June 4, 2019
Director Compensation: Delaware Reiterates “Entire Fairness” Applies
– Liz Dunshee
A recent Bracewell memo notes that – in light of the Delaware Supreme Court’s 2017 Investors Bancorp decision – nearly 75% of surveyed LTIPs now include a director-specific limit on the size of annual grants, with many plans also capping total annual compensation for board members.
That trend isn’t likely to die out any time soon. Last week, the Delaware Court of Chancery reaffirmed that the entire fairness standard applies to most decisions that directors make about their own compensation. The opinion – Stein v. Blankfein – says that director pay decisions can be actionable even if the directors held a “good-faith, Stuart-Smalley-like belief” that they were “good enough, smart enough, and doggone it, they were worth twice—or twenty times—the salary of their peers” (bravo to the Vice Chancellor on the SNL reference – and in this case, it’s not much of a stretch to envision the Goldman Sachs directors holding that belief).
This Stinson blog has the details about the case & its implications – here’s an excerpt:
The following courses of action remain available to public company boards in approving director compensation:
– Have specific awards or self-executing guidelines approved by stockholders in advance; or
– Knowing that the entire fairness standard will apply, limit discretion with specific and meaningful limits on awards and approve director compensation with a fully developed record, including where appropriate, incorporating the advice of legal counsel and that of compensation consultants.
It may also be possible to obtain a waiver from stockholders of the right to challenge future self-interested awards made under a compensation plan using the entire fairness standard. To do so, stockholders would have to approve a plan that provides for a standard of review other than entire fairness, such as a good faith standard. In addition stockholders would have to be clearly informed in the proxy statement that director compensation is contemplated to be a self-interested transaction that is ordinarily subject to entire fairness, and that a vote in favor of the plan amounts to a waiver of the right to challenge such transactions, even if unfair, absent bad faith. Note that the Court did not conclude, because it was not required to do so, that such a waiver was even possible.