Investors, proxy advisory services and corporate governance watchdogs closely monitor executive compensation, and express their views on executive pay in diverse fora, ranging from advisory say-on-pay votes required under the Dodd-Frank Act to a CEO Salary Watchdog Facebook page. Compensation decisions nevertheless remain a core function of a board of directors. A stockholder derivative plaintiff challenging most board decisions regarding executive compensation or severance payments confronts a pleading Everest. To avoid dismissal, a plaintiff challenging board decisions about the value of an executive’s services usually must allege particularized facts that raise reasonable doubt about whether the board acted within the bounds of broad business judgment discretion afforded to it on compensation matters.
In a recent decision addressing stockholder derivative claims challenging a variety of compensation-related decisions as waste, Delaware Vice Chancellor Sam Glasscock III in Seinfeld v. Slager1 reaffirmed the stringent requirements for a plaintiff to state a claim for most challenges to compensation. In a ruling that introduces uncertainty about the level of detail a stockholder-approved equity compensation plan needs in order to qualify director decisions to award themselves equity for business judgment deference, however, the court held that a board’s decision to award directors equity bonuses under a stockholder-approved plan will be evaluated for entire fairness, i.e., both the process and the amount of compensation are fair to the company, if the plan lacks sufficiently defined terms and limits on the authorized awards.
