Recent Delaware Court of Chancery Decision Has Significant Implications for Director Compensation

July 8, 2015

Practical Law logo newCompanies should consider amending their equity compensation plans to impose specific limits on non-employee director compensation following a recent Delaware Court of Chancery decision applying the entire fairness standard in a challenge to non-employee director equity awards.

Calma v. Templeton involved a stockholder derivative action against Citrix Systems, Inc. and its directors challenging grants of non-employee director equity awards under a plan that was approved by company stockholders. As in Seinfeld v. Slager, the Citrix plan had no limits on director compensation other than a generic limit of one million shares (or restricted stock units) per beneficiary per calendar year.

The court held that a board’s self-compensation decisions are conflicted transactions and are subject to entire fairness review instead of the deferential business judgment standard. The court further held that the affirmative defense of stockholder ratification did not apply because the company stockholders:

  • Approved only the plan, which did not specify the amount or form of compensation awardable to the company’s non-employee directors (apart from the generic limit applicable to all beneficiaries).
  • Did not approve any of the specific non-employee director grants or Citrix’s director compensation practices.

In addition, in its entire fairness review, the court found that the plaintiff stockholder had raised meaningful questions as to the appropriateness of the peer group used to determine director compensation.

Calma involved a very common equity compensation plan design.  As a result of the decision, companies should:

  • Determine the maximum amount that directors can receive under an equity compensation plan.
  • Consider if limits on director grants are appropriate, and whether different limits should apply to non-employee directors.

For more information, see Legal Update, Delaware Court of Chancery Applies Entire Fairness to Breach Claim Relating to Non-employee Director Equity Awards.