In Re Investors Bancorp, Inc. Stockholder Litigation (2017)
In recent years, plaintiffs’ lawyers have turned their aim to director compensation. They have generally alleged that directors have paid themselves too much equity, breaching their fiduciary duties and wasting corporate assets. If directors grant themselves equity, they must prove the amount is entirely fair to the corporation, unless stockholders ratify the equity plan, in which case, the action is subject to the more deferential business judgment rule. For equity plans that provide for fixed grants and no board discretion, stockholders know exactly what they are approving, and ratification generally inoculates the directors. Equity plans that provide for discretion, if there are “meaningful limits,” may also be defended if there is stockholder ratification. Absent such meaningful limits, though, the reasonableness of the equity grants is subject to review under the more exacting “entire fairness” standard.
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