however, will be deemed as ratification of awards that are consistent with those limits.
In Citrix, the court concluded “that the defendants have not established that Citrix stockholders ratified the RSU Awards because, in obtaining omnibus approval of a Plan covering multiple and varied classes of beneficiaries, the Company did not seek or obtain stockholder approval of any action bearing specifically on the magnitude of compensation to be paid to its non-employee directors.”
According to the Court, once a 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” that Citrix found to be essential when determining whether stockholders also approved in advance the specific awards that were subsequently made under the plan.
The plan at issue here provided for “specific limits on the compensation of” the non-employee and executive members of the Board such that the stockholders’ approval of the EIP reflected their ratification of all of the specific awards later approved by the Board. The EIP expressly stated that “[t]he maximum number of shares of Stock that may be covered by Awards granted to all non-Employee Directors, in the aggregate, is thirty percent (30%) of the shares authorized under the Plan all of which may be granted during any calendar year.” The EIP also stated that “[t]he maximum number of shares of Stock that may be subject to stock options to any one Participant who is an employee covered by Code Section 162(m) during any calendar year . . . shall be 4,411,613 shares” and that “[t]he maximum number of shares of Stock that may be subject to Restricted Stock Awards or Restricted Stock Units which are granted to any one Participant who is an employee covered by Code Section 162(m) during any calendar year . . . shall be 3,308,710 shares, all of which may be granted during any calendar year.”
The Court noted the foregoing limits were unlike the “generic” limit for all beneficiaries under the equity compensation plan in Citrix. Therefore, the Directors decision must be reviewed for waste under the business judgment rule, and the Plaintiffs did not plead waste.