Just before year-end, the Delaware Court of Chancery issued a notable decision regarding disclosures around equity incentive plans. On December 16, 2020, the Chancery Court dismissed a stockholder’s direct claim that members of the board of Columbia Financial Inc. (“Columbia” or the “Company”) breached fiduciary duties for failing to disclose purportedly material information regarding equity awards provided to directors. The decision provides guidance on standards for adequate disclosures and affirms the Chancery Court’s willingness to decide questions of materiality at the pleading stage.
In April of 2018, Columbia went public through a minority stock offering and, at the time, it did not have any stock-based incentive plan in place for employees or directors. A year later, the Company’s board approved an equity incentive plan (the “EIP”), and issued a proxy statement seeking shareholder approval (the “Proxy”). The Proxy described the purpose of the plan as to, among other things, allow the Company to “attract, retain and reward the best available persons for positions,” and to “recognize significant contributions” to the Company.
Stockholders approved the EIP in June of 2019, and Columbia subsequently issued a series of equity awards for its directors totaling approximately US$13 million based, in part, on Columbia’s conversion to a public company. The Chancery Court described these awards as “objectively” generous.
Plaintiff sought to invalidate the EIP and subsequent awards, alleging the stockholder vote approving the plan was not fully informed due to purportedly material omissions in the Proxy. Plaintiff claimed that defendants designed the EIP to retroactively reward the directors for taking the Company public, did not disclose this information in the Proxy and, in fact, presented the EIP as contemplating only forward-looking compensation.
The Chancery Court held, however, that this allegedly omitted information was not material. In doing so, the Chancery Court explained that directors seeking shareholder action have a common law duty to provide all material information to shareholders, and that this standard is governed by the duties of care and loyalty. Information in this context is material “if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.”
Applying this standard, the Chancery Court rejected plaintiff’s theory, and pointed out that the Proxy expressly contemplated that the EIP might provide awards for past accomplishments. In particular, the Proxy stated that the EIP would “reward” accomplishments and “recognize significant contributions”; further, the Proxy disclosed that the EIP was designed, in part, to remedy Columbia’s prior inability to offer what it felt was competitive compensation. Accordingly, the Chancery Court held that stockholders were on notice that the EIP might be used to make up for that, and that a reasonable stockholder would not find the omitted information material.
In addition to the direct claim, the plaintiff also asserted derivative claims concerning the total amount of the awards, which were not at issue on this motion and remain subject to an entire fairness review.
This decision has practical implications for any case involving allegations of misleading or incomplete disclosures and reflects the Chancery Court’s willingness to meaningfully engage with questions of materiality on a motion to dismiss.
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