Because directors have a statutory right to set their own compensation (See DGCL §122(15) and §141(h)), director compensation plans are neither void nor voidable. However, the ability of boards to set their own compensation is not without limits. Director compensation is a quintessential “interested director” transaction. In these cases, directors are deciding the amounts and nature of their own compensation and naturally have at least implicit biases in favor of larger amounts. It is no surprise then that director decisions to set their own compensation are subject to entire fairness review upon a stockholder challenge.
In the case that follows, the Delaware Supreme Court addresses whether stockholder ratification in the form of fully-informed, disinterested stockholder approval of a compensation plan for non-employee directors affords the plan the protection of the business judgment presumption rather than the more exacting entire fairness standard. Investors Bancorp also provides a useful overview of the doctrinal development of stockholder ratification for non-employee director compensation.
Note that the discussion in Investors Bancorp relates to director compensation, not compensation of corporate executives. Decisions by the board of directors to compensate corporate executives, like the CEO and other C-level executives who are not simultaneously directors of the corporation, are typically treated like arms-length transactions and granted the protection of the business judgment presumption. Absent a successful attack under the waste standard, claims that the board violated their duty of loyalty to the corporation by approving executive compensation plans will typically fail.
This book, and all H2O books, are Creative Commons licensed for sharing and re-use. Material included from the American Legal Institute is reproduced with permission and is exempted from the open license.