New Court Ruling, New Need for Caution

Philadelphia partner Doug Raymond’s latest column for Directors & Boards, written with the assistance of Philadelphia associate Remy Nshimiyimana, was published in the October 2012 issue of the magazine.

Doug, a partner in the firm’s Corporate and Securities Practice Group, discusses a recent Delaware Court of Chancery decision that denied business judgment deference to a board’s decision to grant equity incentive awards to board members, even though the plan under which the awards were granted had been approved by stockholders. The court held that the directors had breached their fiduciary duties, which, Doug says, “illustrates the pitfalls of today’s governance environment, particularly in the area of board compensation, where boards historically had significant latitude.”

Doug notes that these are not easy days for boards: “Putting the burden on the board to demonstrate that their actions are “entirely fair” inevitably creates an incentive for some to litigate these issues,” he says. He adds that “in the future, directors should consider whether to submit specific limitations on their own compensation program, both cash and equity, to the stockholders for approval.”