Client Alert: Seinfeld v. Slager
Directors of public company boards set their own compensation, which has long been a source of concern for shareholders. A recent Delaware Chancery Court (the “court”) ruling casts new light on how directors can fulfill their fiduciary duties when setting their own pay.
Unlike in prior cases, in Seinfeld v. Slager the court refused to apply the “business judgment rule” to dismiss a challenge to directors who had approved large equity awards for themselves under a shareholder-approved plan. In the early stages of the litigation, the court refused to dismiss the shareholder’s claim under the business judgment rule given that the shareholder-approved equity plan did not impose “meaningful limits” on the maximum size of an award that could be made to a director. The court focused less on the actual size of the challenged awards and more on the almost unlimited size of the awards that could be made under the shareholder-approved equity plan.
Although the court denied the directors’ motion to dismiss, we believe that the guidance from this decision will benefit public company directors. The decision will likely lead to additional limits on director equity awards in shareholder-approved equity plans, which will better protect director pay decisions from shareholder legal challenges. Such director-award limits in plans can still be relatively high, and so ultimately should not place tight constraints on boards as they grant director equity awards. Although Seinfeld directly applies only to directors of Delaware corporations, the Delaware court is often seen as a leading court on corporate governance issues.