In Re Investors Bancorp, Inc. Stockholder Litigation
177 A.3d 1208
| Del. | 2017Background
- Investors Bancorp adopted a broad Equity Incentive Plan (EIP) in June 2015 reserving 30,881,296 shares for options/restricted stock across ~1,800 participants; non-employee directors could receive up to 30% of option/restricted-stock shares.
- The proxy disclosed that the number, types, and terms of awards would be determined by the Compensation Committee after shareholder approval; shareholders approved the EIP (96.25% of votes).
- Within days the Committee met multiple times and awarded large option and restricted-stock packages to all directors and senior executives (total alleged fair value ≈ $51.65M), producing awards far above prior pay and peer averages.
- Stockholders filed derivative suits alleging the board breached fiduciary duties by granting unfair/excessive self-interested awards; defendants moved to dismiss, invoking shareholder ratification and failure to make a pre-suit demand.
- The Court of Chancery dismissed; the Delaware Supreme Court reversed, holding that when a discretionary plan grants directors post‑approval discretion and plaintiffs plausibly allege inequitable exercise of that discretion, ratification cannot defeat the claim at the pleading stage; also, demand was excused.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether shareholder approval of a discretionary EIP bars claims alleging directors awarded themselves excessive awards (ratification defense) | Shareholder approval of general plan parameters does not ratify later self-interested discretionary awards; such awards must be subject to equitable review if plausibly alleged to be unfair | Ratification of the EIP (with limits) validates subsequent awards made within plan parameters and supports dismissal under business-judgment review | Ratification is unavailable to dismiss when shareholders only approved discretionary plan parameters and plaintiffs plausibly allege inequitable exercise; directors must prove entire fairness |
| When can ratification apply to director compensation under an approved plan? | Ratification only applies where shareholders approved specific awards or a self-executing plan with no director discretion | Approval of a plan with meaningful limits on director awards can extend ratification to post‑approval discretionary awards | Ratification applies when shareholders approved specific awards or self-executing plans; for discretionary plans, ratification only protects awards when shareholders imposed meaningful, specific limits — otherwise entire fairness applies |
| Whether the Investors Bancorp EIP contained meaningful limits sufficient to invoke ratification | Plaintiffs: EIP provided broad discretion (30% cap across directors) and non-specific award terms — no meaningful limits | Defendants: The 30% cap and plan parameters are meaningful limits comparable to cases allowing ratification | Held that the EIP’s generic parameters and post-approval discretion supported a reasonable inference of inequitable awards; ratification defense inapplicable at pleading stage |
| Whether demand on the board was required for claims against executive directors (demand futility under Rule 23.1) | Plaintiffs: Board members who voted to grant themselves awards could not have impartially considered a demand challenging those same awards — demand excused | Defendants: Awards to executives occurred over several meetings and lacked a single quid pro quo; majority of directors were disinterested | Held demand was excused: contemporaneous meetings producing awards to both non-employee and executive directors made independent board consideration implausible |
Key Cases Cited
- Kerbs v. California Eastern Airways, 90 A.2d 652 (Del. 1952) (shareholder ratification cures voidable board acts unless the action was a gift, ultra vires, illegal, or fraudulent)
- Gottlieb v. Heyden Chem. Corp., 90 A.2d 660 (Del. 1952) (ratification applies to specifically disclosed awards; future unspecified bargains are not ratified)
- Sample v. Morgan, 914 A.2d 647 (Del. Ch. 2007) (shareholder approval of broad discretionary authority is not a "blank check"; equitable review remains available)
- Calma v. Templeton (Citrix), 114 A.3d 563 (Del. Ch. 2015) (plans with only generic limits on all beneficiaries do not allow ratification of director compensation)
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (test for demand futility and when board demand may be excused)