In Re Investors Bancorp, Inc. Stockholder Litigation
177 A.3d 1208 (2017)
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Rule of Law:
Stockholder approval of an equity incentive plan that grants directors discretion to award themselves compensation does not constitute ratification of the specific awards. If challenged, such discretionary, self-interested compensation awards are subject to the entire fairness standard of review.
Facts:
- Investors Bancorp's board of directors, based on recommendations from its Compensation and Benefits Committee, set director and executive compensation for 2015.
- A few months later, in March 2015, the board proposed the 2015 Equity Incentive Plan (EIP) to provide additional incentives for officers, employees, and directors.
- The EIP reserved a pool of over 30 million common shares for various awards, with a provision allowing up to 30% of all option or restricted stock shares to be granted to non-employee directors.
- The proxy statement for the EIP specified that the number, types, and terms of the awards were subject to the discretion of the Committee and had not yet been determined.
- In June 2015, Investors Bancorp's stockholders approved the EIP.
- Three days after stockholder approval, the Committee held the first of four meetings and ultimately approved awards of restricted stock and stock options to all board members and two top executives, Kevin Cummings and Domenick Cama.
- The total fair value of the awards was over $51.6 million, resulting in average compensation of over $2.1 million for each non-employee director and over $16 million and $13 million for Cummings and Cama, respectively.
- The plaintiffs alleged these award amounts were excessive compared to peer companies and constituted a breach of fiduciary duty.
Procedural Posture:
- Stockholders of Investors Bancorp, Inc. filed derivative complaints against the company's directors in the Delaware Court of Chancery.
- The separate lawsuits were consolidated into a single action alleging breaches of fiduciary duty for awarding excessive compensation.
- The defendant-directors (appellees) filed a motion to dismiss for failure to state a claim and for failure to make a pre-suit demand on the board.
- The Court of Chancery granted the defendants' motion and dismissed the complaint.
- The plaintiff-stockholders (appellants) appealed the Court of Chancery's dismissal to the Delaware Supreme Court.
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Issue:
Does stockholder approval of a discretionary equity incentive plan, which grants directors authority to make compensation awards to themselves within general parameters, constitute ratification that shields the specific awards from judicial review under the entire fairness standard?
Opinions:
Majority - Seitz, Justice
No. When stockholders approve an equity incentive plan that gives directors discretion to grant themselves awards within general parameters, and a stockholder properly alleges that the directors inequitably exercised that discretion, the ratification defense is unavailable to dismiss the suit. The court drew a distinction between stockholder approval of specific, non-discretionary awards (which are ratified) and approval of a plan that merely grants directors the authority to make future, discretionary awards to themselves. While stockholders grant legal authority by approving the plan, the directors' subsequent exercise of that authority is 'twice-tested' by equity and must remain consistent with their fiduciary duties. Because the actual awards are self-interested decisions not approved by stockholders, directors must prove the entire fairness of the awards to the corporation if a breach of fiduciary duty claim is properly alleged.
Analysis:
This decision significantly limits the scope of the stockholder ratification defense for director compensation, clarifying a previously muddled area of Delaware law. It rejects the 'meaningful limits' test that the Court of Chancery had developed, establishing a clearer, brighter-line rule: ratification only applies to the specific awards or to self-executing plans, not to discretionary frameworks. The ruling increases the litigation risk for boards that use discretionary compensation plans, as they can no longer rely on the plan's approval to secure business judgment review for specific self-interested awards. Consequently, directors must be prepared to demonstrate the entire fairness of such awards, a much higher legal standard.
