In re Investors Bancorp, Inc. S'holder Litig., C.A. No. 169, 2017 (Del. Dec. 13, 2017) (Seitz, J.)

In this decision, the Delaware Supreme Court reversed the Court of Chancery’s dismissal of a complaint alleging that directors of Investors Bancorp, Inc. breached their fiduciary duties in connection with the directors’ decision to grant themselves restricted stock and stock options under an equity incentive plan previously approved by the company’s stockholders.  The Court of Chancery dismissed the complaint after finding that the prior stockholder approval of the equity incentive plan under which the awards were issued constituted ratification of the awards, rendering the directors’ actions subject to the presumption of protection under the business judgment rule.  In reversing that decision, the Supreme Court distinguished between “self-executing” equity incentive plans approved by stockholders and those plans, like the one at issue here, that give directors discretion to grant themselves awards within general parameters, and held that the stockholder ratification defense was unavailable to dismiss the complaint because plaintiffs had adequately alleged that the directors “inequitably exercised [their] discretion” under the plan’s general parameters. 

At Investor Bancorp’s annual stockholder meeting in 2015, over 96% of the voting shares approved an equity incentive plan that empowered the directors to award restricted stock awards, restricted stock units, incentive stock options, and non-qualified stock options to themselves and the company’s officers, employees, and service providers subject to general parameters and limits for each type of compensation plan award.  The proxy sent to stockholders provided that “[t]he number, types and terms of awards to be made pursuant to the [plan] are subject to” the directors’ discretion and “[would] not be determined until subsequent to stockholder approval.”  Shortly after the stockholders approved the plan, the board’s compensation committee held four meetings that ultimately resulted in board approval of substantial stock option and restricted stock awards to all of the company’s directors, including the two executive directors, the CEO and COO.  The total value of the awards was $51.7 million.  Plaintiff stockholders filed suit alleging that the awards were unfair and excessive and asserting derivative claims for breach of fiduciary duty.

The Court of Chancery found that the awards were within the “meaningful limits on the awards directors can make to themselves” as part of the equity incentive plan, as approved by a fully informed stockholder vote.  Therefore, the Court of Chancery held that the stockholders’ approval constituted ratification of the awards, rendering them subject to the “business judgment rule’s presumptive protection” and reviewable only as waste, which plaintiffs had not pled. 

The Supreme Court reversed the dismissal, explaining that “when a stockholder properly alleges that the directors breached their fiduciary duties when exercising their discretion after stockholders approve the general parameters of an equity incentive plan, the directors should have to demonstrate that their self-interested actions were entirely fair to the company.”  In other words, “when it comes to the discretion directors exercise following stockholder approval of an equity incentive plan, ratification cannot be used to foreclose the Court of Chancery from reviewing those further discretionary actions when a breach of fiduciary duty claim has been properly alleged.”  The Court concluded that the plaintiffs had sufficiently alleged facts leading to a pleading stage reasonable inference that the directors breached their fiduciary duties in making unfair and excessive discretionary awards to themselves after the stockholders had approved the plan.  Specifically, plaintiffs had pled facts that the equity incentive awards were inordinately higher than compensation to officers and directors at comparable companies, as well as in comparison to awards to these directors and officers in prior years.  Therefore, the Court held that the directors must demonstrate the entire fairness of the awards to the company.  The Court also concluded that stockholders were excused from making a demand on the board under Court of Chancery Rule 23.1 because the directors were not disinterested.

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