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Delaware Supreme Court Revisits Stockholder Ratification of Director Equity Awards

By Lawrence A. Goldman, Gibbons P.C.

In a recent decision, In re Investors Bancorp Stockholder Litigation, the Delaware Supreme Court considered the limits of the stockholder ratification defense when directors make equity awards to themselves under the general parameters of an equity plan. Reversing the Court of Chancery, the court held that when stockholders approve only the broad parameters of a plan and the directors retain discretion to make awards under the parameters, such exercise of discretion must be consistent with directors’ fiduciary duties. Since the actual awards are self-interested decisions not approved by the stockholders, the awards, if challenged, are subject to an entire fairness standard of review. Under the equity plan at issue, a maximum number of shares subject to awards were reserved for non-employee directors, but the directors retained the right to make actual awards subject to the aggregate maximum. The court distinguished stockholder approval of an equity plan where the making of awards would be self-executing, leaving no discretion to directors. In such a case, the stockholders would know exactly what they are approving, so the ratification defense would generally apply.

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