In re Investors Bancorp, Inc. S’holder Litig.: Stockholder Ratification of Equity Compensation Package
May 25, 2017
In In re Investors Bancorp, Inc. Stockholder Litigation, 2017 WL 1277672 (Del. Ch. Apr. 5, 2017), the Court of Chancery granted defendants’ motion to dismiss claims challenging the adoption of an equity compensation plan by the board of directors of Investors Bancorp, Inc. (“Investors Bancorp” or the “Company”). The Court held that because the plan contained discrete limits with respect to director equity awards, the ratifying effect of approval of the plan by a fully informed stockholder vote extended to individual awards made pursuant to the plan.
The Company was created in December 2013 through a “mutual-to-stock” reorganization transaction of a two-tier mutual holding company bearing the same name. Following the reorganization, the surviving Company’s board was comprised of twelve directors, including ten non-employee directors, the chief executive officer, and the chief operating officer.
Seven of the ten non-employee directors served on the compensation committee of the board, which is charged with making recommendations to the board concerning director compensation. On December 15, 2014, the compensation committee met to set compensation for the upcoming year. The committee recommended the board maintain the existing compensation arrangements for non-employee directors and maintain the base salaries of the chief executive officer and chief operating officer, but increase the cash incentive component of their compensation packages.
On March 24, 2015, the board approved the Company’s 2015 Equity Incentive Plan, which reserved approximately 31 million shares for various types of equity-based awards for the Company’s officers, employees, non-employee directors, and service providers. Within that ceiling, the plan limited the number of shares of each type that could be issued and the number of shares the Company could award to any one employee or director, as well as the maximum percentage of total shares available to be awarded that could be issued to non-employee directors in the aggregate.
The plan was submitted to stockholders at the Company’s 2015 annual meeting. Over 96% of the shares voted at the meeting—representing nearly 80% of the total shares then outstanding—voted to approve the plan. The proxy statement for the annual meeting disclosed the purpose and limits of awards pursuant to the plan. The proxy statement also disclosed that the number, type, and terms of any specific awards to be made pursuant to the plan would remain subject to the compensation committee’s discretion and would not be determined until after stockholder approval of the plan.
On June 23, 2015, based on the compensation committee’s post-approval recommendations, the board approved equity incentive awards to the non-employee and employee directors that had an aggregate fair value as of the grant date of approximately $51.5 million. The Company announced the equity awards in a Schedule 14A Proxy Statement issued on April 14, 2016. Three complaints were filed shortly thereafter and were soon consolidated.
In reviewing plaintiffs’ claims in respect of the non-employee director grants, the Court presumed that, because every member of the board who made the decision to grant the awards received a special benefit from the decision, “entire fairness [would be] the default standard of review.” To overcome the entire fairness standard, defendants needed to establish that the stockholders’ approval of the plan had the effect of ratifying the awards, in which case the board’s decision would be subject to the presumption of the business judgment rule.
Plaintiffs raised three principal arguments in response to the affirmative defense of ratification. First, plaintiffs claimed that the awards were not ratifiable because the plan lacked a “self-executing” feature (i.e., one that would provide for fixed amounts of awards to the non-employee directors with no board discretion to increase or enhance such awards) or “meaningful limits” on the amount of awards. Second, plaintiffs claimed that the board could have sought stockholder approval of the specific grants, but failed to do so. Finally, plaintiffs claimed that the stockholder ratification was ineffective because the stockholder vote was not fully informed.
The Court concluded that the plan was not so broad as to preclude ratification. The Court rejected plaintiffs’ attempt to analogize the plan to the equity incentive plan that was reviewed under entire fairness in Calma v. Templeton, in which the Court had concluded that the stockholders’ adoption of the “broad parameters” of a plan that covered multiple beneficiaries and had no specific limits on the magnitude of awards to non-employee directors was insufficient to ratify subsequent grants to the non-employee directors. Rather, the Court determined that the fact that the plan was a company-wide “omnibus stock plan,” as opposed to a director-specific plan, was not dispositive. Analogizing to the Court’s decision in In re 3COM Shareholders Litigation, the Court determined that the “key point is the specific focus on the limit or limits imposed on awards to various beneficiaries of the plan.” The Court found that the board, in seeking stockholder approval of the plan, had not sought a “blank check” on awards to directors; instead, the stockholders were advised when approving the plan of the maximum number of shares of each type of award available, limits pertaining to non-employee and executive directors, and the magnitude of the potential awards board members could make to themselves when approving the plan.
As the grants to the non-employee directors were made within the confines of the specific limits indicated by the stockholder-approved plan, the board’s decision to make the grants was reviewable only for waste, which plaintiffs had not pled. Accordingly, the Court dismissed plaintiffs’ claims challenging the non-employee director grants.
The Court separately rejected plaintiffs’ disclosure-based claims, holding that demand on the board was not excused in respect of the specific grants of equity compensation to the executive officer defendants in the absence of facts indicating that the executive officers would not have supported the awards to non-employee directors had their own awards not been approved and because the votes of the executive officers were not required for approval of the plan.
The Court’s decision has been appealed to the Delaware Supreme Court.