August 3, 2017
Subsidiary Awards to Parent Directors: Entire Fairness Applies
– Liz Dunshee
A recent Delaware case – Williams v. Ji – held that the entire fairness standard applies to equity awards in a subsidiary that were granted to directors of the parent company. The directors of the parent company approved & benefited from the grants. Here’s the intro from Steve Quinlivan’s blog:
The Delaware Court of Chancery examined an alleged scheme in which the directors of Sorrento Therapeutics granted themselves options and warrants for the stock of five subsidiaries over which the company had voting control. Shortly before or after the options grants, the board transferred valuable assets and opportunities of the corporation to the subsidiaries. The subsidiary option plans and grants were not approved by the stockholders of Sorrento.
The court acknowledged that directors may be compensated for additional service in managing subsidiaries – but rejected the defendants’ characterization that these were typical compensation decisions subject to business judgment review. It noted that “self-interested compensation decisions made without independent protections are subject to the same entire fairness review as any other interested transaction.”