Issue link: https://digital.shearman.com/i/1035494
Shearman & Sterling LLP Director Compensation and the Delaware Courts | 37 CHANGES IN RESPONSE TO BANCORP In the 2018 proxy season, shareholders of one Top 100 Company approved an amended equity incentive plan that provides that each director will receive an annual retainer of $350,000, which the board is authorized to increase by up to $25,000 before getting additional approval. The plan also sets lead independent director retainers and committee chair retainers, with the board authorized to increase these retainers by up to $5,000. These discretionary increases may not take place prior to January 2020. Finally, the board has discretion to provide directors with other fees for service on a specific purpose committee or for any other special service. In addition, shareholders of another Top 100 Company approved a new director compensation plan that includes an annual retainer of $100,000 and an annual restricted stock unit grant with a value of $100,000. New directors will also receive a grant of 2,000 restricted stock units, but in no event will any director receive awards in excess of $500,000 in any year. The lack of widespread change to stockholder ratification practices following the Bancorp decision may be evidence of the fact that companies are confident that their non-employee director awards are entirely fair. To that end, even if "meaningful limits" no longer ensure the application of the business judgment rule, such limits may continue to offer some protection from challenges to discretionary awards. For example, to the extent the range of possible award values within the "meaningful limits" is generally consistent with peer group levels, stockholders would have difficulty alleging the grant of those awards was not entirely fair. Further, enhanced disclosure of the reasons for the director compensation program, including a comparison to peers, may deter litigation. Bancorp, where the awards diverged significantly from peer group levels (and the previous year's award levels), is a good example of bad facts making bad law. OTHER IMPLICATIONS In addition to the claims related to non-employee director compensation, the plaintiffs in Bancorp also challenged awards made to two employee directors. The employee director defendants (the CEO and COO) attempted to have those claims dismissed for failure to make a demand on the board, as the executive compensation decisions were not self-dealing transactions. The Supreme Court rejected this argument, however, noting that plaintiffs need not demonstrate a "quid pro quo" between the non-employee directors and the executive directors to prove a lack of independence. Because the awards made to the employee directors were made nearly contemporaneously with the awards of the Top 100 Companies empower their nomination and governance committee (or similar committee) to make non-employee director compensation decisions, rather than vesting that authority on the compensation committee 45 to the non-employee directors, the Court stated that "[i]t is implausible to us 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."