Delaware Court Ruling Raises Questions About Informal NYSE Interpretations

The following post comes to us from Robert Buckholz, partner and co-coordinator of the Corporate and Finance Group at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication, and is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Louisiana Municipal Police Employees Retirement System v. Bergstein [1] concerns a $120 million equity grant to the Chief Executive Officer of Simon Property Group, Inc. (“SPG”) and a related amendment to SPG’s stock incentive plan that was required to make the grant. The shareholder plaintiff alleges that the board of directors’ amendment of the plan was a breach of fiduciary duty because the plan mandated shareholder approval of amendments where required by law, regulation or applicable stock exchange rules. The defendants moved to dismiss, noting that SPG had received email confirmation from New York Stock Exchange staff that shareholder approval of the amendment was not required under NYSE rules. Ruling from the bench, Chancellor Leo E. Strine, Jr. denied SPG’s motion to dismiss, citing concerns that a staff email did not serve as a definitive interpretation of NYSE rules – particularly where, in Chancellor Stine’s view, the email to the NYSE did not adequately describe the broader circumstances.

The process SPG used is the customary one by which listed companies receive interpretations from the NYSE staff on governance matters, and Chancellor Strine’s ruling is at an early stage of the case. However, until there is more definitive guidance as to the weight that courts will give NYSE staff interpretations, listed companies should bear in mind the Chancery Court’s ruling when evaluating the weight that a court will give an NYSE email interpretation on a governance matter, particularly when evaluating whether a proposed change to an equity compensation plan would require shareholder


On July 7, 2011, SPG, a real estate investment trust (“REIT”) and NYSE-listed corporation, announced that it had entered into a new employment agreement with its Chief Executive Officer and Chairman, David Simon. The compensation package included a one-time retention award in the form of one million “performance units” – units of limited partnership interest in the REIT’s operating partnership that, once earned, are exchangeable for shares of SPG common stock. Mr. Simon’s retention award, which had a grant date value in excess of $120 million, vests in one-third increments on the sixth, seventh and eighth anniversaries of the grant date, subject only to his continued employment. Also on July 7, 2011, SPG disclosed that its board of directors (the “Board”) had approved an amendment (the “2011 Amendment”) to SPG’s 1998 Stock Incentive Plan (the “1998 Plan”) to allow grants of performance units based solely upon the satisfaction of continuous-service vesting requirements.

Mr. Simon’s compensation package, and the retention award in particular, were met immediately with negative press. On August 8, 2012, SPG shareholder Louisiana Municipal Police Employees Retirement System (“LAMPERS”) filed a derivative action on behalf of SPG against the Board and Mr. Simon asserting breaches of fiduciary duties for, respectively, enacting an illegal amendment to the 1998 Plan and accepting the resulting retention grant. [2] LAMPERS noted that while the 1998 Plan generally permits the Board to amend the plan terms without shareholder approval, it expressly mandates such a vote where required by law, regulation or applicable stock exchange requirements. Among other arguments, LAMPERS asserted that NYSE Listing Rule 303A.08 required a shareholder vote to approve the 2011

NYSE Listing Rule 303A.08 provides that, with limited exemptions, shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions thereto, and provides a list of examples of material revisions, including an expansion of the types of awards available under the plan. Guidance under the NYSE’s Frequently Asked Questions on Executive Compensation Plans (“NYSE FAQs”) further provides that if a revision does not fall into one of the listed examples, it is considered material if it would materially increase the potential dilution of shareholders or have an effect similar to one of the listed examples. [3] In its shareholder-approved form, the 1998 Plan provided for the grant of a range of equity-based awards including options, stock appreciation rights, restricted stock and performance units. Prior to the 2011 Amendment, however, performance units could be earned only upon the attainment of certain specified types of performance goals (so-called “performance-vesting” awards). In order to make the retention grant to Mr. Simon, the Board amended the 1998 Plan to allow for the issuance of performance units that vest based solely on continued service (so-called “time-vesting” awards).

Prior to adoption of the 2011 Amendment, following a process customarily employed by NYSE-listed companies, SPG’s outside counsel sent an email outlining SPG’s analysis that no shareholder vote was required under NYSE rules and received email confirmation of the NYSE staff’s agreement with SPG’s interpretation. In its email to the NYSE, SPG’s counsel reasoned that: (1) an amendment to change allowable vesting conditions would not add a new type of award to the 1998 Plan, as NYSE guidance makes clear that the “type” of award refers to either full-value awards or appreciation-based awards; [4] (2) the proposed amendment does not increase potential shareholder dilution or have an effect similar to the material revision examples in NYSE Rule 303.08; and (3) the NYSE has stated that changes to the vesting schedule of outstanding options to permit them to vest on a change in control are not material revisions regardless of whether the change requires an amendment to the underlying plan. [5] In its pleadings, LAMPERS responded that the 2011 Amendment represented a significant expansion of the types of awards payable under the 1998 Plan, particularly in light of SPG’s prior disclosures regarding its “pay-for-performance” culture, and that the defendants’ reliance on a private, non-public email with an NYSE lawyer was misplaced.

Ruling and Implications

Chancellor Strine refused to dismiss LAMPERS’ claim that the 2011 Amendment required shareholder approval under the NYSE rules. At oral argument, Chancellor Strine focused on the difference between an award tied to meeting performance goals and an award “without any performance criteria other than showing up” [6] (comparing the latter to non-cash salary) and suggested that time-vesting performance units could be considered a new “type” of award or similar change under the 1998 Plan.

Chancellor Strine also determined that the NYSE staff email confirmation that applicable exchange rules did not require shareholder approval of the 2011 Amendment was not dispositive at the pleading stage. In emphasizing the non-binding, “off-the-cuff” [7] nature of the NYSE email, Chancellor Strine suggested that the process was too informal to rely on for purposes of evaluating shareholder expectations under the 1998 Plan, and contrasted the process with the more “formal comfort” [8] of an SEC no-action letter (though no such no-action process exists at the NYSE). Chancellor Strine further suggested that SPG’s email did not give the NYSE staff sufficient background, in that SPG’s email did not describe the intended $120 million grant to its Chief Executive Officer or include the company’s prior public disclosures highlighting the pay-for-performance philosophy underlying the 1998 Plan and performance unit awards. Chancellor Strine also focused on the short amount of time between the submission of SPG’s email to the NYSE staff on Friday afternoon and the NYSE staff’s response on Monday afternoon. However, the discussion did not address the possibility that, as is often the case, this email exchange documented an earlier more extensive discussion between SPG and the staff. Moreover, counsel to SPG argued that the fact that the NYSE had not taken action against SPG for amending the 1998 Plan without shareholder approval was evidence of the NYSE’s agreement with SPG’s position.

While the case will now proceed, the Chancery Court’s ruling at the pleading stage should be considered when evaluating whether to proceed on the basis of an NYSE staff interpretation on a governance matter, particularly when evaluating whether a proposed change to an equity compensation plan would require shareholder approval. In addition, the ruling serves as a reminder that companies seeking informal guidance from the NYSE on rule interpretations should provide a sufficient level of disclosure to the staff.


[1] C.A. No. 7764-CS (Del. Ch. May 30, 2013) [hereinafter LAMPERS].
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[2] The complaint was amended subsequently to include two claims for breach of the duty of candor in connection with SPG’s April 2012 proxy materials that included a proposal for shareholder approval for additional amendments to the 1998 Plan. Chancellor Strine granted dismissal of these claims.
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[3] See NYSE Frequently Asked Question C-2, NYSE Frequently Asked Questions on Executive Compensation Plans (as of March 29, 2007) available at
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[4] See NYSE FAQ C-3 (stating that where a plan provides for the grant of restricted stock, an amendment to permit the award of restricted stock units is not a material revision as both are a “type” of award that provides for equity compensation without any exercise or base price).
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[5] See NYSE FAQ C-10.
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[6] LAMPERS, tr. at 95.
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[7] Id. at 23.
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[8] Id. at 16.
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