Issue link: https://digital.shearman.com/i/1019978
Shearman & Sterling LLP 36 | Director Compensation and the Delaware Courts In Espinoza v. Zuckerberg (124 A. 3d. 47 (Del. Ch. Oct. 28, 2015)), the board of Facebook approved non-employee director compensation that shareholders later challenged as excessive. Following the filing of the action, Facebook's controlling shareholder, Mark Zuckerberg, expressed his approval of the non-employee directors' compensation in a deposition and affidavit. The Delaware Chancery Court held that this did not constitute valid stockholder ratification. Rather, valid stockholder ratification must be accomplished formally through a vote at a stockholders' meeting, or by written consent in compliance with Section 228 of the Delaware General Corporation Law. Following a review of Delaware cases considering the stockholder ratification defense with respect to self-interested compensation decisions, the Delaware Supreme Court noted that the defense had been successfully invoked where stockholders approved: The director defendants in Bancorp argued that the business judgment standard should apply as they had exercised discretion within the parameters approved by the company's stockholders. The Court, however, expressed skepticism notwithstanding recent Court of Chancery decisions (such as Calma v. Templeton, 114 A. 3d. 53 (Del. Ch. Apr. 30, 2015)), which found that awards granted pursuant to stockholder approved plans with "meaningful limits" were properly reviewed under the business judgment rule. The Delaware Supreme Court rejected the stockholder ratification defense in Bancorp, stating that the stockholders had "approved the general parameters of the [grants to directors]…Because the stockholders did not ratify the specific awards under the EIP, the affirmative defense of ratification cannot be used to dismiss the complaint." Prior to Bancorp, the exercise of director discretion after stockholder approval of general (but meaningful) limits in plans became a standard practice for U.S. companies. Now, companies that previously obtained stockholder approval for annual limits on the equity awards that may be granted to individual non- employee directors (either based on a dollar figure or number of shares) may find that more specific approval is necessary to benefit from the protections of the business judgment rule. Further, it should not be assumed that the Delaware Supreme Court's holding is limited to equity awards. Companies seeking the protection of the business judgment rule should therefore consider soliciting stockholder approval of the cash portion of their director compensation programs as well. A plan under which directors exercised discretion in awarding compensation, consistent with stockholder- approved parameters A self-executing plan under which directors had no discretion when making awards Specific awards