In re Investors Bancorp, Inc. Stockholder Litigation

177 A.3d 1208 (2017)

Quick Summary

In re Investors Bancorp, Inc. Stockholder Litigation involved plaintiffs (shareholders) filing a lawsuit against defendants (board members) over allegedly excessive director compensation awarded through an equity incentive plan (EIP). The dispute centered on whether such compensation breached fiduciary duties and if shareholder ratification acted as a defense.

The Delaware Supreme Court held that despite shareholder approval of an EIP, specific discretionary awards made by directors require judicial review for fairness when challenged, as they may breach fiduciary duties. Consequently, the case was remanded for further proceedings on this basis.

Facts of the Case

The board of Investors Bancorp, Inc. (defendant) proposed an equity incentive plan (EIP) which was to allocate stock awards and options to the company’s officers, employees, and directors. The EIP contained limits on the allocation and issuance of stock but left the determination of specific awards to the board’s discretion post-shareholder approval. Following approval by the shareholders, the board granted themselves and certain executives substantial stock options and restricted stock far exceeding the average compensation at peer companies. This action led to a lawsuit by Bancorp shareholders (plaintiffs) alleging that the board breached their fiduciary duties by awarding excessive compensation to themselves.

The CEOs and COOs received multi-million-dollar awards, significantly higher than their previous year’s earnings and averages in the industry. The board justified these awards by hiring a consultant to review stock awards from similarly situated companies. The shareholders contended that these awards were not for future performance but for past services, particularly related to the company’s conversion from a mutual-to-stock entity.

Procedural Posture and History

  1. Shareholders of Investors Bancorp, Inc. filed suit against the company’s board of directors, challenging the compensation awarded under the EIP.
  2. The Delaware Court of Chancery dismissed the complaint on the basis of stockholder ratification due to limits contained in the EIP.
  3. The plaintiffs appealed to the Delaware Supreme Court, which considered the scope of the ratification defense when directors allocate equity awards to themselves under an EIP.

I.R.A.C. Format


Whether the directors of Investors Bancorp, Inc. breached their fiduciary duties by awarding themselves excessive equity incentives under an EIP that was approved by shareholders, and whether stockholder ratification is a valid defense against such a claim.

Rule of Law

Directors must prove that self-interested equity awards are entirely fair to the corporation unless these awards are specifically ratified by fully informed, uncoerced, and disinterested shareholders. Discretionary equity incentive plans approved by shareholders do not automatically ratify subsequent specific awards directors make to themselves; such awards require judicial scrutiny for fairness when challenged.

Reasoning and Analysis

The Delaware Supreme Court highlighted that while stockholder ratification is a powerful defense that can lead to a deferential standard of review, it is not absolute. When directors retain discretion after stockholder approval of an EIP, they must still act within their fiduciary duties. In this case, the court determined that the EIP approved by shareholders did leave significant discretion to the board for subsequent specific awards. The plaintiffs’ allegations suggested that the directors may have breached their fiduciary duties in awarding themselves excessive compensation under the guise of the EIP. As such, the court found that stockholder ratification did not apply as a defense at this stage, and the directors would need to demonstrate the entire fairness of their awards.

This decision reflects a balance between respecting shareholder approval when exercised with full information and safeguarding against potential abuses of directorial discretion in self-compensation. The ruling serves as a reminder that while shareholders can grant directors broad authority, any exercise of that power must still adhere to fiduciary principles.


The Delaware Supreme Court reversed the Court of Chancery’s decision dismissing the complaint. It remanded for further proceedings consistent with its opinion that stockholder ratification did not apply as a defense to dismiss the case at this stage. The directors would have to prove the fairness of their self-awarded compensation under the EIP.

Key Takeaways

  1. Stockholder ratification is not an absolute defense against claims of breach of fiduciary duty when directors award themselves compensation under an EIP.
  2. Directors must demonstrate entire fairness when making self-interested equity awards even if an EIP has been approved by shareholders.
  3. The court will scrutinize directorial discretion in awarding equity incentives to ensure adherence to fiduciary duties even after shareholder approval of an EIP.

Relevant FAQs of this case

What constitutes a breach of fiduciary duty in a corporate setting?

A breach of fiduciary duty occurs when a fiduciary acts in their own self-interest, neglects their responsibilities, or fails to act with the required level of care and loyalty towards the company and its shareholders.

  • For example: If a board member of a corporation uses insider knowledge to profit personally at the company’s expense, it would be considered a breach of fiduciary duty.

How does shareholder ratification influence director liability for self-interested transactions?

Shareholder ratification can potentially shield directors from liability if the shareholders are fully informed, uncoerced, and vote in favor of a transaction that benefits directors personally. However, this defense is limited and does not absolve directors from ensuring transactions meet standards of fairness.

  • For example: If the majority of disinterested shareholders approve a transaction after being fully informed of its implications, this may provide directors with a defense against claims of self-dealing.

What is required for an equity incentive plan (EIP) to adhere to fiduciary duties?

An EIP must be formulated and executed in a manner that aligns with the best interests of the corporation and its shareholders, ensuring compensation is reasonable and justifiable, with clear performance-based metrics when appropriate.

  • For example: An EIP that offers stock options contingent on meeting specific growth milestones can demonstrate adherence to fiduciary duties by aligning director interests with those of the company.
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