A Delaware Court of Chancery judge recently dismissed a stockholder derivative suit against the directors of Investors Bancorp alleging they breached their fiduciary duties by awarding themselves excessive compensation under an equity incentive plan. The ruling provides additional guidance on the stockholder ratification defense and when stockholder approval of an equity compensation plan may constitute ratification of awards to directors.
In 2015, the board of Investors Bancorp adopted an equity incentive plan (EIP) that reserved a set amount of shares of the company’s stock for restricted stock awards and stock options for the company’s officers, employees, non-employee directors and service providers. The plan also set limits on (i) the number of shares that may be issued as stock options or as restricted stock awards, restricted stock units or performance shares and (ii) the number of shares that may be awarded to employees and directors. The board received stockholder approval of the plan at the company’s annual meeting.
Following a series of meetings that began three days after the vote, the Compensation Committee approved awards of restricted stock and stock options to all board members which totaled about $51.5 million. The derivative action was filed after the awards were made public and alleged that the directors breached their fiduciary duties by awarding themselves “grossly excessive compensation.”
In a decision April 5, Vice Chancellor Joseph Slights III said the key issue was whether stockholder approval of the EIP would be deemed ratification of the awards made under the plan. Siding with the defendant, the judge found the EIP contained “meaningful, specific limits on awards to all director beneficiaries” which were disclosed to stockholders. As such, the judge said the stockholder’s approval of the EIP served to ratify the director awards.
Judge Slights also found that the stockholders were fully informed of all the material facts before voting. While plaintiffs argued otherwise, the judge said they had either pointed to omissions that were not material or had selectively referred to portions of the proxy without providing full context. “Because the EIP (with director-specific limits) was approved by a fully informed stockholder vote and plaintiffs have not pled a claim for waste, plaintiffs have failed to plead a claim of breach of fiduciary duty against defendants relating to subsequent awards issued under the EIP.”