On December 13, 2017, the Delaware Supreme Court reversed the Court of Chancery’s dismissal of fiduciary duty breach claims brought derivatively by stockholders of Investors Bancorp, Inc. against its directors in connection with the directors’ decision to grant themselves restricted stock and stock options under an equity compensation plan previously approved by a stockholder vote. In re Inv’rs Bancorp, Inc. Stockholder Litig., C.A. No. 12327-VCS (Del. Ch. December 13, 2017). As discussed in our post regarding that decision, the Court of Chancery dismissed the claims, finding that the stockholder approval constituted ratification of the awards, rendering them subject to the presumption of protection under the business judgment rule. In an opinion by Justice Collins J. Seitz, Jr., however, the Delaware Supreme Court reversed, holding that defendants must demonstrate the entire fairness of their equity awards, because plaintiffs adequately alleged that the directors “inequitably exercised [their] discretion” under the compensation plan’s “general parameters,” notwithstanding stockholder approval.
Investor Bancorp’s stockholders approved the compensation plan, which empowered the directors to award to themselves up to 30% of all available options or restricted stock shares. Certain general parameters were placed on each type of compensation plan award. But the company’s proxy statement provided that “[t]he number, types and terms of awards to be made pursuant to the [plan] are subject to” the directors’ discretion. The proxy also disclosed that the plan would allow the company to “attract, motivate and retain highly qualified officers, employees and directors” going forward. The stockholders approved in a vote garnering 96.25% of the voting shares in favor of the plan. Shortly thereafter, the board’s compensation committee held four meetings that ultimately resulted in board approval of substantial stock option and restricted stock awards to all of the company’s directors, including the two employee directors, the CEO and COO, whose grants were valued at more than $16 million and $13 million respectively.
Plaintiff stockholders filed suit alleging that these awards were unfair and excessive and asserting derivative claims for breach of fiduciary duty. The stockholders also argued that the proxy indicated the plan “would reward future performance,” when the grants in fact “reward[d] past efforts for [a] mutual-to-stock conversion.”
The Court of Chancery found that the awards were within the “meaningful limits on the awards directors can make to themselves” as part of the compensation plan, as approved by a fully informed stockholder vote. Therefore, the Court of Chancery held that the stockholder approval constituted ratification of the awards, rendering them subject to the “business judgment rule’s presumptive protection” and reviewable only as waste, which plaintiffs did not plead.
The Supreme Court reversed the dismissal, explaining that “when a stockholder properly alleges that the directors breached their fiduciary duties when exercising their discretion after stockholders approve the general parameters of an equity incentive plan, the directors should have to demonstrate that their self-interested actions were entirely fair to the company.” In other words, “when it comes to the discretion directors exercise following stockholder approval of an equity incentive plan, ratification cannot be used to foreclose the Court of Chancery from reviewing those further discretionary actions when a breach of fiduciary duty claim has been properly alleged.”
Here, “the plaintiffs have alleged facts leading to a pleading stage reasonable inference that the directors breached their fiduciary duties in making unfair and excessive discretionary awards to themselves after stockholder approval of the [plan].” Specifically, the compensation awards were inordinately higher than compensation to officers and directors at comparable companies, as well as in comparison to awards to these directors and officers in prior years. Moreover, the stockholders did not ratify the specific awards made by the directors. Therefore, the Court held that the directors must demonstrate the entire fairness of the awards to the company. The Court also concluded that stockholders were excused from making a demand on the board under Court of Chancery Rule 23.1 because the directors were not disinterested.
