We have previously blogged on the lawsuit filed against the directors of Facebook (including employee directors Mark Zuckerberg and Sheryl Sandberg) in Delaware Chancery Court, Espinoza v. Zuckerberg, et al., beginning in June 2014, when the suit was filed (Litigation Over Executive and Director Compensation Takes Another Turn for the Worse) and as recently as last November, Executive Compensation Litigation Update – Preliminary Decision in Favor of Plaintiffs in Lawsuit Over Facebook Directors’ Compensation. This week, the parties reached a settlement, which they have submitted to the court for approval.

The proposed settlement has three main components (quoted fully below). Facebook agreed to:

  1. Make certain governance reforms by amending the Compensation & Governance Committee Charter.
  2. Submit to a stockholders vote at the 2016 annual meeting, separate proposals for stockholder approval on compensation for Non-Employee Directors as follows:
    1. a proposal to approve the 2013 grants to the Non-Employee Directors; and
    2. a proposal to approve the Annual Compensation Program for Non-Employee Directors, which includes a specific amount for annual equity grants and delineates the annual retainer fees for use by the Board going forward.

  The Non-Employee Directors must abstain from voting in their capacity as stockholders on each of these proposals.

    3.  Pay an award of attorneys’ fees and expenses to plaintiff’s counsel not to exceed $525,000.

For those of you who wonder why we write about litigation so much, it is simply because most litigation can be avoided by better drafting of plans and agreements and/or better procedures. We have been recommending that all companies adopt limits on annual equity grants and annual retainer fees to directors. Consider it for this winter/spring.

2. Terms of the Settlement

2.1. As a direct result of the filing, prosecution, and settlement of the Action, Facebook has agreed to implement and maintain in substance the corporate governance reforms, additions, amendments, or formalizations set forth below (the “Corporate Governance Reforms”) for a period of five (5) years from the Effective Date. In connection with the Settlement and in consideration of the Released Claims set forth herein:

2.1.1. Compensation & Governance Committee Charter.

As soon as practicable after the Effective Date, the Board shall amend the charter of the Compensation & Governance Committee to provide that the Compensation & Governance Committee shall be responsible for: (A) conducting annually a review and assessment of all compensation, including cash and equity-based compensation, paid by Facebook to the Non-Employee Directors; (B) engaging an independent compensation consultant to advise the Compensation & Governance Committee in connection with such annual review and assessment, including with respect to (x) the amount and type of Non-Employee Director compensation to be paid for the following year, and (y) comparative data deemed appropriate by such consultant; and (C) recommending to the Board, on the basis of such review and assessment, whether to make, on a prospective basis, any change in the compensation payable to the Non-Employee Directors.

2.1.2. Board Review.

The Board shall review annually the compensation payable to the Non-Employee Directors, including any recommendation by the Compensation & Governance Committee as to any change in the compensation payable to the Non-Employee Directors.

2.1.3. Stockholder Vote.

At the 2016 annual meeting of stockholders of Facebook, Facebook shall include separate proposals for stockholder approval on compensation for Non-Employee Directors as follows: (i) Facebook shall propose to the stockholders that they approve the 2013 grants to the Non-Employee Directors; and (ii) Facebook shall propose to the stockholders that they approve the Annual Compensation Program, which includes a specific amount for annual equity grants and delineates the annual retainer fees for Non-Employee Directors, for use by the Board going forward. The Non-Employee Directors shall abstain from voting in their capacity as stockholders on each of these proposals.