I had a notion to title this blog “For the Love of God, People, Have Counsel Review and Revise Your Stock Plan!” I have been blogging and speaking on this issue for three years (See “Recent Court Decisions Suggest Changes to Stock Plan Design to Reduce Litigation Risk”). The folks at Agenda magazine for directors reminded me that they have quoted me on the issue in articles from 2012, 2013, and 2014 (and now in 2015). Unfortunately, some folks have not been keeping up on best practices.
On April 30, the Delaware Chancery Court issued another decision in a shareholder derivative action against a corporation and its board members over director compensation in general and stock awards in particular, Calma v. Templeton, et. al. (Citrix systems, Inc.) Plaintiffs challenged the award of RSUs to eight non-employee directors, claiming the awards were “excessive” in comparison to compensation paid to directors at the company’s peers. The Court ruled that the plaintiffs could proceed with their claim because the directors’ decision to make the awards was not entitled to the routine protection of the business judgment rule because the directors were not “disinterested.”
"The plaintiff does not contend that Citrix stockholders failed to approve the Plan; that Citrix stockholders were not fully informed when they approved the Plan; or that the RSU Awards violated the Plan. Rather he asserts that the defendants must establish the entire fairness of the RSU Awards as conflicted compensation decisions because the Plan does not have any ‘meaningful limits’ on the annual stock-based compensation that Citrix directors can receive from the Company.” [Emphasis added]
“But Mike,” you say, “doesn’t every plan in the country allow directors to make awards to themselves? Doesn’t that turn the ordinary judicial standard of review on its head, forcing the board to prove the Awards were fair instead of plaintiffs proving them to be unfair?”
Yes they do and yes it does!
In holding against the company and the directors, the Court summarized its application of the entire fairness test as follows: “It is reasonably conceivable that the RSU awards were not entirely fair.” That is a very low hurdle. It is reasonably conceivable that the Chicago Cubs will win the World Series this year (after a 100-year drought). Not likely, but reasonably conceivable. Once plaintiffs get the case into the “entire fairness test,” further litigation and legal expenses – or a costly settlement – are assured.
The Plan contained a general limit of 1 million shares on awards to any participant, but no sub-limit on awards to directors. Thus, plaintiffs argued and the Court accepted that based on Citrix’s $55 stock price when the lawsuit was filed, a director could receive an award worth $55 million. Not that they did or that any director in history received such an award, but that they could! (No word yet on whether the directors also will be charged with bank robbery because they could decide to rob a bank.)
The decision went against the company/board due to the lack of simple language in the company’s stock plan that we have been suggesting for years. Without the meaningful plan limits on director stock awards, the directors were left to argue that the company’s stockholders had ratified the awards when they had voted to approve the plan. This argument had worked for the company in Cambridge Retirement System v. Bosnjak (see “More Bad News in the Trend of Lawsuits Against Non-Executive Directors Over Their Own Compensation”), but that plan had explicit shareholder approval of the stock awards to the directors.
This does not mean plaintiffs have won the case. However, it does mean that the costs in directors’ time and the company’s treasure of fighting this semi-ridiculous lawsuit will now accelerate rapidly (most likely leading to a settlement that enriches the plaintiffs’ lawyers with zero benefit to shareholders).