In re Investors Bancorp, Inc. Shareholder Litigation: Stockholder Ratification of Equity Incentive Plan Does Not Foreclose Fiduciary Review of Discretionary Grants under the Plan
March 8, 2018
In In re Investors Bancorp, Inc. Shareholder Litigation, 2017 WL 6374741 (Del. Dec. 13, 2017, revised Dec. 19, 2017), the Delaware Supreme Court recently considered “the limits of the stockholder ratification defense” in actions challenging directors’ compensation where stockholders have approved the compensation plan, and the Court provided guidance regarding when that defense may apply based on the level of discretion retained by the directors under the plan. Reversing the trial court, the Court held that “when stockholders have approved an equity incentive plan that gives the directors discretion to grant themselves awards within general parameters, [and a plaintiff properly challenges the exercise of that discretion] … then the ratification defense is unavailable to dismiss the suit.”
Investors Bancorp, Inc. (“Bancorp”) is a bank holding company that operates 143 branches in New Jersey and New York. In 2014, Bancorp’s compensation committee (the “Committee”) approved cash-based compensation for the non-employee directors which ranged from $97,200 to $207,055 per director. In 2015, the board approved similar cash compensation. Shortly thereafter, the board approved an equity incentive plan (the “2015 EIP”), described to stockholders as designed to incentivize future growth and performance. The 2015 EIP reserved up to 30% of equity awards for the board’s non-employee directors. Bancorp’s proxy noted that the “number, types and terms of awards to be made pursuant to the [2015 EIP] are subject to the discretion of the Committee … and will not be determined until subsequent to stockholder approval.” The stockholders approved the 2015 EIP.
The board later awarded the non-employee directors equity compensation worth a total of $21,594,000. According to the plaintiffs, this compensation was both backward-looking (i.e., a reward for past service rather than to incentivize future performance) and significantly higher than comparable, or even much larger non-comparable, companies’ director compensation. In 2015, the CEO and CFO also received increased salaries, bonuses and significant equity awards.
The trial court, relying on a line of cases focusing on whether the compensation plan had “meaningful, specific limits on awards to all director beneficiaries,” dismissed the action. The Supreme Court reversed, noting that directors are allowed by statute to set their compensation but that such action is a “self-interested” decision. The Court noted that the ratification defense has been recognized in three instances: (1) when stockholders approve specific director awards, (2) when the plan is self-executing and the directors retain no discretion over the awards, and (3) when directors exercise discretion over the amount and terms of the awards after stockholder approval.
Focusing on the third instance, the Court held that “when it comes to the discretion directors exercise following stockholder approval of an equity incentive plan, ratification cannot be used to foreclose” judicial review “when a breach of fiduciary duty claim has been properly alleged.” The Court explained that such discretion can be granted “precisely because [stockholders] know that authority must be exercised consistently with equitable principles.” In other words, an inequitable exercise of discretion does not become permissible merely because the equity awarded is within certain parameters of discretion granted by the plan. The Court held that the complaint raised a pleading stage inference that the board’s compensation was excessive and unfair, and the board must demonstrate its fairness.