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Facebook Agrees to Settle Excessive Director Compensation Claims in Return for Corporate Governance Reforms
Practical Law Legal Update w-001-3911 (Approx. 5 pages)
Facebook Agrees to Settle Excessive Director Compensation Claims in Return for Corporate Governance Reforms
by Practical Law Employee Benefits & Executive Compensation
| Published on 28 Jan 2016 • USA (National/Federal) |
Facebook, Inc. (Facebook) has agreed to settle claims arising out of Espinoza v. Zuckerberg, et al. challenging the compensation of its non-employee directors. In the stipulation of settlement filed with the Delaware Chancery Court on January 25, 2016, Facebook agreed to implement and maintain certain corporate governance reforms for five years.
On January 25, 2016, Facebook, Inc. (Facebook) entered into a stipulation of settlement filed with the Delaware Chancery Court to settle claims arising out of Espinoza v. Zuckerberg, et al. (124 A.3d 47 (Del. Ch. 2015)) challenging the compensation of its non-employee directors. In connection with the settlement, Facebook agreed to implement and maintain certain corporate governance reforms for five years.
Background
The dispute in Zuckerberg arose out of the Facebook board's approval in 2013 of a compensation plan that established the compensation for the board's six (as of 2013) non-employee directors, including an annual $300,000 grant of restricted stock units and a set annual cash retainer.
A stockholder filed a derivative complaint against the board, alleging:
- Breach of fiduciary duty by awarding and/or receiving excessive compensation at the expense of Facebook.
- Waste of corporate assets.
- Unjust enrichment.
The defendant directors moved for summary judgment on the issues of breach of fiduciary duty and unjust enrichment, arguing that Mr. Zuckerberg, Facebook's controlling stockholder, expressly ratified the 2013 compensation plan and, as a result, the board's actions were subject to the business judgment rule. Additionally, the defendants moved to dismiss the corporate waste claim.
The court denied the motion for summary judgment on the issue of shareholder ratification (see Legal Update, Facebook: For Ratification, Controlling Stockholders Must Adhere to Formalities Under DGCL: Stockholder Ratification Must Strictly Comply with DGCL Requirements) and granted the defendants' motion to dismiss the corporate waste claim.
For more information on the Zuckerberg decision, see Legal Update, Facebook: For Ratification, Controlling Stockholders Must Adhere to Formalities Under DGCL.
The parties thereafter entered into settlement negotiations.
Stipulation of Settlement
The January 25, 2016 stipulation of settlement requires Facebook to:
- Implement and maintain corporate governance reforms for a period of five years from the effective date of the settlement agreement (see Corporate Governance Reforms).
- Pay attorneys' fees and expenses to the plaintiff's counsel in an amount up to $525,000.
Corporate Governance Reforms
The corporate governance reforms require Facebook to take certain actions, including:
- Amending the charter of the compensation and governance committee to provide that the committee will be responsible for:
- conducting an annual review and assessment of all compensation, including cash and equity-based compensation, paid by Facebook to non-employee directors;
- engaging an independent compensation consultant to advise the compensation and governance committee in connection with the annual review and assessment, including with respect to the amount and type of non-employee director compensation to be paid the following year and any appropriate comparative data; and
- on the basis of the review and assessment, recommending to the board whether to make any change in the compensation payable to non-employee directors.
- Conducting an annual review of the compensation payable to non-employee directors by the board, including any recommendation by the compensation and governance committee as to any change in the compensation payable to non-employee directors.
- Including separate proposals at the 2016 annual stockholder meeting for stockholder approval of the following non-employee director compensation:
- the 2013 grants to the non-employee directors; and
- the annual compensation program, which includes a specific amount for annual equity grants and sets out the annual retainer fees for non-employee directors, for use by the board going forward.
Practical Implications
The Facebook dispute and settlement highlight the importance of good corporate governance practices. In particular, companies should:
- Evaluate and impose meaningful limits on the amount of compensation that directors can award to themselves.
- Review their compensation committee charter (or, if applicable, the charter of the board committee responsible for director compensation) and consider whether any changes should be made to the process for evaluating and approving director compensation. For forms of applicable committee charters, see Standard Documents, Compensation Committee Charter and Nominating and Corporate Governance Committee Charter.
- Adhere to appropriate corporate formalities when approving director compensation.
- Consider engaging an independent compensation consultant to advise the compensation (or other applicable) committee in connection with its evaluation of director compensation.
- Consider benchmarking director cash and equity compensation against an appropriate peer group.