Late last month, a Delaware chancery court allowed a shareholder derivative suit contesting the validity of a $120 million retention grant to Simon Property Group’s CEO to proceed past the motion to dismiss stage.
The suit was filed by the Louisiana Municipal Public Employees Retirement System in the wake of Simon Property Group’s failed 2011 say-on-pay vote. The crux of the plaintiff’s claim is that a $120 million equity-based retention grant to Simon Property Group’s CEO was not permitted under the terms of the company’s equity compensation plan.
The equity compensation plan was an omnibus plan that permitted various types of equity-based awards, including “performance units,” which were required under the terms of the plan to be subject to performance-based vesting conditions. The units the board of directors wished to grant to Simon Property Group’s CEO were scheduled to vest based only on the CEO’s continued performance of services. Therefore the company amended the equity compensation plan to remove the performance-based vesting requirement for performance units. It did not seek shareholder approval for the amendment.
NYSE listing requirements mandate that certain amendments to equity compensation plans be subject to shareholder approval. These amendments include expanding the types of awards that may be granted under the plan. The question before the court was whether the amendment removing the performance-based vesting requirement had the effect (as the plaintiffs argued) of expanding the types of awards that could be granted under the plan. Prior NYSE guidance had indicated that amendments that merely remove or eliminate vesting requirements, for example in connection with a change in control, did not require shareholder approval. Indeed, Simon Properties Group had obtained informal guidance (an email) from NYSE staff stating that shareholder approval was not required with respect to the amendment at issue.
The Delaware chancery court decided in favor of the plaintiffs, rejecting Simon Property Group’s argument that the amendment was not required, and calling into question the reliability of informal NYSE staff guidance on interpretive issues under the NYSE listing requirements.
The case contains a number of lessons for companies that sponsor equity compensation plans: (i) whenever amending a plan, pay careful attention to whether shareholder approval is required, whether under applicable exchange listing requirements or tax requirements or otherwise; (ii) understand that an amendment that creates a de facto new type of award — such as (as here) turning performance units into restricted stock units — will likely require shareholder approval; (iii) do not necessarily rely on informal exchange guidance in determining whether shareholder approval is required; and (iv) realize that non-performance-based equity awards, especially big ones and especially to the CEO, are likely to generate substantial shareholder resistance, including derivative suits and failed say-on-pay votes.