Over the past several years, the Delaware Court of Chancery has applied the stockholder ratification defense in challenges to director compensation awards made pursuant to stockholder approved equity incentive plans (EIPs). As a general rule, those cases have held that where stockholders approved a “meaningful limit” on director compensation awards, directors’ decisions to award equity within the scope of those limits would be protected by the defense.

A recent Delaware Supreme Court case, however, In re Investors Bancorp Stockholder Litigation, No. 169, 2017 (Dec. 19, 2017), impacts that analysis. In that case, the Supreme Court materially narrowed the application of the stockholder ratification defense, potentially leaving board compensation decisions open to challenge under entire fairness review (rather than the more permissive business judgment rule), although the full impact of the court’s ruling will likely be determined through future challenges to director actions.

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