Last week litigation over executive and director compensation continued its evolution down the path we have been describing for the last couple years, as the strike suit lawyers filed an “excessive compensation” lawsuit against the officers and directors of Facebook in Delaware Chancery Court,Espinoza v. Zuckerberg, et al. Picking up on a thread offered by some earlier Delaware court decisions, in addition to its obligatory and generalized claims of too much compensation, the lawsuit argues that the “demand” requirement is excused “Because all of the Director Defendants approved the compensation at issue here and all the non-employee Director Defendants ... received the challenged compensation pursuant to an incentive plan that contains no limits on their compensation, let alone meaningful ones, the Director Defendants stand on both sides of the compensation awards.” Since 1996, conventional wisdom, supported by economic efficiency, has led companies to provide stock awards to officers and directors under the same incentive plan. This lawsuit confirms our earlier warnings that companies need to rethink this approach.
Is this lawsuit likely to prevail? Of course not. But that is not the goal of the plaintiff's lawyers in this action (and similar actions). The goal is to survive a defense motion to dismiss the suit for failure to satisfy the demand requirement and achieve a juicy settlement for the lawyers. However, we strongly suspect that some of the parties will come away wishing that they had been reading our blogs on this topic – and on defensive plan drafting to avoid shareholder litigation generally – over the last few years, in which case they could have avoided this mess entirely.
P.S. I have tried to keep this discussion short and simple. However, if you do not understand the “demand” requirement or defensive plan drafting strategies, you should consider contacting us to discuss how to better protect your officers and directors against these lawsuits.