(CN) – The Supreme Court of Delaware has revived a shareholder lawsuit that accused Investors Bancorp directors of awarding themselves excessive stock-based compensation worth $50 million.
Reversing a Chancery Court decision, the Delaware Supreme Court ruled that directors for Investors Bancorp must face the lawsuit over allegedly exorbitant compensation that they granted themselves in the wake of a mutual-to-stock conversion.
Investors Bancorp is the holding company for New Jersey-based Investors Bank, a bank with roughly 150 branches stretching from Philadelphia to Long Island.
The challenged compensation includes individual stock-based awards valued at $2.66 million for two non-executive directors, and $2.03 million for eight other non-executive directors.
According to the company, the compensation was granted to these directors in part to reward them for their role in completing the bank’s conversion from a mutual-holding firm into a fully public entity (owned entirely by shareholders) in 2014.
The awards were more than twenty times higher than the median award granted to non-employee directors at comparable companies following a mutual-to-stock conversion, the lawsuit alleged.
The plaintiffs claimed the stock-based awards granted to CEO-director Kevin Cummings and COO-director Domenick Cama, valued at $16.7 million and $13.36 million respectively, likewise exceeded by a vast margin the typical incentive compensation given to top executives at comparable companies that underwent mutual-to-stock conversions.
Cummings and Cama had purportedly already received bonuses in connection with Investors Bank’s conversion to a wholly public entity. The bank justified the $30 million in additional stock-based compensation to these two executives by asserting it would increase their share ownership and create a stronger link between their performance and realizable pay.
Case precedent in the Delaware Chancery Court has evolved so that even when shareholders approve a compensation plan, defendant directors in these cases can still be subject to the entire fairness standard if the plan does not contain meaningful limits on self-interested awards for directors.
The Chancery Court dismissed the lawsuit against Investors Bancorp, finding the equity-incentive plan approved by shareholders in 2015 contained limits on directors’ compensation, which were specific enough to infer shareholder ratification.
Among other limits, the plan capped the amount of options and restricted stock available for any given single employee, and for non-executive directors on a cumulative basis.
In overturning the decision and reviving the lawsuit, the Delaware Supreme Court noted: “When it comes to the discretion directors exercise following stockholder approval of an equity incentive plan, ratification cannot be used to foreclose the Court of Chancery from reviewing those further discretionary actions when a breach of fiduciary duty claim has been properly alleged.”
Justice Collins Seitz ruled that when stockholders approve general parameters of an equity incentive plan, they grant directors the legal authority to make awards, but the directors’ exercise of that authority “must be done consistent with their fiduciary duties.”
Seitz wrote that the entire fairness standard should apply to the Investors Bancorp case, not the business judgment standard, which would have required the plaintiff shareholders to demonstrate corporate waste, a high burden by all accounts.
Seitz further reversed the Chancery Court’s decision that the plaintiff shareholders failed to make a demand for remedy from the board with respect to the executive directors Cama and Cummings’ compensation.
The judge wrote that demand was futile, as it was “implausible to [the court] that the non-employee directors could independently consider a demand when to do so would require those directors to call into question the grants they made to themselves.”