Recent lawsuits have challenged director compensation under Delaware law at several public companies. The issue at the core of these lawsuits is that outside directors are viewed as interested parties with respect to their own compensation (cash or equity). Therefore, any compensation program that applies to outside directors runs the risk of losing protection of the business judgment rule under Delaware law because of arguable self-interest. Without the protection of the business judgment rule, the outside director compensation plan would be subject to scrutiny under the “entire fairness” doctrine of Delaware law. Although any particular compensation plan may survive review under the “entire fairness” standard, most companies do not want to subject their compensation arrangements to such a review or run the risk of defending a claim on the merits at trial. As a result, when such an arrangement is challenged, the company involved may choose to settle the matter.

Recent settlements indicate the direction in which these settlements are headed. Although the set of cases actually settled to date is not large enough to form the basis of confident generalization, the following items may be part of the mix. Read More