Seinfeld v. Slager and "Limits" on Directors' Fees (Part 3)
We are discussing Seinfeld v. Slager, 2012 Del. Ch. Lexis 139 (Del Ch. June 29, 2012).
The other issue that arose in Seinfeld was the decision by the board to grant itself "restricted stock units" under the company's stock plan. According to the allegations, outside directors in 2009 received total compensation of between $843,000 and $891,000. Of that amount, $743,700 came in the form of awards under a stock incentive plan "administered by administered by a committee of non-employee members of the Board or if no committee exists, by the Board itself." As the court noted: "The Defendant Directors are participants in the Stock Plan, and pursuant to it have awarded themselves time-vesting restricted stock units."
The Plaintiff challenged the fees as excessive. In determining the standard of review, the court focused on the allegations that the directors had awarded themselves stock units under the stock plan. A prior decision had found that even where this occurred, the applicable standard was the business judgment rule.
Plaintiffs, however, argued that the plan lacked "sufficient definition to afford" directors the protections of the BJR. The court agreed.
The Stock Plan before me puts few, if any, bounds on the Board's ability to set its own stock awards. The Plan itself provides that the Committee, comprising the Directors themselves, has the sole discretion, in terms of restrictions and amount, over how to compensate themselves. In regard to restricted stock, the limitations upon the Board are that it can only award 10,500,000 shares total and award an Eligible Individual 1,250,000 shares a year. . . . Assuming that there were 12 directors, the Board could theoretically award each director 875,000 restricted stock units. At $24.79, the award to each director would be worth $21,691,250 and the total value would be $260,295,000.
Nor did shareholder approval change the outcome. See Id. ("A stockholder-approved carte blanche to the directors is insufficient. The more definite a plan, the more likely that a board's compensation decision will be labeled disinterested and qualify for protection under the business judgment rule. If a board is free to use its absolute discretion under even a stockholder-approved plan, with little guidance as to the total pay that can be awarded, a board will ultimately have to show that the transaction is entirely fair.").
The lack of standards in the stock plan did not result in a finding that the fees were, in fact, excessive. Instead, it imposed on the board the obligation to show fairness. The board would still have an opportunity to show that the fees were not excessive in fact. Nonetheless, the case was allowed to go forward.
The decision did not portend any meaningful judicial review of directors fees or any meaningful downward pressure on the amount of fees. The take away is simply that companies should include more meaningful limits on board discretion in stock plans. To the extent boards are not in a position to award themselves shares or options that could be characterized as "excessive," the standard of review in Delaware is likely to remain the business judgment rule.
Primary materials on the case have been posted at the DU Corporate Governance web site.