Posted by David E. Gordon, Frederic W. Cook & Co., Inc., on
Thursday, March 10, 2016
David E. Gordon is a Managing Director in the Los Angeles office of Frederic W. Cook & Co., Inc. This post is based on a FW Cook publication authored by Mr. Gordon and Bindu M. Culas.
Executive compensation experts were unpleasantly surprised by the settlement in late January of Espinoza v. Zuckerberg, a case challenging the reasonableness of stock awards to Facebook’s non-employee directors. [1] The facts surrounding this settlement create concern that unless a company has a shareholder-approved plan with meaningful limits on both the cash and equity compensation that can be awarded to non-employee directors in a year, it faces a risk of being sued, particularly where the actual amount of compensation gives plaintiffs’ lawyers a credible argument that pay is “above market.”
There are several reasons why Espinoza is concerning. First, the amount of the allegedly “excessive” compensation did not seem particularly large. Second, the plaintiff’s lawyers are expected to receive attorneys’ fees of $525,000 even though it appears highly likely that Facebook would have eventually prevailed because its controlling shareholder approved the transaction. Last, the settlement can be read to require a shareholder vote every time there is an increase in director pay, thus creating a precedent of a “Say-on-Director-Pay” standard. It should be noted that Frederic W. Cook & Co. has no knowledge of the facts in Espinoza outside the public filings.
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