Fox & Wolf on Protecting Director Compensation Plans From Entire Fairness Review

Over at The CLS Blue Sky Blog, David Fox and Daniel Wolf recently posted an interesting piece entitled, “Seinfeld and Director Compensation: A Decision That Wasn’t About Nothing.”  What follows is an excerpt of their opening overview of Seinfeld.  Go read the entire post to find out how they recommend companies deal with that decision this proxy season.

Until Seinfeld, boards of directors generally believed they were protected by the fairly lenient business judgment rule when granting themselves awards under stockholder approved plans. In the 1999 Chancery Court decision In Re 3COM, then Vice Chancellor  Steele held that the business judgment rule should apply to director option grants so long as the grants were made under a plan that had been previously approved by stockholders and had “sufficiently defined terms”….

In finding that the board in Seinfeld was interested in the equity grant, Vice Chancellor Glasscock focused on the “sufficiently defined terms” requirement from 3COM and found that the plan in question lacked the definition and limitations necessary to allow the board’s compensation decision to qualify for business judgment rule protection, notwithstanding prior stockholder approval of the plan….

In questioning the board’s reliance on the plan, Vice Chancellor Glasscock said, “Though the stockholders approved this plan, there must be some meaningful limit imposed by the stockholders on the board for the plan to be consecrated by 3COM and receive the blessing of the business judgment rule, else the ‘sufficiently defined terms’ language of 3COM is rendered toothless.”