The recent surprising Delaware Supreme Court decision: In re Investors Bancorp, Inc. Stockholder Litigation (previously reported on here), and associated widespread confusion about the going-forward scope of applicability and implications on director compensation plans, presumably prompted this fairly atypical joint four-firm (Cravath/Davis Polk/Cleary/Simpson Thacher) memo: "New Year’s Resolutions For Director Compensation From Investors Bancorp," which analyzes the case and offers a series of considerations that generally advise a wait-and-see approach pending clarification of the law in lieu of making changes now in response to the decision.
Although the entire memo is worth review, these practical takeaways to mitigate litigation risk are particularly noteworthy:
Regardless of the presence or scope of an equity plan limit, we recommend that the following should be considered in order to minimize the litigation risk arising from Investors Bancorp:
- If a company is going to put a maximum limit to shareholder approval, include more specific and tighter limits on the amounts of cash and equity compensation that each director may be awarded annually pursuant to plans submitted for shareholder approval. Tighter limits that minimize discretion will help to mitigate the risk of nuisance litigation.
- Most importantly, enhance the frequency and rigor of the board’s consultation with a compensation consultant to determine the appropriate amount of director cash and equity compensation. Evidence showing that director compensation levels, including equity awards, are generally consistent with peer levels, including an annual benchmarking survey, may be helpful to show that those decisions were reasonable and entirely fair. Be mindful of the peer set used. Plaintiffs frequently criticize boards’ choice of peers.
- Separate executive compensation decisions from director compensation decisions, and mitigate other factors that could suggest a lack of disinterestedness. In Investors Bancorp, the Supreme Court determined that demand was excused, because it was “implausible to [the court] that the non-employee directors could independently consider a demand when to do so would require those directors to call into question the grants they made to themselves.”[5] Boards should consider granting director and executive awards under separate plans. Boards should also consider delegating director compensation decisions to the Nominating and Governance Committee, rather than have those decisions be approved by the Compensation Committee or all of the non-executive members of the board.[6]
- Document the decision carefully. The Delaware courts have repeatedly emphasized “the importance of process in satisfying fiduciary duties when evaluating and approving executive compensation packages.”[7] While board committees typically, and understandably, default to a “less is more” approach in capturing deliberation in their minutes, this might be an area where a bit more is warranted. For example, if a company’s director compensation is in the upper percentile of its peer study, consider having the record reflect a brief statement of the rationale. Consider disclosing in the annual proxy statement information regarding the rationale behind director compensation decisions and each element of director compensation.
[5] In re Investors Bancorp, Inc. Stockholder Litig page 32.
[6] A recent opinion in the New York state courts also suggests the importance of separating the director and executive compensation decisions and of limiting the number of directors involved in the approval of director compensation, for demand futility purposes. See Cement Masons Local 780 Pension Fund v Schleifer, 2017 N.Y. Misc. LEXIS 2554 (June 28, 2017).
[7] Delaware Court of Chancery Offers Practical Lessons for Compensation Committees, Cleary M&A and Corporate Governance Watch.
See our numerous memos on this case on our Director Compensation page here.