Cause for concern regarding director compensation.

• Author: Raymond, Doug
• Position: DIRECTOR COMPENSATION

Directors have again been given a clear message: If they set their own compensation without 'guardrails' approved by the shareholders they risk facing breach of fiduciary duty claims.

In recent years, there have been rumblings about the risks directors face when approving their own compensation. Those rumblings, triggered by a 2012 Delaware Court of Chancery opinion, Seinfeld v. Slager, reverberate further following the most recent ruling on the subject. Calma v. Templeton closely echoes Seinfeld and gives directors renewed reason for concern.

In Calma v. Templeton, a shareholder filed suit against Citrix Systems Inc., a Delaware corporation, and its board of directors alleging that Citrix's directors had breached their fiduciary duties by awarding excessive equity compensation to the company's non-employee directors. The plaintiff further argued that these awards were self-dealing transactions because they were made by the recipient directors to themselves and so, as in Seinfeld, the highly burdensome entire fairness standard of review applied.

The Citrix board had granted these awards under the company's omnibus Equity Incentive Plan, which had been approved by a majority of the company's disinterested shareholders. The plan had given to the board's compensation committee, consisting solely of non-employee directors, broad discretion to grant awards to the plan's myriad potential participants, including Citrix officers, directors, employees, and advisors. The only limitation was that no single participant could receive more than 1 million shares per year, which translated to more than $55 million. The plan set no sub-limits on awards to directors.

As in earlier cases, the Citrix directors argued that the challenged awards to the non-employee directors had been ratified when the shareholders approved the plan and the decision to approve the challenged awards was therefore entitled to business judgment deference. The court disagreed.

No sanctuary

The court concluded that ratification offers no sanctuary to directors purporting to act under a "blank check" from shareholders. Because the court found that the shareholders had not been asked to approve any act bearing on the magnitude of non-employee director compensation, it held that the plan's approval alone could not ratify the decision to award the challenged equity grants. The court went on to note: "[specifying the precise amount and form of director compensation in an equity...