The Advisors' Blog

– Broc Romanek

Here come more shareholder suits using routine proxy disclosures to challenge non-employee director compensation. Here’s an excerpt from this Goodwin Procter memo:

Two cases asserting allegations of excessive director compensation have already been filed in 2019, and at least 10 cases were filed in 2018. In Stein v. Benioff, Civil Action No. 2019-0028 (Del. Ch. Ct. Jan. 15, 2019), the plaintiff alleges that the non-employee directors of Salesforce awarded themselves excessive cash and stock compensation (averaging $608,406) when compared to the company’s self-selected peer group (averaging $366,524). The plaintiff also alleges that the compensation plan had no meaningful limits and that attempted ratification of the compensation plan by shareholders was ineffective because the proxy disclosures concerning stock compensation were false and misleading for several reasons. Specifically, the plaintiff asserts that the proxy misstated that prior-year grants were restricted stock when they were actually fully vested shares, omitted the grant date fair value of stock compensation, falsely approximated the total value of stock compensation under the new plan to be $427 million (when the 10-K subsequently disclosed actual value of $997 million), and misstated where to find the assumptions for the calculation of stock awards.

Similarly, in Heng Ren Silk Road Investments LLC v. Chen, Civil Action No. 2019-0010 (Del. Ch. Ct. Jan. 7, 2019), the plaintiffs allege that the average $138,000 compensation for non-employee directors of China Automotive Systems Inc. was three times that of non-employee directors of comparably sized Nasdaq-listed Chinese companies, who all averaged $50,000 or less in compensation.

Complaints frequently contain some variation of the following allegations:

– When compared to similar companies — either a company’s self-selected peer group or similar companies by industry or market cap — the non-employee directors are compensated at least twice as much as the average non-employee director.
– The plans under which the non-employee director’s compensation was granted were not ratified by shareholders, the shareholder vote to approve the director compensation plan was ineffective because of misstatements in the proxy, or an approved compensation plan has been amended or changed since initial shareholder approval.
– Proxy statements seeking shareholder ratification of compensation plans contain any number of materially false or misleading statements or omissions, including: the grant date fair value of prior stock compensation, the expected value of stock compensation to be granted, the types of shares or equity granted, and the assumptions used to calculate stock compensation under a plan.
– If approved, the compensation plan fails to contain meaningful limits on either the number or value of shares that may be granted.