Annual Corporate Governance & Executive Compensation Survey

2018 Corporate Governance Survey

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DIRECTOR COMPENSATION AND THE DELAWARE COURTS Doreen E. Lilienfeld and Matthew H. Behrens Shearman & Sterling LLP Director Compensation and the Delaware Courts | 35 DIRECTOR COMPENSATION AND THE DELAWARE COURTS Doreen E. Lilienfeld and Matthew H. Behrens The Delaware courts have recently rendered a series of decisions, culminating with the Delaware Supreme Court's December 2017 holding in In re Investors Bancorp, Inc. Stockholder Litigation, No. 169 (Del. 2017) ("Bancorp"), limiting the extent to which the business In Bancorp, the Delaware Supreme Court reversed the Delaware Court of Chancery and held that awards granted to directors under a stockholder-approved equity incentive plan are subject to "entire fairness" review if the plan gives the directors discretion to determine their own compensation. According to the Bancorp complaint, the stockholders of Investors Bancorp Inc. approved an equity incentive plan ("EIP") that allowed the directors to allocate up to 30% of all shares available under the EIP in the form of director awards. Shortly thereafter, the company's compensation committee granted awards to its non-employee directors with grant date fair values that averaged over $2 million each, even though awards at peer companies purportedly average $175,817. The plaintiffs challenged these awards, claiming that the directors breached their fiduciary duties by granting themselves unfair and excessive compensation. The approval by non-employee directors of their own compensation is a conflicted transaction that enables a plaintiff to rebut the business judgment standard of review. Therefore, unless the directors could assert the affirmative defense of stockholder ratification, the decision would be subject to "entire fairness" review and the directors would have the burden of establishing that the transaction was the product of both fair dealing and fair price. IMPACT ON STOCKHOLDER RATIFICATION INSIGHTS judgment rule protects directors when determining their own compensation. Although the law is still developing, the Bancorp decision has already led some Top 100 Companies to change their director compensation approval processes. Unlike the business judgment standard of review, which places the burden on the plaintiff to prove that the directors did not act "on an informed basis, in good faith, and in the honest belief that the action was in the best interest of the Company" (Aronson v. Lewis, 473 A.2d. 805, 812 (Del. 1984)), the entire fairness standard of review places the burden on the directors to show that their decision was the product of fair dealing and fair price (Weinberger v. UOP, Inc. 457 A.2d 701, 711 (Del. 1983)). $ $

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