How To Avoid Director Pay Litigation

In the last few years, Delaware courts have issued several rulings in lawsuits involving complaints of excessive compensation to non-employee directors ¹. The takeaways from these cases can be summarized as follows:

• Decisions by directors about their own compensation will be reviewed by Delaware courts as a self-dealing transaction under the entire fairness standard, but such decisions can gain the protection of the business judgment rule if such decisions are made pursuant to a director pay limit or proposal that is approved by a fully informed, disinterested majority of shareholders.
• Shareholder approval of an equity plan does not constitute ratification of director compensation in the absence of meaningful limits in the plan on the amount of cash and equity compensation that may be awarded to directors.