Delaware Supreme Court Revisits Stockholder Ratification of Director Equity Awards
By Lawrence A. Goldman, Gibbons P.C.
In a recent decision, In re Investors Bancorp Stockholder Litigation, the Delaware Supreme Court considered the limits of the stockholder ratification defense when directors make equity awards to themselves under the general parameters of an equity plan. Reversing the Court of Chancery, the court held that when stockholders approve only the broad parameters of a plan and the directors retain discretion to make awards under the parameters, such exercise of discretion must be consistent with directors’ fiduciary duties. Since the actual awards are self-interested decisions not approved by the stockholders, the awards, if challenged, are subject to an entire fairness standard of review. Under the equity plan at issue, a maximum number of shares subject to awards were reserved for non-employee directors, but the directors retained the right to make actual awards subject to the aggregate maximum. The court distinguished stockholder approval of an equity plan where the making of awards would be self-executing, leaving no discretion to directors. In such a case, the stockholders would know exactly what they are approving, so the ratification defense would generally apply.
Court of Chancery Dismisses Implied Covenant Claim Arising Out of Privately Negotiated Sale Transaction
By Tarik J. Haskins, Morris, Nichols, Arsht & Tunnell LLP
In Miller v. HCP & Company, 2018 WL 656378, the Court of Chancery granted defendants’ motion to dismiss an action seeking relief under the implied covenant of good faith and fair dealing under the subject company’s limited liability company agreement (LLC Agreement) in connection with a sale of the subject company pushed by the defendants. The plaintiffs argued that a privately negotiated sale of the subject company pushed by board members appointed by the controller, which primarily benefitted the controller while leaving the other members with little or no proceeds, breached an implied covenant that any sale of the subject company would be conducted pursuant to an open-market sale or auction to ensure maximum value for all members. The Court of Chancery reasoned that there was no gap in the LLC Agreement for the implied covenant to fill because the LLC Agreement addressed the issue of how the subject company could be sold by providing that the board of managers could determine in its sole discretion how to conduct a sales process. Further, the court rejected plaintiff’s argument that the implied covenant required the board of managers to exercise its discretion “reasonably and in good faith,” because the gap typically found by courts in contractual grants of sole discretion was filled in the LLC Agreement by the provision therein that prohibited the board of managers from using that discretion to approve a sale of the company to an insider, thereby avoiding the potential for self-dealing. Finally, the court stated that even if plaintiffs were correct regarding a gap in the LLC Agreement, the implied covenant claim would still fail because the plaintiffs’ reasonable expectations were not frustrated by the predictable manner in which the defendants conducted the sale. Consequently, defendants’ motion to dismiss was granted.