Based on a recent Delaware Supreme Court case: "In re Investors Bancorp, Inc. Stockholder Litigation," even if the company's shareholders approve an equity plan, if challenged, director awards granted pursuant to that plan will only confer the benefit of the business judgment rule - as opposed to the more stringent entire fairness standard of review - where the shareholders also approve specific awards for the directors or when the equity plan is "self-executing," i.e., awards are granted pursuant to a formula and absent any director discretion. The significant holding departs with the prior case law-established standard, which accommodated shareholder-approved "meaningful limits" on director compensation accompanied by director discretion to reap the benefit of the BJR.
Based on the particular facts and the broader holding, companies are advised to regularly benchmark their director compensation relative to peers, enhance their proxy disclosure on their director compensation practices, and consider obtaining shareholder approval of specific awards or a self-executing formula plan for their directors.
Orrick advises that proxy statements and any director compensation proposal include these disclosures:
- The company’s director compensation philosophy;
- The process used to determine director compensation, including the role and analysis of the compensation consultant;
- How director compensation compares to peers;
- The rationale behind director compensation decisions and each element of director compensation; and
- Whether directors are subject to any stock ownership guidelines.
Access additional relevant memos on our Director Compensation page here.