Generous Director Equity Compensation Plan: Shareholders' Approval Was Not Sufficient To "Ratify" Payments Subsequently Made Under It

The April 30, 2015 ruling of the Delaware Court of Chancery in Calma v. Templeton shines a spotlight on how courts may respond to concerns about director compensation. In this preliminary decision on a motion to dismiss, the Court decided that the awarding of restricted stock units (RSUs) in accordance with a company's compensation plan was subject to the "entire fairness" test, given the circumstances set out below. The decision provides important guidance relating to shareholder ratification of board compensation, which is of particular interest in the context of say-on-pay votes.

Calma concerned the compensation plan of non-employee directors (outside directors) of Citrix Systems, Inc. (Citrix). Adopted in 2005, the plan sought to advance the best interests of the corporation by encouraging stock ownership, including by means of the attribution of RSUs to outside directors. The plan gave the compensation committee complete authority to make all decisions with