Director compensation limits and considerations
A recent ruling by the Delaware Supreme Court could have far-reaching consequences for how companies set their director compensation limits. Dentons’ Venture Technology and Emerging Growth Companies team examines what the decision means, what impact it may have and how companies should respond.
- Delaware court decisions in recent years have led a number of companies to adopt stockholder-approved director compensation limits in order to benefit from the stockholder ratification defense, which can prove useful if director compensation decisions are challenged by stockholders as being excessive or unreasonable.
- A December 2017 decision by the Delaware Supreme Court in In re Investors Bancorp, Inc. Stockholder Litigation should cause companies to reconsider whether stockholder-approved director compensation limits are a viable defense.
- Companies that have adopted a director compensation limit in recent years should retain those limits or consider updating them the next time they are seeking stockholder approval of their underlying compensation plans.
- Companies that have not adopted a director compensation limit in their plans should approve limits with the understanding that the courts will review, or retain the right to review, those limits based on the “entire fairness” standard, as was evidenced by the court’s actions in Investors Bancorp.
- Irrespective of the board’s judgment regarding whether to have director compensation limits or formula awards, all companies should continue to ensure that director compensation decisions are made following a robust process that takes into account market and peer group practices and that such decisions are carefully described in the annual proxy statement.
- The Investors Bancorp decision makes having a robust process critical, as well as observing a robust disclosure regimen that gives stockholders a clear sense of award limits and disbursements necessary.