In January, I posted on the disquieting reversal of the Investors Bancorp case. Today, I want to mention another case that received little attention, but that highlights an important point in this area.
I am somewhat embarrassed to admit that I first noticed Cement Masons Local 780 Pension Fund v. Schleifer in an article in Governance Insights from ISS Analytics by Alexandra Higgins. The Pension Fund, which was a stockholder in Regeneron Pharmaceuticals, alleged that the company’s non-employee directors were the highest compensated non-employee directors in the United States in 2013, and were compensated at much higher levels than were directors at peer companies. Each nonemployee director had received in excess of $1,400,000 in compensation that year. The only restrictions on the compensation that could be paid to the non-employee directors was a limit of 1 million shares per individual on non-qualified stock options under the company’s 2014 equity incentive plan over the life of the Plan. The 2014 Plan included no annual limit and provided that non-employee directors could receive awards other than non-qualified stock options.
Although ISS and Glass Lewis advised shareholders to vote against the 2014 Plan, the result of the shareholder vote was just over 65 million votes for the 2014 Plan and nearly 41 million votes against it. However, Cement Masons alleged that if the shares owned by the directors and other defendants were subtracted from the “for” vote total, along with shares owned by an affiliated company, which owned 20% of the company’s stock (and was legally bound to vote “for” the 2014 Plan), the number of “for” votes would be reduced from just over 65 million to 24.3 million. The latter figure represented the number of disinterested shareholders voting in favor of the 2014 Plan, which was far less than the number of shareholders who voted against the 2014 Plan.
Under the circumstances, the Supreme Court of New York County (note that in New York the Supreme Courts are more like the trial courts in other states, rather than the highest court of that state) found that the shareholder approval of the 2014 Plan did not save the day for the director defendants, and the business judgment rule under New York corporation law did not shield the directors’ judgment in this “self-interested transaction.” New York and Delaware law require that a self-interested transaction be “specifically approved in good faith by vote of the stockholders.” While New York courts have not directly interpreted this requirement, Delaware courts have interpreted the similar Delaware corporate law requirement to mean that only disinterested shareholders’ votes may be considered.
Like Investors Bancorp, Schleifer further supports the conclusion that general limits on non-employee director compensation under a shareholder-approved plan are not enough.