SIP Doesn’t Waive Entire Fairness Requirement
A stockholder alleged that the aggregate combination of cash and equity compensation paid to the company’s non-employee directors was “grossly excessive” and thus amounted to a breach of the directors’ fiduciary duty of loyalty. The plaintiff’s allegations focused on equity awards made to non-employee directors under the company’s stock incentive plans (“SIPs”) approved by stockholders. The directors argued waiver of the entire fairness standard in the SIP. However the Delaware Chancery Court relied on a state Supreme Court decision and held the “entire fairness” standard applies with regard to director approval of director compensation. Rejecting the directors’ arguments, the court found stockholder approval in this context did not represent a sufficiently knowing waiver of the entire fairness standard. The court highlighted that the plans absolve, in advance, the directors for breaches of duty in self-dealing, absent a demonstration of bad faith.