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For 30 years, Mark Poerio has been in private practice with a focus on executive compensation, employee benefits, and fiduciary matters, especially from a business, governance, tax, securities, and litigation perspective. He currently serves as President of the prestigious American College of Employee Benefits Counsel, and on the executive board of the American Benefits Council.

  

Mark's clients include public and private companies, and he has significant experience with not-for-profit organizations. His business oriented pay-for-performance approach has led to his role as special counsel to compensation committees, as well as to his spearheading of projects designed to link executive compensation both to corporate goals and to the enforcement of post-employment covenants relating to trade secrets and restrictive covenants (such as non-competes).

  

 

Mark also teaches at Georgetown Law - with his past courses focusing on executive compensation and governance, the design of benefit plans and employment-related agreements, and employee stock ownership plans (ESOPs).

 

 

 

The Wagner Law Group

The Wagner Law Group is a nationally recognized practice in the areas of ERISA and employee benefits, estate planning, employment, labor and human resources and investment management.

 

Established in 1996, The Wagner Law Group is dedicated to the highest standards of integrity, excellence and thought leadership and is considered to be amongst the nation's premier ERISA and employee benefits law firms. The firm has seven offices across the country, providing unparalleled legal advice to its clients, including large, small and nonprofit corporations as well as individuals and government entities worldwide. The Wagner Law Group's 32 attorneys, senior benefits consultant and five paralegals combine many years of experience in their fields of practice with a variety of backgrounds. Eight of the attorneys are AV-rated by Martindale-Hubbell and seven are Fellows of the American College of Employee Benefits Counsel, an invitation-only organization of nationally recognized employee benefits lawyers.  Five of the firm's attorneys have been named to the prestigious Super Lawyers list for 2017, which highlights outstanding lawyers based on a rigorous selection process.

 

 

 

 

 

  

 

 

 

Contact Info

The Wagner Law Group

 

  Integrity | Excellence

  

Boston 

Tel: (617) 357-5200 

Fax: (617) 357-5250 

99 Summer Street 

13th Floor

Boston, MA 02110

 

Washington, D.C.

Tel: (202) 969-2800

 

Fax: (202) 969-2568

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Chicago

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Chicago, IL 60603

 

  

Palm Beach Gardens 

Tel: (561) 293-3590
Fax: (561) 293-3591
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Tampa

Tel: (813) 603-2959

Fax: (813) 603-2961

101 East Kennedy Boulevard

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San Francisco

Tel: (415) 625-0002

Fax: (415) 358-8300

300 Montgomery Street

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St. Louis

Tel: (314) 236-0065

Fax: (314) 236-5743
25 W. Moody Avenue
St. Louis, MO  63119 

 

 

www.wagnerlawgroup.com

 

 

 

 

 

Director Compensation

 Law Alert

 

Litigation Risks Escalate for Director Compensation:

How to Avoid Becoming the Next Target

 

 

 

 

Shareholders have long had the ability to bring derivative actions to recover damages from corporate directors who overpaid themselves. Claims of that kind were rare before 2012, but have escalated in recent years for two reasons. First, detailed survey data about director compensation levels has become readily available due to enhanced SEC proxy disclosure rules, thereby facilitating peer group comparisons and demonstrations of unreasonableness. Second, a series of Delaware court decisions has established new precedent that favors shareholders who bring excessive compensation claims. Discussed below are the liability risks associated with making director compensation decisions, and some smart precautions for directors to consider.

 

As a preliminary matter, court review of most director compensation decisions occurs under the highly deferential business judgment rule. However, if a shareholder alleges excessive compensation with specificity, directors may need to pass a fact-intensive ''entire fairness'' test, under which directors must demonstrate that they both engaged in a prudent process for determining their compensation levels, and ultimately made reasonable and justifiable decisions. Before 2018, Delaware courts would apply the business judgment rule if director compensation fell within shareholder-approved limits that were meaningful.


A surprise twist -- in favor of shareholder derivative claims -- came from Delaware's Supreme Court in Investors Bancorp decision (12/19/2017). In that case, the court retreated from the meaningful limits test, and held that the business judgment rule would not protect directors if --

  • a shareholder properly alleges that directors breached their fiduciary duties by paying themselves excessive compensation; and
  • the directors had exercised discretion over their compensation or stock awards, even if that had occurred within meaningful shareholder-approved limits.

 

In response to the foregoing, it makes sense for boards to immediately consider the following questions addressed in Parts I and II below: Does it make sense to seek shareholder approval for a set amount of director compensation? And, what should board members be doing, from a process side, to build a record that justifies the discretion they exercise when setting their own compensation?

 

 

 

I.         Shareholder-approved Amount

 

 

 

 

If a shareholder-approved plan establishes a self-executing (nondiscretionary) formula for determining future director compensation, that formula should secure judicial review under the business judgment rule for so long as directors follow that formula when determining their compensation levels.

 

  

 

Suppose, however, that directors decide in the future to pay in excess of a shareholder-approved formula. They may, of course, choose to seek stockholder approval for the increase. They could instead decide to forego that approval, and instead position to defend the increase as being reasonable and defensible under the entire fairness standard. The risk of being sued for paying excessive compensation seems far less for increasing a shareholder-approved amount than it would be for defending the entire director compensation package.

 

 

 

II.        Improved Procedures

 

 

 

 

In its Investors Bancorp decision, Delaware's Supreme Court permitted the litigation to proceed because:

 

  

 

''The plaintiffs have alleged facts leading to a pleading stage reasonable inference that the directors breached their fiduciary duties in making unfair and excessive discretionary awards to themselves after stockholder approval of the EIP." [Author's note: EIP abbreviates Equity Incentive Plan.]

 

  

 

What gave rise to that ''reasonable inference''? The court highlighted a few allegations, supported by data drawn from the complaint. Notably, peer data showed that Investors Bancorp made new stock awards that jumped director pay to a level 23 times the median paid by similarly-situated companies. Those stock awards also increased the annual compensation of directors to high multiples of their past annual compensation levels. Although directors had held four meetings and considered peer data, the complaint alleged that the board relied on peer data that itself was arbitrarily selected and ''driven by self-selection bias.'' Interestingly, the data came from a law firm serving as corporate counsel -- rather than from an independent consultant.

 

  

 

The complaint against Investors Bancorp's directors seems to have been grounded in far more than conclusory allegations of excessive compensation. That gave the litigation legs. Directors should respond by following a well-documented process that involves independent advice, and decisions that are readily justifiable based on an examination of relevant peer data.

 

 

 

CONCLUSION

 


Given the escalating likelihood that shareholders and analysts will focus on the reasonableness of director compensation, corporate directors should consider taking the following steps when making decisions about their own compensation:

 

  • Start with a compensation consultant.  Peer data provides the best indicia of reasonableness, and helps to fashion discussion of what forms of compensation to consider and how much to pay.  All of this can begin at the compensation committee level.
  • Act through more than one meeting, in order to build a record that indicates a thorough level of procedural diligence. Decisions made at a single meeting are often second-guessed as having been rushed or inadequately reviewed.
  • Consider having shareholders approve precise levels of annual awards, or a particular dollar value for each director's annual compensation. This could involve locking-in a suitable amount for a period expected to cover several future years.
  • Consider including an automatic escalator in any shareholder-approved formula for determining director compensation. An escalator may delay the need for future shareholder votes.

·         For instance, if shareholders are asked to approve a fixed dollar amount or equity award level, they could coincidentally approve an annual increase by a fixed percentage, such as 10%.

·         This approach should preserve business judgment rule review because, as held in Investors Bancorp, "when it comes to the discretion directors exercise following stockholder approval of an equity incentive plan, ratification cannot be used to foreclose the Court of Chancery from reviewing those further discretionary actions when a breach of fiduciary duty claim has been properly alleged." 
 

 

Overall, directors face costly litigation if the entire fairness test applies to shareholder claims alleging director compensation is excessive. Board members who want to avoid litigation, as well as the associated risk to their reputations, should take preventative action in 2018.

 

 

 

* * *

 

Further information about director compensation is available , from partner, Mark Poerio, as well as from the following webpages that he updates:

 

 

(This alert is adapted from WLH Partner Mark Poerio's article title "New Year - New Stock Plan," published in Bloomberg's Pension & Benefits Daily, 35 PBD, 2/21/2018)
 

 

 

 

 

 

 

 

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This Newsletter is provided for information purposes by The Wagner Law Group to clients and others who may be interested in the subject matter, and may not be relied upon as specific legal advice.  This material is not to be construed as legal advice or legal opinions on specific facts. Under the Rules of the Supreme Judicial Court of Massachusetts, this material may be considered advertising.