Monthly Archives: April 2016

April 1, 2016

Director Pay Litigation: Espinoza Settlement Rattles

Here’s the intro from this Willis Towers Watson memo about a proposed settlement in the Espinoza lawsuit (this is the Facebook case that I’ve blogged about before and Mike Melbinger has blogged about a few times – but it’s worth blogging about again, particularly since the court approved the settlement a few days ago):

A recent settlement agreement in litigation challenging the compensation paid to a company’s outside directors is attracting considerable attention. The settlement in the Espinoza case (C.A. No. 9745, Del. Ch.) was filed in a shareholder lawsuit alleging that a company’s board had breached its fiduciary duties, committed corporate waste and caused unjust enrichment by paying excessive compensation to non-employee directors. Among its most notable provisions, the proposed settlement calls for the company to obtain shareholder approval of the pay of its outside directors.

Here’s the key takeaways from the memo:

This lawsuit and the proposed settlement serve as yet another reminder that companies should be diligent in developing and periodically evaluating their non-employee director compensation programs. Recall that two other recent Delaware cases (Seinfeld v. Slager and Calma v. Templeton) also involved challenges to non-employee director compensation. In both of those cases, the Delaware Chancery Court denied summary judgment and required the cases to be reviewed under the entire fairness standard (instead of the business judgment rule) because the companies’ equity plans did not impose “meaningful limits” on director compensation. (For more on those cases, see “Delaware Ruling on ‘Excessive’ Director Pay Offers Guidance for Avoiding Future Litigation,” Executive Pay Matters, June 4, 2015.)

While Calma and Seinfeld focus on the content of the shareholder-approved plan (i.e., were there meaningful limits on director compensation in the plan such that shareholders could understand the magnitude of compensation to be paid), Espinoza focuses on the approval process.

While the factual circumstances surrounding Espinoza were unique, the settlement still serves as a reminder that companies should evaluate the limits in their plans with respect to the amount of compensation that directors can award to themselves. If the plan does not impose any “meaningful limits” on director compensation, the company should consider adding them. Companies may also consider whether benchmarking their director cash and equity compensation programs against their peer group is warranted and, if so, they need to be certain that the peer group is appropriate.

Furthermore, companies should review their committee charters and make changes to the process for evaluating and approving director compensation, if necessary. Shareholder ratification of a self-dealing transaction (such as when directors award themselves pay) must be accomplished formally by a vote or by written consent in order to shift the standard of review from the entire fairness standard to the more favorable business judgment rule.

XBRL: SEC Staff Issues Custom Axis Tags Guidance

As noted in this blog, the SEC’s DERA (Division of Economic and Risk Analysis) has issued “Staff Observations” about custom axis tags. This is the second time that DERA has published something like this – the last time was in July 2014 about XBRL exhibits…

Our April Eminders is Posted!

We have posted the April issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!

Broc Romanek