Attorneys: Companies Should Rethink Director Pay Plans After Citrix Ruling

Stay current on changes and developments in corporate law with a wide variety of resources and tools.

By Yin Wilczek

June 18 — Companies may want to reconsider their director compensation plans in the wake of a recent decision involving Citrix Systems Inc., attorneys said June 18.

In an April ruling, the Delaware Chancery Court in Calma v. Templeton allowed a shareholder to proceed with derivative claims that the technology company overpaid its directors.

The reason the decision merits attention is that “there's nothing extraordinary about it,” said Andrew Johnston, a partner at Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Del. The numbers involved “don't snap out of a page at you.”

Andrew Liazos, a Boston-based partner at McDermott, Will & Emery LLP, agreed that is one of the reasons why the case is interesting. None of the pay involved was “staggeringly high” or “startling,” Liazos said. “We've all seen director pay within these limits.”

The attorneys spoke at a panel during an ALI-CLE executive compensation conference.


The attorneys noted that Seinfeld v. Slager was the first of such cases to survive a motion to dismiss. 

Liazos added that other similar cases are being brought, including a lawsuit filed earlier this month that accused Goldman Sachs Group Inc. directors of self-dealing. “This is not going to go away.”

According to slides for the panel, director equity awards were provided under separate formula plans until a change in rules in 1996. Currently, most director equity awards are included in shareholder-approved omnibus plans that also cover executives and key employees.

Unlike executive officers, there are no requirements for non-employee directors to be subject to a limit on their equity grants, according to the slides. The common practice for omnibus stock plans is either not to include a grant limit for director equity grants or to impose the same limit that applies to executive officers under Section 162(m) of the tax code.


In the wake of Calma and Seinfeld, the panel suggested that companies:

• consider having separate equity award limits for director compensation, to avoid the entire fairness standard of review;

• consider alternatives for designing director compensation limits;

• obtain independent advice when developing peer groups for director equity compensation, evaluating peer group practices and establishing limits; and

• where possible, avoid having directors approve their own individual director compensations, such as compensation for a special committee.


Liazos noted that a “likely conversation” that may occur is should a company include a specific per-director equity limit and if it does, how should it be designed? Should there be a dollar limit rather than a limit on the number of shares? he asked. In addition, should it consider the fact that directors may hold different positions, such as committee chairman? How about new directors?

What About ISS?

There are a “lot of issues to think through in terms of designing a limit,” Liazos said. He added that the “big wild card” is what Institutional Shareholder Services Inc. is going to do. “Are they going to decide they want to wade into these waters by setting forth some sort of best practice?”

Martha Steinman, a New York-based partner at Hogan Lovells US LLP, agreed that there will be “a lot of dialogue around what limits to put in” given directors' varying pay and positions. There will be “some tension” in imposing director limits between “wanting it to look like what director compensation looks like in people's minds versus” the need for companies to have flexibility in “that number,” she said.

More Litigation Ahead 

In other remarks, Johnston noted that companies should expect more litigation around failures to comply with compensation plan terms. “The director compensation piece” will be the area that the plaintiffs' bar focuses on going forward, he said.

Liazos also warned that there will be more litigation over Section 162(m). Under the provision, the Internal Revenue Service does not allow public companies to deduct compensation over $1 million per year for their chief executive officers and their next four highest-paid executives unless the compensation meets certain requirements.

What companies should keep in mind with respect to executive compensation-related lawsuits is that plaintiffs' law firms are searching through proxy disclosures for Section 162(m) violations, Liazos said. “They're looking for more than just the blocking and tackling errors,” such as a company exceeding plan limits, he added. “They're also looking for” other, more “esoteric violations that go far beyond what we’ve ever seen in IRS audits.”

To contact the reporter on this story: Yin Wilczek in Washington at

To contact the editor responsible for this story: Ryan Tuck at

Request Corporate on Bloomberg Law