Settlement of Solak v. Barrett May Provide Additional Guidance on Setting Director Pay

I’ve stressed how important it is for public company executives and directors to stay apprised of developments in the director pay area, including developments/settlements of director pay lawsuits.  Earlier this summer, the Delaware Chancery court approved a settlement of Solak v. Barrett, a case in which the plaintiffs alleged that the directors of Clovis Oncology breached their fiduciary duties by adopting a compensation plan that overcompensated themselves, in relation to companies of comparable market capitalization and size. In their complaint, the plaintiffs cited as evidence, the fact that the non-employee directors of Clovis each had been paid an average of $429,163 annually between 2012 and 2016, while Fortune 50 companies pay their directors a median total of $281,667 a year and S&P 500 companies pay an average $277,237 a year.  The plaintiffs noted that Clovis is a small-cap company and not part of the Fortune 50 the S&P 500. The plaintiffs sought, among other things, an award of money damages and the imposition of corporate governance reforms.

Key provisions of the Clovis settlement are as follows:

• Clovis was required to ask its shareholders at its 2018 annual meeting to approve a new director compensation plan that prescribed annual dollar limits (cash and equity) on the compensation that could be paid to its non-employee directors. Based on data provided by an independent compensation consultant, the Clovis board asked its shareholders to approve the following limits, which would place the Clovis directors between the 50^th and 75^th percentile of directors in their peer group
  • An annual cash retainer of $50,000 for service on the board of directors (which amount would be increased to $75,000 for the first year of board service).  No additional cash would be paid for meeting attendance, provided, that members who served as chairs of committees or who served on the audit, nominating and governance and compensation committees would receive additional cash payments for their service.
  • An initial equity award in the form of non-qualified stock options with a fair value of $525,000.
  • For each additional year of service, an additional non-qualified stock option award with a fair value of $350,000.
  • The Clovis board reserved the right to modify the numbers set forth above but in no case could the annual award exceed $400,000 and total compensation (cash and equity) could not exceed $600,000.
  • Notably, the Clovis shareholders rejected this proposal at the Company’s 2018 annual meeting.
• Clovis was required to provide robust disclosure about the benchmarking data, best practices, and processes it used to develop the plan described above.  Clovis was also required to annually review the peer group it used to benchmark its director compensation.
• Clovis was required to implement stock ownership guidelines for its directors.
• Clovis was required to pay $395,000 in plaintiff lawyer legal fees and expenses.

Although the Clovis director compensation plan did not receive shareholder approval at the company’s 2018 annual meeting, public companies may nonetheless wish to review the Solak v. Barrett settlement and compare their processes for establishing director compensation to those approved by the Delaware courts in the settlement.