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In re Investors Bancorp, Inc. Stockholder Litigation

Court of Chancery of Delaware

April 5, 2017

IN RE INVESTORS BANCORP, INC. STOCKHOLDER LITIGATION

          Submitted: January 5, 2017

          David A. Jenkins, Esquire, Neal C. Belgam, Esquire, and Clarissa R. Chenoweth, Esquire of Smith Katzenstein & Jenkins LLP, Wilmington, Delaware, and Steven J. Purcell, Esquire, Douglas E. Julie, Esquire, and Robert H. Lefkowitz, Esquire of Purcell Julie & Lefkowitz LLP, New York, New York, Attorneys for Plaintiffs.

          Kenneth J. Nachbar, Esquire and Zi-Xiang Shen, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware, Attorneys for Defendants.

          MEMORANDUM OPINION

          SLIGHTS, Vice Chancellor

         A mutual holding company that owned more than half of the stock of a bank subsidiary completed a mutual-to-stock conversion to become a fully public stock holding company. Following the conversion, the directors adopted an equity compensation plan and submitted it to the stockholders for approval. After receiving stockholder approval, the directors granted themselves substantial restricted stock and stock options under the plan. When word of the equity awards became public, stockholders initiated this derivative action alleging that the compensation awards were excessive and unfair to the corporation.

         The key issue in this case is whether the stockholder approval of the equity compensation plan extends to the board of directors' subsequent decision to authorize grants of awards under the plan such that the propriety of these awards should be reviewed under a waste standard. Always recognizing that these are inherently self-dealing transactions, this court has nonetheless considered challenges to board-level and executive compensation awards under different standards of review depending upon the specific details and parameters of the plan previously submitted for stockholder approval. In some instances, the court has determined that any purported limit on the total amount of equity compensation allowed under a plan approved by stockholders was, in fact, no limit at all. In these cases, this court has refused to deem approval of the overall plan as approval of any awards directors might give themselves under its terms and has reviewed the awards under the entire fairness standard of review. In other instances, this court has concluded that the action of the directors fell within limits specifically imposed by the terms of the plan that had been approved by stockholders. Under these circumstances, this court deems the stockholder approval of the plan to be ratification of awards made under the plan and reviews the awards for waste.

         In this case, both non-employee directors and executive directors were granted equity awards under a stockholder-approved plan. Critically, this plan included director-specific limits that differed from the limits that applied to awards to other beneficiaries under the plan. Based on settled guidance in this area, particularly In re 3COM Corp. S'holders Litig. and Calma on Behalf of Citrix Systems, Inc. v. Templeton ("Citrix"), [1] I conclude that the fully informed stockholder vote that approved the plan extended to the awards themselves, which indisputably fell within the limits set by the plan. Accordingly, the propriety of these awards will be reviewed under the business judgment rule which defaults to a waste standard. Plaintiffs have not pled waste. I also conclude that Plaintiffs have not satisfied the test for demand futility under Court of Chancery Rule 23.1 with respect to their claim challenging the grant of awards to the executive directors. Finally, I have determined that Plaintiffs' unjust enrichment claim is merely a recast of their breach of fiduciary duty claim and that they have failed to state a viable claim under either theory of recovery. Therefore, the motion to dismiss must be granted.

         I. BACKGROUND

         The facts are drawn from allegations in the Complaint, documents integral to the Complaint and matters of which the Court may take judicial notice.[2] As it must at this stage of the proceedings, the Court assumes as true all well-pled facts in the Complaint.[3]

         A. The Parties

         Plaintiffs, Robert Elburn and Dieter Soehnel, are and have continuously been stockholders of Investors Bancorp, Inc. ("Investors Bancorp" or the "Company") since May 7, 2014. Both stockholders acquired their shares in the Company's second-step offering described in detail below.

         Defendants, Robert C. Albanese, Dennis M. Bone, Doreen R. Byrnes, Robert M. Cashill, William V. Cosgrove, Brian D. Dittenhafer, Brendan J. Dugan, James J. Garibaldi, Michele N. Siekerka and James H. Ward III are the ten non-employee directors that sit on the Company's twelve-member board of directors (the "Non-Employee Director Defendants"). Defendants, Kevin Cummings, the Company's President and CEO, and Domenick A. Cama, the Company's COO and Senior Executive Vice President, are the two executive officers that serve on the Company's board (the "Executive Director Defendants").

         Nominal Defendant, Investors Bancorp, is a Delaware corporation with its principal place of business in Short Hills, New Jersey. The Company is a holding company for Investors Bank, a New Jersey chartered savings bank that has its corporate headquarters in Short Hills, New Jersey and operates 143 branches located throughout New Jersey and New York.

         B. Investors Bancorp Transitions to a Public Stock Holding Company Through a "Second-Step" Conversion

         Before the Company transitioned into its current capital structure, its predecessor, also called Investors Bancorp, Inc. ("Old Investors Bancorp"), completed an initial public offering in 2005. Through the initial public offering, Old Investors Bancorp offered 43.74% of its outstanding common stock for sale to public investors. After the public offering, Investors Bancorp, MHC, which was the mutual holding company parent of Old Investors Bancorp, held 54.94% of the outstanding common stock. The new Investors Bancorp was created in December 2013 in order for Old Investors Bancorp, Investors Bancorp, MHC and Investors Bank to undertake a Plan of Conversion and Reorganization (the "Conversion Plan"). Pursuant to the Conversion Plan, Investors Bancorp, MHC would cease to exist following the completion of a "second-step" conversion. Investors Bank would then reorganize from its two-tier mutual holding company structure into a fully public stock holding company structure (the "Mutual-to-Stock Conversion") and thereafter would become a wholly-owned subsidiary of a state-chartered stock corporation, Investors Bancorp (the "second step" of the conversion).

         As part of the Conversion Plan, the shares of Old Investors Bancorp already held by the public were converted to shares of common stock of Investors Bancorp pursuant to an exchange ratio designed to preserve percentage ownership interests. The shares previously held by Investors Bancorp, MHC were sold to the public at $10.00 per share. Through this second-step offering, the Company sold 219, 580, 695 shares and raised net proceeds of $2.15 billion. The Conversion Plan was completed in May 2014.

         C. 2014 Director Compensation

         The Company's board of directors (the "Board") sets director compensation based on recommendations of the Compensation and Benefits Committee (the "Compensation Committee"). The Compensation Committee's membership includes a majority of the Board with seven out of the ten non-employee directors serving on the committee. At issue in this case are equity awards approved by the Board as compensation for both non-employee and executive directors.

         1. Non-employee Directors

         In 2014, non-employee directors were awarded three different strains of compensation: (i) a monthly cash retainer for board service; (ii) additional cash rewards for attending board and board committee meetings; and (iii) perquisites and other personal benefits. The Chairman of each committee received an additional annual retainer. As the following chart depicts, annual compensation for all non-employee directors ranged from $97, 200 to $207, 005, with $133, 340 as the average amount of compensation per director.

Name

Investors Bancorp Cash Fees

Bank Cash Fees

All Other Compensation

Total

Albanese

$56, 500

$73, 200

$343

$130, 043

Bone

$37, 500

$73, 200

$264

$110, 964

Byrnes

$59, 500

$73, 200

$9, 898

$142, 598

Cashill

$48, 000

$146, 400

$12, 605

$207, 005

Cosgrove

$24, 000

$73, 200

$32, 970

$130, 170

Dittenhafer

$59, 500

$73, 200

$13, 392

$146, 092

Dugan

$45, 000

$73, 200

-

$118, 200

Garibaldi

$24, 000

$73, 200

-

$97, 200

Siekerka

$45, 000

$73, 200

$230

$118, 430

Ward

$59, 500

$73, 200

-

$132, 700

         2. Executive Directors

         As of 2014, Cummings, the Company's President and CEO, received the following compensation: (i) a base salary of $1, 000, 000; (ii) an Annual Cash Incentive Award of up to 150% of his base salary contingent on certain performance goals; and (iii) perquisites and other benefits valued at $278, 400. In total, his annual compensation package was valued at $2, 778, 700. For Cama, the Company's COO and Senior Executive Vice President, annual compensation consisted of: (i) a base salary of $675, 000; (ii) an Annual Cash Incentive Award of up to 120% of his base salary; and (iii) perquisites and other benefits valued at $180, 794. In total, his 2014 compensation was valued at $1, 665, 794.

         D. The Adoption of the Equity Incentive Plan

         The Compensation Committee held a meeting on December 15, 2014, approximately seven months following the completion of the Conversion Plan, to review 2014 director compensation and to set compensation for 2015. At the meeting, a compensation consultant from GK Partners, Inc., Gregory Keshishian, presented a study analyzing the director compensation within eighteen publicly held companies that the Compensation Committee had previously identified as peers. The study revealed that, on average, these companies paid their non-employee directors $157, 350 in total compensation. The Company's average non-employee director compensation of $133, 340 in 2014 was in line with this figure. Following the presentation, the Compensation Committee recommended to the Board that the non-employee director compensation package remain the same for 2015. The only change was to increase the fees paid for attending committee meetings from $1, 500 to $2, 500.

         The Compensation Committee discussed the compensation package for executive officers at the same meeting. After reviewing and discussing GK Partners' compensation study with respect to average compensation paid to executive officers, the Compensation Committee unanimously recommended to the Board that Cummings' annual salary remain at $1, 000, 000, but that his 2015 Annual Cash Incentive Award be increased from 150% to 200% of his base salary. The Board retained Cama's base salary at its 2014 level, but raised his 2015 Annual Cash Incentive Award from 120% to 160% of his base salary.

         The only items left to be determined were the precise metrics that would apply to the incentive awards. Those metrics were set at the next meeting of the Compensation Committee on February 23, 2015. The meeting minutes do not reflect any discussion of additional awards for directors in 2015.

         On March 24, 2015, the Board revisited director compensation and ultimately adopted the 2015 Equity Incentive Plan at issue in this litigation (the "EIP") to be administered by the Compensation Committee. Under the EIP, 30, 881, 296 shares of the Company's common stock are reserved for restricted stock awards, restricted stock units, incentive stock options, and non-qualified stock options for the Company's officers, employees, non-employee directors, and service providers. The EIP imposes limits on: (i) the number of shares the Company can issue as stock options (a maximum of 17, 646, 455) or as restricted stock awards, restricted stock units or performance shares (a maximum of 13, 234, 841), and (ii) the number of shares the Company can award to employees and directors. Specifically, the EIP imposes the following ceilings on awards to employees and non-employee directors:

• A maximum of 4, 411, 613 shares, in the aggregate (25% of the shares available for stock option awards), may be issued or delivered to any one employee pursuant to the exercise of stock options;
• A maximum of 3, 308, 710 shares, in the aggregate (25% of the shares available for restricted stock awards and restricted stock units), may be issued or delivered to any one employee as a restricted stock or restricted stock unit grant; and
• The maximum number of shares that may be issued or delivered to all non-employee directors, in the aggregate, pursuant to the exercise of stock options or grants of restricted stock or restricted stock units shall be 30% of all option or restricted stock shares available for awards, "all of which may be granted in any calendar year."[4]

         According to the Proxy filed on April 30, 2015, the EIP was meant to "provide additional incentives for [the Company's] officers, employees and directors to promote [the Company's] growth and performance and to further align their interests with those of [the Company's] stockholders."[5] The Proxy also disclosed that "[t]he number, types and terms of awards to be made pursuant to the [EIP] are subject to the discretion of the [Compensation] Committee and have not been determined at this time, and will not be determined until subsequent to stockholder approval."[6] The EIP was put to a stockholder vote on June 9, 2015, at the Company's 2015 Annual Meeting. Of the shares voted at the meeting, 96.25% voted to approve the EIP (representing 79.1% of the total shares outstanding).

         E. 2015 Director Compensation

         Beginning on June 12, 2015, three days after the stockholder vote to approve the EIP, the Compensation Committee held four meetings that ultimately resulted in the approval of awards of restricted stock and stock options to all Board members. The minutes of the first meeting on June 12 state that the objective of the meeting was to "begin the process of determining the allocation of shares" to be granted under the EIP. At the next meeting, on June 16, the Board received input from various experts, including a presentation by outside counsel, Luse Gorman, PC. The materials for this presentation included a chart of 164 companies that had undergone a mutual-to-stock conversion in the past twenty years with a list of the number of stock options and stock awards that each company had distributed to its directors and executive officers upon completion of the conversion.

         The Compensation Committee met next on June 19. At this meeting, the Compensation Committee focused on the language in the EIP that authorized up to 30% of the EIP's capacity to be granted to non-employee directors. At some point in the meeting, Cama proposed a number of restricted stock and stock options to be awarded to himself and Cummings. Thereafter, the Compensation Committee polled each member for a reaction to Cama's proposal and each "responded in the affirmative." At the end of the meeting, the Compensation Committee held an executive session (without Cama and Cummings) during which "[a]ll members of the Committee reaffirmed their sentiment of where they came out in the open session" with respect to the awards to be granted to Cama and Cummings. A few days later, on June 23, the Board approved an award of stock options and restricted stock for each of the twelve Board members. In total, the grant date fair value of the awards for all twelve Board members was approximately $51.5 million, broken down by member as follows:

Name

Restricted Stock

Stock Options

Total

Albanese

$1, 254, 000

$780, 000

$2, 034, 000

Bone

$1, 254, 000

$780, 000

$2, 034, 000

Byrnes

$1, 254, 000

$780, 000

$2, 034, 000

Cashill

$1, 881, 000

$780, 000

$2, 661, 000

Cosgrove

$1, 254, 000

$780, 000

$2, 034, 000

Dittenhafer

$1, 881, 000

$780, 000

$2, 661, 000

Dugan

$1, 254, 000

$780, 000

$2, 034, 000

Garibaldi

$1, 254, 000

$780, 000

$2, 034, 000

Siekerka

$1, 254, 000

$780, 000

$2, 034, 000

Ward

$1, 254, 000

$780, 000

$2, 034, 000

Cummings

$12, 540, 000

$4, 159, 999

$16, 699, 999

Cama

$10, 032, 000

$3, 327, 998

$13, 359, 998

         F. Procedural History

         Following the Company's announcement of the equity awards in a Schedule 14A Proxy Statement issued on April 14, 2016, three separate complaints were filed in this Court alleging that the directors had breached their fiduciary duties by awarding themselves grossly excessive compensation. Following the Court's entry of an order appointing co-lead Plaintiffs and co-lead counsel, Defendants filed a motion to dismiss the Verified Stockholder Derivative Complaint (the "Compl.") under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief can be granted and under Court of Chancery Rule 23.1 for failure to make a pre-suit demand with respect to the grants of equity compensation to the executive directors.

         II.ANALY ...


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