We are beginning to see the impact of the Delaware Supreme Court’s reversal in the Investors Bancorp case, and it is not pretty. Two companies/boards recently agreed to settle lawsuits over non-employee director compensation, the attorneys for the parties and the Chancery Court Judge acknowledged that the settlement was influenced by the Investors Bancorp Case. In Solak v. Barrett, et. al., the lawsuit alleged that the directors of Clovis Oncology paid themselves excessive compensation in breach of their fiduciary duties and wasted corporate assets. According to the complaint, non-employee directors received an average of $617,700 in 2015, which was more than twice the average compensation of non-employee directors in the Fortune 50. Clovis is well outside the Fortune 500.
Under the proposed settlement, the Board would take certain “corrective action” and adopt certain “corporate governance reforms.” The company will present a binding proposal to approve a new director compensation plan to its stockholders at the company’s next annual meeting. The proposal will establish a specified amount of overall compensation payable to existing and newly-appointed non-employee directors. Each incumbent non-employee director’s total annual base compensation, including cash and equity components (based on grant-date fair value), and exclusive of additional fees awarded for board and committee service will be at an amount specified in the proposal between $350,000 and $425,000. Newly appointed non-employee director’s total base compensation may be higher. Each non-employee director also may receive additional fees awarded for board and committee service.
The proposal will include a full description of the new director compensation plan, will explain the process of formulating the new director compensation plan, and will identify the constituents of the company’s peer group. If approved by stockholders, the specified amount of total annual non-employee director compensation will remain in effect for a definite time between two and five years.
The company also agreed to follow certain practices in considering changes to the new director compensation plan in the future, including using compensation paid to non-employee directors of peer group companies as a guide, reviewing its peer group on an annual basis, and following current best practices (which we have discussed in prior blogs). Finally, the company belatedly agreed to adopt mandatory stock-ownership guidelines for non-employee directors.
Every public company in America needs to review its non-employee director compensation process or risk facing a lawsuit. As I have noted in previous posts, I had never seen plaintiffs win a case like this in the first 35 years of my career. Now they seem to be on a roll.