In Pascal v. Czerwinski et al, the Delaware Court of Chancery considered whether disclosures in Columbia Financial’s 2019 proxy statement related to the adoption of an equity incentive plan, or EIP, were adequate. The directors of the company granted awards to themselves as compensation for past efforts to take the company public.
The plaintiffs claimed the director defendants:
- planned to use the EIP to retroactively reward themselves for taking the Company public (the “go-public conversion”),
- had been planning to do so even before issuing the 2019 Proxy, which solicited the stockholders’ vote for the EIP, but
- did not include any disclosure of that plan in the 2019 Proxy, as demonstrated by the fact that the 2019 Proxy’s language regarding the EIP framed the EIP as contemplating forward-looking compensation only.
The complaint alleged that one of the reasons for the EIP was the directors’ intent to award themselves equity under the plan to compensate past efforts to take the company public However it was claimed the defendants failed to disclose in the 2019 Proxy that they intended the EIP to reward past efforts, as the alleged proxy disclosures only addressed the intent to incentivize future actions.
The defendants argued the 2019 Proxy did disclose both intentions: the proxy provided that the EIP was meant to “attract, retain and reward the best available persons for positions of substantial responsibility and to recognize significant contributions made by such individuals to the Company’s success.”
The Court found that the 2019 Proxy did not explicitly mention the possibility of retrospective payment for the go-public conversion. However, the 2019 Proxy did set out that the company might issue awards in part for past accomplishments. And, given that “awards for past accomplishments” encompasses “retrospective payment for the conversion,” the Court did not find it reasonably conceivable that stockholders would have found the difference between the two to be material.
It’s a good reminder at this time of year to think carefully about disclosures when asking for approval of equity compensation plans.
It’s worth noting the Court indicated the awards would be subject to entire fairness review and the Court did not decide any claims regarding breach of fiduciary duty.