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Consider Adding Separate Annual Limits on Director Equity Awards

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As reported in Part 1 of our End of Year Plan Sponsor “To Do” Lists, employers that are adopting or amending equity-based compensation plans in 2014 should consider adding a separate annual limit on director equity awards.  Including a separate sublimit for director equity awards appears to be a trend that continues to gain momentum amongst executive compensation practitioners.  A recent survey published by Towers Watson indicates that 22% of Form 500 companies that adopted or amended stock plans during the 2013 proxy season added a separate limit on director equity awards.

Many employers have added the separate sublimit for directors to respond to the Delaware Chancery Court’s ruling in Seinfeld v. Slager.  In that case, the Court refused to apply the “business judgment rule” to dismiss a challenge to directors who approved large equity awards for themselves under a shareholder-approved equity-based compensation plan. The Court ruled that the plan did not impose “meaningful limits” on the maximum award that could be made to a director, and therefore, lacked sufficient definition to afford protection under the business judgment rule.

The questions for employers to consider in light of Seinfeld are whether to (1) add a separate annual limit for director equity awards; and (2) ask the shareholders to approve the limit to afford protection under the “business judgment rule.”