In Re Investors Bancorp, Inc. Stockholder Litigation
169, 2017
| Del. | Dec 19, 2017Background
- Investors Bancorp adopted a broad Equity Incentive Plan (EIP) in 2015 reserving ~30.9M shares for awards to ~1,800 officers, employees, non-employee directors and service providers; non-employee directors could receive up to 30% of option/restricted-stock shares.
- The proxy disclosed that the Committee would have discretion to determine the number, types, and terms of awards after stockholder approval; stockholders approved the EIP (96.25% of votes).
- Within days of approval the Compensation Committee met repeatedly, reviewed peer data and consultant analyses, and awarded large stock-option and restricted-stock grants to both non-employee directors and two executive directors (Cummings and Cama).
- Plaintiffs (stockholders) sued, alleging the post-approval discretionary awards were unfairly large, rewarded past conversion work rather than future performance, and far exceeded peer-company awards.
- The Court of Chancery dismissed the complaint, finding stockholder ratification applied because the EIP contained meaningful, specific limits on director awards; the Supreme Court reversed and remanded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether stockholder approval of an EIP that leaves post-approval discretion to directors bars judicial review (ratification defense) | Elburn/Soehnel: General approval of an EIP that leaves allocation discretion does not ratify later self-interested awards; directors must prove entire fairness when discretion is exercised unfairly | Directors: Stockholder approval of plan parameters (with limits) ratifies subsequent awards made within those limits; business judgment/waste review should apply | The Court held stockholder approval of general-plan parameters does not foreclose review of later discretionary, self-interested awards; ratification defense unavailable where complaint pleads inequitable exercise of discretion — directors must prove entire fairness |
| Scope of ratification: When does approval shift burden to plaintiff to show waste? | Plaintiffs: Ratification only applies when stockholders approved specific awards or self-executing plans; not when directors retained broad discretion | Defendants: Relied on cases (3COM/Criden) saying meaningful limits in plan parameters allow ratification and deferential review | Court: Ratification applies when (1) specific awards were submitted; (2) plan is self-executing; or (3) directors exercised discretion under plan parameters that reasonably conveyed what stockholders were approving. Broad discretionary plans without such specificity do not preclude entire-fairness review |
| Whether demand was required before filing (demand futility) for claims against executive directors | Plaintiffs: Demand excused because the same directors who approved their own awards could not impartially consider a demand challenging those awards | Directors: Plaintiffs failed to plead a quid pro quo or single transaction tying non-employee and executive director awards; majority could act independently | Court: Demand excused — near-contemporaneous, overlapping meetings and identical challenged conduct created reasonable doubt about board independence |
| Pleading sufficiency at motion-to-dismiss stage | Plaintiffs: Complaint alleges facts permitting a reasonable inference of inequitable/excessive awards (magnitude, timing, consultant bias, departure from disclosed future-performance rationale) | Defendants: Allegations insufficient given plan limits and stockholder approval; dismissal warranted | Court: Plaintiffs’ factual allegations support a reasonable inference of breach; dismissal improper — case remanded for further proceedings |
Key Cases Cited
- Kerbs v. California Eastern Airways, 90 A.2d 652 (Del. 1952) (stockholder ratification can validate director self-interested plans unless they constitute a gift or are illegal/fraudulent)
- Gottlieb v. Heyden Chem. Corp., 90 A.2d 660 (Del. 1952) (ratification covers specific, fully disclosed awards; future unspecified bargains cannot be ratified)
- Lewis v. Vogelstein, 699 A.2d 327 (Del. Ch. 1997) (ratification applies where plans are self-executing and awards are specified)
- Sample v. Morgan, 914 A.2d 647 (Del. Ch. 2007) (stockholder approval of broad discretionary authority does not grant a "blank check"; equitable review remains available)
- Citrix Systems, Inc. v. Templeton (Calma on Behalf of Citrix), 114 A.3d 563 (Del. Ch. 2015) (broad, generic plan limits that do not specify director compensation cannot be treated as ratifying specific director awards)
- Cede & Co. v. Technicolor, 634 A.2d 345 (Del. 1993) (discusses entire-fairness standard when approvals are self-interested)
- Schnell v. Chris-Craft Ind., 285 A.2d 487 (Del. 1971) (self-interested director actions are not permitted merely because legally possible; fairness required)