The Delaware Supreme Court recently issued a decision (In re Investors Bancorp, Inc. Stockholder Litigation) largely rejecting prior Delaware case law which had held that directors’ self-interested compensation decisions could benefit from review under the deferential business judgment rule where stockholders have approved meaningful director compensation limits.

Under Bancorp, stockholder approval of directors compensation may not serve as a defense where plaintiffs can successfully plead that director awards were unfair and excessive unless stockholders have approved either the directors’ awards or a director compensation plan that is self-executing of formulaic. 

In light of Bancorp, companies wishing to insulate themselves from plaintiff claims against directors for breach of fiduciary duties relating to director compensation – particularly those companies which may be more at risk because their director compensation is higher than their peer director compensation –may wish to consider whether it may be prudent to obtain stockholder approval of formula plans that preclude directors from exercising discretion regarding the terms and conditions of the awards. Alternatively, companies could considering obtaining stockholder approval of their director awards.

Please see the Compensation Connection Blog for a discussion of the Bancorp case.