Surprise – Director Comp Must Be Fair

Surprise – Director Comp Must Be Fair

Stockholder approval of an incentive plan is not a foolproof defense against an “entire fairness review” of self-compensation decisions, as the Citrix Systems, Inc. (“Citrix”) board of directors learned the hard way. In Calma v. Templeton et al, a recent derivative action on behalf of Citrix, a stockholder challenged awards of restricted stock units (“RSU”) that were granted by the board’s three-member compensation committee to the eight non-employee directors (including themselves), and asserted that the defendants must establish the entire fairness of the compensation. The defendants contended that in obtaining stockholder approval of an encompassing compensation plan the stockholders had ipso facto ratified the grants, subjecting the awards to a less onerous standard of review.

The Delaware Chancery Court opinion, issued by Chancellor Andre Bouchard on April 30, 2015, concluded in the plaintiff’s favor: “[T]he defendants have not established that Citrix stockholders ratified the RSU Awards, because in obtaining omnibus approval of a Plan covering multiple and varied classes of beneficiaries, the Company did not seek or obtain stockholder approval of any action bearing specifically on the magnitude of compensation to be paid to its non-employee directors. Accordingly, because the RSU Awards were self-dealing decisions, the operative standard of review is entire fairness.”

The Entire Fairness Standard is a fact-intensive enhanced scrutiny which makes it incumbent upon defendants to establish “to the court’s satisfaction that the transaction was the product of both fair dealing and fair price” (Cede & Co. v. Technicolor, Inc., 1993). The burden shifts to the defendants to show that both the process that was followed and the terms that were achieved are fair to the stockholders of the corporation. When a board’s decision is reviewed under the Entire Fairness Standard, the directors are, in essence, guilty until proven innocent. This is the painful position in which Citrix’s directors now find themselves.

The Calma v. Templeton ruling has broader implications, however. It draws into question the efficacy of prominent and frequently-used procedural safeguards against the Entire Fairness Standard. Foremost among those standards, as mentioned above, is stockholder approval of incentive plans with generic limits. Specific and realistic limitations on grants to directors should be built into future compensation plans, and if the Calma v. Templeton ruling is a prelude to a wave of compensation litigation, best practice may become to submit proposed grant amounts directly to stockholder approval. The ruling also highlights the limitations of independent special committees when its members appear on both sides of a transaction.

The common safeguard that Citrix seemingly overlooked was to obtain a fairness opinion from an independent financial advisor. In this situation, an independent financial advisor could provide an opinion as to whether compensation granted is in line with industry peer groups, and which companies should be included in such peer groups. A fairness opinion can provide critical valuation information to interested parties in a transaction, and can increase the probability that a fiduciary’s decision will be protected by the Business Judgment Rule instead of the Entire Fairness Standard, a more favorable outcome for directors. The essence of the Business Judgment Rule is that directors of a company are immune from liability in company transactions that are within their authority and power to effect, so long as they are independent and disinterested with respect to the action at issue, and such transactions are completed in good faith as well as with reasonable skill and prudence. Houlihan Capital specializes in providing clients with independent valuations and has a history of working closely with clients’ legal counsel, regulators, auditors, and investors on matters of transaction fairness.

For more information regarding when and why to obtain a fairness opinion, please see Houlihan Capital’s white paper Fairness Opinions: Uses and Issues. For further information on independent third party valuation services, please contact Paul Clark ( at 312-450-8656 or visit

Houlihan Capital is a leading, solutions-driven valuation, financial advisory, and boutique investment banking firm committed to delivering superior client value and thought leadership in an ever-changing landscape. The firm has extensive experience in providing objective, independent and defensible opinions of value that meet accounting and regulatory requirements. Our clients include some of the largest asset managers, private equity funds, hedge funds, fund administrators, and both public and private operating companies, who benefit from our comprehensive valuation and financial advisory services. Houlihan Capital is a Financial Industry Regulatory Authority (FINRA) and SIPC member, SOC-compliant, and is committed to the highest levels of professional ethics and standards. In short: Value. Added.

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