Investors Bancorp‘s Impact on Long-Term Incentive Plans

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2019-06-15

Posted by Matthew B. Grunert, Scott C. Sanders and Jackie Z. Coleman, Bracewell LLP, on Saturday, June 15, 2019
Editor's Note: Matthew B. Grunert and Scott C. Sanders are partners and Jackie Z. Coleman is an associate at Bracewell LLP. This post is based on their Bracewell memorandum, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

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.