Excessive Director Pay Settlements Resulting in Corporate Governance Reforms


Settlements involving lawsuits over excessive compensation to non-employee directors are requiring companies to change their compensation practices.

Director compensation is under increased scrutiny by shareholders.  The catalyst for these concerns stems from the notion that boards of directors improperly are setting their own pay. 

The Delaware Court of Chancery approved settlement agreements in two prominent shareholder derivative actions alleging excessive director compensation:  Calma v. Templeton, Del. Ch., No. 9579-CB, order and final judgment 9/9/16; and Espinoza v. Zuckerberg, Del. Ch., No. 9745-CB, order and final judgment 3/30/16.  The terms of both settlements require companies to implement specific changes to their director compensation practices. 

Citrix Settlement

In April 2014, plaintiffs initiated a shareholder derivative action alleging that the compensation paid to eight non-employee directors of Citrix Systems Inc. was excessive.  The Delaware Court of Chancery denied defendants’ motion to dismiss, which was premised on the shareholder ratification defense. Calma v. Templeton, No. 9579-CB, 2015 BL 125718 (Del. Ch. Apr. 30, 2015).  The court’s decision generated significant buzz among practitioners in that mere shareholder approval of compensation plans did not amount to ratification without approval of specific action “bearing specifically on the magnitude of compensation to be paid to its non-employee directors.” 

The Delaware Court of Chancery recently approved the proposed settlement agreement in Calma v. Templeton.  See related story, Citrix to Cap Board Pay in Pact Approved by Del. Court. The Citrix settlement agreement contains corporate governance reforms requiring the company to implement specific changes to its current director compensation practices.  Citrix is required to comply with the following provisions for a period of at least five years:

  • amend Equity Incentive Plan for non-employee directors to include:  (1) $795,000 cap on annual equity compensation grants; (2) specify types of annual equity compensation grants available; and (3) describe vesting, excerciseability and settlement of annual equity compensation grants;
  • at the 2017 annual meeting, present Equity Incentive Plan amendments to shareholders for approval;
  • provide enhanced disclosures regarding non-employee director compensation practices in proxy statements, including:  (1) compensation philosophy and rationale; (2) process by which decisions were made; and (3) specific annual awards for the year; and
  • amend Compensation Committee charter to identify specific responsibilities of the committee.

Facebook Settlement

Earlier this year, the Delaware Court of Chancery approved the proposed settlement agreement in Espinoza v. Zuckerberg, a similar shareholder derivative action alleging excessive compensation to non-employee directors and officers of Facebook Inc.  Espinoza v. Facebook, No. 9745-CB, 2015 BL 353714 (Del. Ch. Oct. 28, 2015).

Facebook is required to comply with the following provisions for a period of at least five years: 

  • amend the Compensation & Governance Committee charter to specify the responsibilities of the committee with respect to non-employee director compensation;
  • instruct the board of directors to review the compensation payable to non-employee directors on an annual basis;
  • engage an independent compensation consultant to advise the Compensation & Governance Committee; and
  • at the 2016 annual meeting, propose for shareholder approval the Annual Compensation Program, which includes the specific amount for annual equity grants and delineates the annual retainer fees for non-employee directors for use by the board of directors going forward (prohibiting non-employee directors from voting in their capacity as shareholder on these proposals).


The recent Citrix and Facebook settlement agreements provide practitioners with additional guidance and best practices.  Thus, these agreements are worth the time to review—the lessons learned by Citrix and Facebook can save companies the expense of potential litigation due to poorly drafted plans.  

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