The Advisors' Blog

Earlier this week, in Ayers v. Foley (Del. Ch.; 6/26), the Delaware Chancery Court relied on the new heightened presumption of disinterestedness for directors of listed companies determined to be independent under stock exchange rules in granting in part a motion to dismiss derivative claims challenging a special equity award to a listed company’s chairman. At the same time, the court denied in part the motion to dismiss with respect to claims challenging a board committee’s approval of non-employee director compensation since the approving directors are “inherently interested.” Here’s a brief summary of the facts:

The company’s compensation committee approved increases to non-employee director compensation — cash and equity — three times between November 2022 and October 2024, totaling $40,000 in cash compensation and $30,000 in equity compensation plus a one-time special equity grant of $100,000 for each NED, vesting over three years. The committee cited “FNF’s superior financial performance, including the success of the F&G acquisition in 2020” as its rationale for the special grant.

After a media report suggested that the board chair might be looking to leave the company, the compensation committee members discussed an retentive equity award for the chairman. He requested a $60 million grant, but the committee determined a $44 million grant was more appropriate based on market data from its compensation consultant. After negotiations, they landed on a $50 million equity grant vesting over three years, with the chairman to receive no further equity during that period. The compensation committee determined that the board’s related person transaction committee should also approve the grant, given its significance.

The plaintiff argued that the two transactions should be analyzed as one (presumably to apply an entire fairness review to both), but VC Will declined, noting that they were separate transactions and would be analyzed separately. And, in fact, she analyzed these two challenged transactions very differently, for good reason. One (the chairman’s grant) involved approval by two independent committees, while the other (the NED compensation) involved an inherently conflicted transaction that must meet entire fairness, absent a stockholder vote.

With respect to the chairman’s grant, VC Will found that the plaintiff failed to plead demand futility because he failed to plead that a majority of the board was conflicted:

The plaintiff [. . .] questions the independence of the other five directors (Ammerman, Hagerty, Rood, Thompson, and Quirk). If he were to succeed in impugning these directors’ impartiality, then—combined with Foley—he would have adequately pleaded demand futility under Rule 23.1. But he falls short of the high bar set by Section 144(d)(2) to plead that three of the five challenged directors [. . .] have a material relationship with Foley.

Section 144(d)(2) includes the recently adopted heightened presumption of disinterestedness for directors of listed companies found by the board to be independent under exchange rules. VC Will said that presumption “may only be rebutted by substantial and particularized facts” showing a material interest or relationship and determined that the business ties of the three directors whose disinterestedness was challenged — including overlapping service on boards of other companies affiliated with the chairman and coinvestments in sports teams — weren’t enough to rebut the presumed independence. Because the plaintiff failed to present any particularized allegations supporting an inference of bad faith, the board did not face a substantial likelihood of liability, and the demand was not excused. The outcome was different for the non-employee director compensation claims, which VC Will allowed to proceed past the pleading stage, at least against the approving directors.

[T]his case concerns directors awarding compensation to themselves [. . .] Delaware courts generally view the unfair dealing component to be effectively satisfied at the pleading stage for self-compensation claims [. . .] As for unfair price, the plaintiff’s allegations also meet his burden. He alleges that the directors’ compensation consistently and significantly outpaced FNF’s peer group while FNF underperformed.

Plaintiff cited data showing that the company’s NED compensation was above the median, while its market cap, income and revenue were comparably lower. Defendants countered that above peer average compensation is not necessarily excessive and that the company had outperformed its peers on operating margin. VC Will noted that defendants’ points are “persuasive points [and] may well pose a formidable barrier to the plaintiff’s ultimate success and dampen expectations for a significant recovery,” but that they present a “factual dispute inappropriate for resolution on a motion to dismiss.”

At present, I cannot adopt the defendants’ preferred performance metric (title operating margin) and ignore the plaintiff’s identified metrics (market capitalization, revenue, and net income). By pleading that the directors’ compensation rose to a  large premium over the peer median while FNF lagged in key financial metrics, the plaintiff has pointed to “‘some facts’ implying lack of entire fairness.”

– Meredith Ervine