Delaware Reaffirms Entire Fairness Standard for Review of Director Compensation

By Audrey Fenske, Steve Quinlivan, Bryan Pitko and Jaclyn Schroeder

In a May 31, 2019 decision, and weaving in quotes from a nearly 70-year-old decision and a nearly 30-year-old SNL skit, the Delaware Court of Chancery, in Stein v. Blankfein et al, reaffirmed that in most circumstances decisions of directors awarding director compensation are subject to review under the entire fairness standard. The court also addressed the possibility of shareholder waiver of application of that standard to future director actions, but did not conclude as to whether such a waiver was even possible. 

Ruling on a motion to dismiss, the court rejected director defendants' argument that the stockholder-approved stock incentive plans absolved, in advance, the director’s breaches of duty in self-dealing, absent a demonstration of bad faith. Since the argument was rejected, the director decisions were subject to review under the entire fairness standard because the plans provided the directors discretion to determine their own awards.

The court also rejected the defendants' argument that the plaintiff failed to adequately allege that the self-awarded director compensation was not entirely fair.

This decision is certain to stir discussion regarding the ability of stockholders to waive the application of the entire fairness standard in director compensation decisions. See our complete analysis of the decision, including discussion of the courses of action available to public company boards in approving director compensation.

For more information on the decision, please contact Audrey Fenske, Steve Quinlivan, Bryan Pitko, Jaclyn Schroeder, Phil McKnight, Jack Bowling or Scott Gootee.

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