The rest of the legal world seems to be waking up to an issue raised by this blog three years ago (See “Recent Court Decisions Suggest Changes to Stock Plan Design to Reduce Litigation Risk”) and discussed periodically since then. It took another major litigation loss to wake them up, but still – better late than never!

Unfortunately, some companies are learning the hard way. As we wrote last month, on April 30, the Delaware Chancery Court issued another decision in a shareholder derivative action against a corporation and its board members over director compensation in general and stock awards in particular, Calma v. Templeton, et. al. (Citrix systems, Inc.) Plaintiffs challenged the award of RSUs to eight non-employee directors, claiming the awards were “excessive” in comparison to compensation paid to directors at the company’s peers. The Court ruled that the plaintiffs could proceed with their claim because the directors’ decision to make the awards was not entitled to the routine protection of the business judgment rule given that the directors were not “disinterested.”

The plaintiff does not contend that Citrix stockholders failed to approve the Plan; that Citrix stockholders were not fully informed when they approved the Plan; or that the RSU Awards violated the Plan. Rather he asserts that the defendants must establish the entire fairness of the RSU Awards as conflicted compensation decisions because the Plan does not have any “meaningful limits” on the annual stock-based compensation that Citrix directors can receive from the Company. (Emphasis added)

The Plan contained a general limit of 1 million shares on awards to any participant, but no sub-limit on awards to directors. Thus, plaintiffs argued and the Court accepted that based on Citrix’s $55 stock price when the lawsuit was filed, a director could receive an award worth $55 million. Not that they did – or that any director in history received such an award – but that they could!

This does not mean plaintiffs have won the case. However, it does mean that the costs in directors’ time and the company’s treasure of fighting these ridiculous lawsuits will now accelerate rapidly (most likely leading to a settlement that enriches the plaintiffs’ lawyers with zero benefit to shareholders).

Another strike suit was filed this week over the same issue, as noted in an Agenda article:

On Tuesday, a shareholder of Goldman Sachs Group filed a derivative suit in the Court of Chancery in Delaware against all 11 of Goldman’s independent board directors for breach of fiduciary duty and unjust enrichment. CEO Lloyd Blankfein and two other executive board members were not charged in the suit since they were dependent upon the outside directors for their comp.