June 18, 2015

KEEPING CURRENT: Chancery Court Holds That Compensation Paid to Nonemployee Directors Pursuant to Shareholder-Approved Plan Must Be Reviewed Under Entire Fairness Standard

In Calma v. Templeton, C.A. No. 9579-CB (Del. Ch. April 30, 2015) (Bouchard, C.), the Delaware Chancery Court held that Citrix System, Inc.’s payment of compensation to nonemployee directors under a shareholder-approved compensation plan must be reviewed under the entire fairness standard because the shareholders’ omnibus approval of a plan covering several different types of beneficiaries did not constitute ratification of the amount of compensation to be paid to nonemployee directors.

In 2005, Citrix shareholders approved an equity compensation plan (the “Plan”) for beneficiaries such as directors, officers, employees, consultants, and advisors. The plan did not specify the amount of compensation that nonemployee directors could receive, instead only providing a limit of 1 million restricted stock units (RSUs) for any beneficiary’s annual compensation. Based on the company’s share price at the time the suit was filed, 1 million RSUs would be worth over $55 million.

The plaintiff filed a derivative action asserting claims for breach of fiduciary duty, waste, and unjust enrichment against Citrix’s board for the RSUs awarded to nonemployee directors from 2011–2013 by the three-member compensation committee. The defendants filed a motion to dismiss.

Chancellor Bouchard first refused to dismiss for failure to make a demand on the board, holding that demand was excused because directors cannot be disinterested when there is a challenge to their compensation, regardless of whether said compensation is material to the recipient. He then held that the plaintiff had rebutted the business judgment standard (in which case the compensation would have been upheld unless it was so egregious as to constitute waste) by showing that the compensation committee was not disinterested. Thus, he held that the entire fairness standard applied. In response to the defendants’ argument that the business judgment rule should apply because the shareholders had ratified the Plan, Chancellor Bouchard said that ratification is only available where shareholders approve either specific awards to directors or a meaningful limitation on what directors could receive. The limitation of 1 million RSUs, with a value of $55 million per person per year was not a meaningful limitation. Thus, Chancellor Bouchard held that the shareholders had not ratified the compensation the defendants received, and the operative standard for review of the awards to them is entire fairness. 

Chancellor Bouchard did, however, dismiss the claim for waste, holding that the plaintiff had not pleaded “the rare type of facts that would make it reasonably conceivable that the RSU Awards are so far beyond the bounds of what a person of sound, ordinary business judgment would conclude is adequate consideration to the Company.” Lastly, he held that the plaintiff’s claim for unjust enrichment was duplicative of the breach of fiduciary duty claim, and therefore, because the plaintiff had adequately stated a claim for breach of fiduciary duty, he had also stated a claim for unjust enrichment.