Partner Felipe Arroyo Quoted Regarding Best Practices for Director Pay

On August 8, 2014, Agenda, a publication of the Financial Times, published an article highlighting attorney recommendations to company boards for implementing best practices regarding director pay.   The article, titled “Director-Pay Suits Gain Ground, More Likely,” comes on the heels of shareholder lawsuits involving Facebook and Unilife Corporation, which allege that board members breached their fiduciary duties by paying themselves excessively.   The article notes that Delaware court judges are trending towards allowing director-pay suits to proceed through the difficult motion to dismiss phase, and therefore suggests that boards evaluate “their process and disclosure around director pay.”

The best practices provided to boards in the article include: (i) “amend[ing] their equity compensation plans to include a limit on the amount or number of shares that directors can receive in a calendar year;” (ii) “review[ing] their committee charters to identify which board committee has the authority to determine director compensation;” (iii) “apply[ing] the same procedures [they] have for executives to the board;” and (iv) “get[ting] some input on their procedures and disclosures from their comp consultant or counsel.”

Felipe Arroyo, a partner at Robbins Arroyo LLP and shareholder advocate, added that a company may want to create a second committee to serve as a check on the primary committee with responsibility for director pay.  In such case, “one committee conducts a deep dive into director pay with a consultant,” says Arroyo, “followed by a presentation at a full board meeting.  Adding another layer of review by a second committee shows additional diligence.”  In this instance, where “people [are] on both sides of their own table … maybe this is one of those occasions where being innovative and having an extra layer of protection is advisable.”

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