We have blogged before about the increase in lawsuits against directors over their own compensation and the lower standards that determine whether such lawsuits can proceed (see, “Recent Court Decisions Suggest Changes to Stock Plan Design to Reduce Litigation Risk,” among others). Actually, this trend encompasses two separate but similar types of shareholder derivative lawsuits:

  • Lawsuits against directors, officers, and the company alleging that the compensation paid or awarded to one or more executives was excessive, improper, or inadequately disclosed to and approved by shareholders (SeeSeinfeld v. SlagerEspinoza v. Zuckerberg, et al.); and
  • Lawsuits against the directors and the company alleging that the compensation of the directors themselves was excessive (or otherwise improper).

As we have discussed previously, plaintiffs’ objective include claims against directors in an attempt to avoid the so-called demand requirement of shareholder derivative litigation under Delaware law. If a plaintiff’s case can survive a motion to dismiss, a significant commitment of the directors’ time and the company’s legal fees often result.

Cambridge Retirement System v. Bosnjak, (Del. Ch. June 26, 2014) [Unilife Corporation], is in the second category. The aggrieved plaintiffs brought shareholder derivative claims for breach of fiduciary duty and corporate waste against the directors and the company concerning stock awards and cash compensation the directors had paid to themselves dating back to November 2010. The company and the directors had moved to dismiss the complaint for failure to make a pre-suit demand. However, the court rightly concluded that a demand was excused “because the claims involve self-dealing transactions implicating a majority of the members of Unilife’s board of directors.”

DGCL § 141(h) expressly provides that “Unless otherwise restricted by the certificate of incorporation or bylaws, the board of directors shall have the authority to fix the compensation of directors.” However, that does not prevent shareholders from challenging the amount or form of compensation paid.

The court, however, did dismiss claims as to the non-executive directors’ stock awards because Unilife followed the unusual procedure of conditioning all equity grants to board members on obtaining stockholder approval, which the stockholders had provided.

For many years, investors and their advisers seemed to pay little attention to directors’ compensation. This may be changing because of the requirements of shareholder derivative litigation. The next step is how to minimize this new risk.