In re Investors Bancorp, Inc. Stockholder Litig.

• Decision Date: 13 December 2017
• Docket Number: No. 169, 2017,169, 2017
• Citation: 177 A.3d 1208
• Parties: IN RE INVESTORS BANCORP, INC. STOCKHOLDER LITIGATION
• Court: Supreme Court of Delaware

177 A.3d 1208

IN RE INVESTORS BANCORP, INC. STOCKHOLDER LITIGATION

No. 169, 2017

Supreme Court of Delaware.

Submitted: October 4, 2017

Decided: December 13, 2017

Revised: December 19, 2017

Steve J. Purcell, Esquire (Argued), Purcell Julie & Lefkowitz LLP, New York, New York; David A. Jenkins, Esquire, Neal C. Belgam, Esquire, and Clarissa R. Chenoweth, Esquire, Smith Katzenstein & Jenkins LLP, Wilmington, Delaware, for Plaintiffs–Below, Appellants Robert Elburn and Dieter Soehnel.

Kenneth J. Nachbar, Esquire (Argued) and Zi–Xiang Shen, Esquire, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware, for Defendants–Below, Appellees Robert C. Albanese, Dennis M. Bone, Doreen R. Byrnes, Domenick A. Cama, Robert M. Cashill, William V. Cosgrove, Kevin Cummings, Brian D. Dittenhafer, Brendan J. Dugan, James J. Garibaldi, Michele N. Siekerka, and James H. Ward III, and Nominal Defendant–Below, Appellee Investors Bancorp, Inc.

Before STRINE, Chief Justice; VALIHURA, VAUGHN, SEITZ, and TRAYNOR, Justices.

SEITZ, Justice:

In this appeal we consider the limits of the stockholder ratification defense when directors make equity awards to themselves under the general parameters of an equity incentive plan. In the absence of stockholder approval, if a stockholder properly challenges equity incentive plan awards the directors grant to themselves, the directors must prove that the awards are entirely fair to the corporation. But, when the stockholders have approved an equity incentive plan, the affirmative defense of stockholder ratification comes into play. Stated generally, stockholder ratification means a majority of fully informed, uncoerced, and disinterested stockholders approved board action, which, if challenged, typically leads to a deferential business judgment standard of review.

For equity incentive plans in which the award terms are fixed and the directors have no discretion how they allocate the awards, the stockholders know exactly what they are being asked to approve. But, other plans—like the equity incentive plan in this appeal—create a pool of equity awards that the directors can later award to themselves in amounts and on terms they decide. The Court of Chancery has recognized a ratification defense for such discretionary plans as long as the plan has "meaningful limits" on the awards directors can make to themselves.¹ If the discretionary plan does not contain meaningful limits, the awards, if challenged, are subject to an entire fairness standard of review.

Stockholder ratification serves an important purpose—directors can take self-interested action secure in the knowledge that the stockholders have expressed their approval. But, when directors make discretionary awards to themselves, that discretion must be exercised consistent with their fiduciary duties. Human nature being what it is,² self-interested discretionary acts by directors should in an appropriate case be subject to review by the Court of Chancery.

We balance the competing concerns—utility of the ratification defense and the need for judicial scrutiny of certain self-interested discretionary acts by directors—by focusing on the specificity of the acts submitted to the stockholders for approval. When the directors submit their specific compensation decisions for approval by fully informed, uncoerced, and disinterested stockholders, ratification is properly asserted as a defense in support of a motion to dismiss. The same applies for self-executing plans, meaning plans that make awards over time based on fixed criteria, with the specific amounts and terms approved by the stockholders. But, when stockholders have approved an equity incentive plan that gives the directors discretion to grant themselves awards within general parameters, and a stockholder properly alleges that the directors inequitably exercised that discretion, then the ratification defense is unavailable to dismiss the suit, and the directors will be required to prove the fairness of the awards to the corporation.

Here, the Equity Incentive Plan ("EIP") approved by the stockholders left it to the discretion of the directors to allocate up to 30% of all option or restricted stock shares available as awards to themselves. The plaintiffs have alleged facts leading to a pleading stage reasonable inference that the directors breached their fiduciary duties by awarding excessive equity awards to themselves under the EIP. Thus, a stockholder ratification defense is not available to dismiss the case, and the directors must demonstrate the fairness of the awards to the Company. We therefore reverse the Court of Chancery's decision dismissing the complaint and remand for further proceedings consistent with this opinion.

I.

According to the allegations of the complaint, which we must accept as true at this stage of the proceedings,³ the plaintiffs are stockholders of Investors Bancorp, Inc. ("Investors Bancorp" or the "Company") and were stockholders at the time of the awards challenged in this case. The defendants fall into two groups—ten non-employee director defendants⁴ and two executive director defendants.⁵ Investors Bancorp, the nominal defendant, is a Delaware corporation with its principal place of business in Short Hills, New Jersey. Investors Bancorp is a holding company for Investors Bank, a New Jersey chartered savings bank with corporate headquarters in Short Hills, New Jersey. The Company operates 143 banking branches in New Jersey and New York. In 2014, after a mutual-to-stock conversion,⁶ Investors Bancorp conducted a second-step offering to the public, which is when the plaintiffs acquired their shares. In this second-step offering, the Company sold 219,580,695 shares and raised about $2.15 billion.

The board sets director compensation based on recommendations of the Compensation and Benefits Committee ("Committee"), composed of seven of the ten non-employee directors. In 2014, the non-employee directors were compensated by (i) a monthly cash retainer; (ii) cash awards for attending board and board committee meetings; and (iii) perquisites and personal benefits. The chairman of each committee received an additional annual retainer. As the Court of Chancery noted, the annual compensation for all non-employee directors ranged from $97,200 to $207,005, with $133,340 as the average amount of compensation per director:

                Investors
                Name Bancorp Bank Cash All Other Total
                Cash Fees Fees Compensation
                   Albanese      $56,500          $73,200          $343           $130,043
                   Bone          $37,500          $73,200          $264           $110,964
                   Byrnes        $59,500          $73,200         $9,898          $142,598
                   Cashill       $48,000         $146,400        $12,605          $207,005
                   Cosgrove      $24,000          $73,200        $32,970          $130,170
                   Dittenhafer   $59,500          $73,200        $13,392          $146,092
                   Dugan         $45,000          $73,200           -             $118,200
                   Garibaldi     $24,000          $73,200           -              $97,200
                   Siekerka      $45,000          $73,200          $230           $118,430
                   Ward          $59,500          $73,200           -             $132,700
                   Total $1,333,402
                

In 2014, Cummings, the Company's President and CEO, received (i) a $1,000,000 base salary; (ii) an Annual Cash Incentive Award of up to 150% of his base salary contingent on certain performance goals; and (iii) perquisites and benefits valued at $278,400, which totaled $2,778,700. Cama, the Company's COO and Senior Executive Vice President, received annual compensation consisting of (i) a $675,000 base salary; (ii) an Annual Cash Incentive Award of up to 120% of his base salary; and (iii) perquisites and benefits valued at $180,794, which totaled $1,665,794.⁷

At the end of 2014, following completion of the conversion plan, the Committee met to review 2014 director compensation and set compensation for 2015. Gregory Keshishian, a compensation consultant from GK Partners, Inc., presented to the board a study of director compensation for eighteen publicly held peer companies. According to the study, these companies paid their non-employee directors an average of $157,350 in total compensation. The Company's $133,340 average non-employee director compensation in 2014 fell close to the study average. Following the presentation, the Committee recommended to the board that the non-employee director compensation package remain the same for 2015. The only change was to increase the fees paid for attending committee meetings from $1,500 to $2,500.

The Committee also reviewed the compensation package for executive officers. After GK Partners reviewed peer-average figures with the committee, the committee unanimously recommended no changes to Cummings' or Cama's annual salary, but recommended an increase in the 2015 Annual Cash Incentive Award from 150% to 200%, and 120% to 160% of their base salaries, respectively.⁸ The Committee did not discuss any additional equity awards at the December or February meetings.

Just a few months after setting the 2015 board compensation, in March, 2015, the board proposed the 2015 EIP. The EIP was intended to "provide additional incentives for [the Company's] officers, employees and directors to promote [the Company's] growth and performance and to further align their interests with those of [the Company's] stockholders ... and give [the Company] the flexibility [needed] to continue to attract, motivate and retain highly qualified officers, employees and directors."⁹

The Company reserved 30,881,296 common shares for restricted stock awards, restricted stock units, incentive stock options, and non-qualified stock options for the Company's 1,800 officers, employees, non-employee directors, and service providers. The EIP has limits within each category. Of the total shares, a maximum of 17,646,455 can be issued for stock options or restricted stock awards and 13,234,841 for restricted stock units or performance shares....