What's Market: Director Share Limits and the Entire Fairness Standard

Practical Law Article w-005-8671 (Approx. 5 pages)

What's Market: Director Share Limits and the Entire Fairness Standard

by Practical Law Employee Benefits & Executive Compensation

Published on 15 Jun 2017 • USA (National/Federal)

A comparison of key terms, including director share limit, of recently filed technology company equity incentive plans using Practical Law's new What's Market, Equity Plans. The What's Market, Equity Plans database provides a continuously expanding database of summaries that helps counsel draft equity plans by analyzing and comparing recent publicly filed equity incentive plans, including summary plan provisions addressing total share reserve, ISO and director share limits, Section 162(m) individual limits, eligible award recipients and types of award.

A recent string of Delaware cases has demonstrated the significant impact that equity plan share limits can have on the applicable standard of review in shareholder litigation involving director equity compensation. To analyze how these cases have affected the drafting of recent equity plans in the technology sector, a custom comparison report of share limit provisions has been created using Practical Law's new What's Market, Equity Plans database.

In both Seinfeld v. Slager (, No. 6462–VCG (Del. Ch. June 29, 2012)) and Calma v. Templeton (, No. 9579-CB (Del.Ch. April 30, 2015)) the Delaware Chancery Court applied the entire fairness standard when shareholders challenged grants of restricted stock unit (RSU) awards to directors under shareholder-approved plans. The court rejected the more deferential business judgment rule, reasoning that the directors were interested parties and that the plans did not contain director-specific share limits.
In re Investor Bancorp, Inc. Stockholder Litigation, No. CV 12327-VCS, (Del. Ch. Apr. 5, 2017), the Delaware Chancery court applied the business judgment rule in a shareholder challenge to grants of restricted stock and stock options to directors under a shareholder-approved plan. The court reaffirmed its prior reasoning, stating that the critical factor for the court's use of the business judgment rule was that "…this plan included director-specific limits that differed from the limits that applied to awards to other beneficiaries under the plan."

What's Market comparison reports are a powerful tool for analyzing market trends, including the effect of director share limit case law on practice. The following table examines three recently filed technology sector equity plans for total share limit, total share limit as a percentage of outstanding shares, eligible award recipients, and director share limits. At a quick glance, it is easy to discover that despite the Delaware case law, technology companies are not universally implementing director-specific share limits in equity plans that contemplate granting awards to directors. To create additional comparison reports for analysis, see What's Market, Equity Plans.

EQUITY PLAN

Imperva, Inc. 2011 stock option and incentive plan (amended)

Effective April 26, 2017

Cabot Microelectronics Corporation 2012 omnibus incentive plan (amended)

Effective March 7, 2017

Activision Blizzard, Inc. 2014 incentive plan (amended and restated)

Effective March 2, 2017

TOTAL SHARE LIMIT

8,086,237 shares of common stock plus certain shares subject to outstanding awards under the company's 2003 stock plan, that are returned to the share reserve, as set out in the plan.

Section 2.1

2,901,360 shares of common stock, plus any shares that are or become available under the company's 2000 equity incentive plan (Prior Plan) on or after the 2012 omnibus plan's shareholder approval date.

Awards other than stock options, stock appreciation rights (SARs), and cash incentive awards: 2,030,952 shares of common stock.

Section 4(b)

46,000,000 shares of common stock, plus certain shares subject to awards outstanding as of the effective date under the Activision 1998 incentive plan, 1999 incentive plan, 2001 incentive plan, 2002 incentive plan, 2002 executive incentive plan, 2002 studio employee retention incentive plan, 2003 incentive plan, 2007 incentive plan, and Activision Blizzard, Inc. 2008 incentive plan, that are returned to the share reserve, as set out in the plan.

Section 3(a)

NUMBER OF SHARES AS A PERCENTAGE OF OUTSTANDING

Approximately 24.2%

*The number of total shares outstanding came from the company’s Form 10-Q as filed on May 8, 2017. Calculated using a total share limit of 8,086,237 shares of common stock.

Approximately 11.5%.

*The number of total shares outstanding came from the company’s Form 10-Q as filed on May 5, 2017. Calculated using a total share limit of 2,901,360 shares of common stock.

Approximately 6.1%.


*The number of total shares outstanding came from the company’s Form 10-Q as filed on May 4, 2017. Calculated using a total share limit of 46,000,000 shares of common stock.

ELIGIBLE AWARD RECIPIENTS

Employees, directors, and consultants.

Section 3

Employees, directors, consultants, and advisors.

Section 5

Employees, officers, directors, consultants, and advisors.

Section 2(u) 

Section 4 

Section 5 

Section 6 

Section 7 

Section 8 

Section 9 

Section 10

DIRECTOR LIMITS

250,000 shares of common stock per director per calendar year.

Section 12

None specified.

None specified.

What's Market: Director Share Limits and the Entire Fairness Standard | Practical Law