Investors Bancorp‘s Impact on Long-Term Incentive Plans
The Harvard Law School Forum on Corporate Governance and Financial Regulation 2019-06-15
The trend of including director-specific limits on the size of annual equity awards to non-employee directors under long-term incentive plans (“LTIPs”) continues to pick up steam, as evidenced by our survey of LTIPs filed this proxy season for shareholder approval. Nearly 75% of LTIPs reviewed now include a director-specific limit on the size of annual non-employee director grants, with a majority of those LTIPs restricting not only the size of annual equity awards, but also capping total annual compensation to non-employee directors.
This trend’s beginnings arose from the 2017 Delaware Supreme Court decision in In re Investors Bancorp, Inc. Stockholders Litigation (“Bancorp”). In Bancorp, the court held that a shareholder-approved cap on the aggregate number of shares that could be granted to non-employee directors under the company’s LTIP did not constitute shareholder ratification of the subsequent individual awards granted to non-employee directors of Investors Bancorp. As a result, the court held that the “entire fairness standard” should apply to any review of the size of non-employee director awards, requiring the board to demonstrate that the awards were fair to the company, as opposed to permitting application of the more company-friendly “business judgment rule,” requiring a showing by the plaintiff of corporate waste.