On December 13, 2017, the Delaware Supreme Court held that discretionary equity compensation grants to directors are subject to an “entire fairness” standard of review, rather than the more deferential “business judgment” rule, even if the equity incentive plan has been adopted and approved by the company’s stockholders. Specifically, the Delaware Supreme Court held that when stockholders have approved an equity incentive plan that gives the company’s directors discretion to grant themselves awards within general parameters, the directors will be required to prove the fairness of their awards to the corporation and will not be able to rely on the business judgment rule unless (i) the directors submit specific compensation decisions related to equity grants to themselves for approval by fully informed, un-coerced, and disinterested stockholders, or (ii) the plan is self-executing (i.e., the plan grants awards to directors over time based on fixed criteria, with the specific amounts and terms approved by the stockholders).

While the exact impact of this case remains to be seen, Delaware-based corporations, even those with stockholder approved plans, should conduct a review of their equity incentive plans and director equity grants to make sure that such grants are fair to the corporation based on supportable facts and take steps to guard against stockholder litigation challenging such awards as unfair and excessive. Companies may want to consider making changes to their director equity compensation practices if (i) the value of equity grants to directors deviate materially from those made by peer companies, and/or (ii) the plan is not self-executing with specific limits and terms for director equity grants.

View a copy of In re Investors Bancorp, Inc. Stockholder Litigation.