Last December, in In re Investors Bancorp Stockholder Litigation, C.A. No. 12327-VCS (Del. Dec. 19, 2017), the Delaware Supreme Court revived concerns about how boards set their own compensation. For years, boards and their advisers have sought to manage the inevitable conflict that arises when directors approve their own compensation. Although the corporation laws of both Delaware and Pennsylvania give boards the authority to set their own compensation (Delaware Gen. Corp. Law Section 144(h). Pa. Business Corp. Law Section 1730) this statutory grant of authority does not eliminate this inevitable conflict between the directors’ own interests and that of the corporation and its owners.
Until recently, many commentators believed that the Delaware Court of Chancery had solved this problem, but boards now have reason to reconsider their compensation plans. In several recent cases prior to Investor Bancorp, the Delaware Chancery Court had approved a process that appeared to adequately address this conflict, at least with respect to equity compensation such as stock options and restricted stock units, see, e.g., Calma v. Templeton, C.A. No. 9579-CB (Del. Ch. April 30, 2015); Seinfeld v. Slager, C.A. No. 6462-VCG (Del. Ch. June 29, 2012). As was described in the 2015 case, Calma v. Templeton, and the 2012 case, Seinfeld v. Slager, most public companies, as required by the NYSE and NASDAQ rules (as well as for other reasons), submit their officers’ equity compensation plans for stockholder approval. These plans often also include provisions for director equity compensation and general parameters that govern the amount of compensation. As such, in cases where plaintiffs claimed that the directors’ had breached their fiduciary duties in approving their own compensation, the Chancery Court focused on whether the plans contained general parameters or “meaningful limits.” The Chancery Court reasoned that breach of the duty of loyalty challenges to these plans could be defeated by stockholder approval of the plans. As long as the stockholder-approved plan included “meaningful limits” on director compensation, even if the “meaningful limits” were quite broad, such stockholder approval constituted ratification of the board action. The Delaware Supreme Court, however, changed this approach in Investors Bancorp.
