A recent case out of the Delaware Court of Chancery could result in heightened scrutiny of equity award grants to non-employee directors. Although this decision was rendered at the procedural stage of the case and the merits of the claims have yet to be fully analyzed, this case potentially affects directors of Delaware companies and those advising them on compensation-related matters.

In this case, a stockholder of Citrix, Inc. (“Citrix”) brought a derivative lawsuit against the Citrix board of directors alleging a number of things, including breach of fiduciary duty by the board of directors in awarding significant equity compensation awards. Specifically, the plaintiff alleged that restricted stock units (“RSUs”) granted to non-employee directors (who constituted eight of the nine Citrix board members) under the Citrix equity incentive plan, were excessive.

Because the non-employee directors who received the RSU grants in question constituted eight of the nine members of the Citrix board of directors, the plaintiff was successfully able to rebut the business judgement rule presumption and the defendants bear the burden of proving to the court’s satisfaction that the RSU grants were the product of both fair dealing and fair price (i.e., the “entire fairness” standard of review).

The defendants argued that because the RSU grants did not exceed the annual limit contained in the plan, stockholder approval of the plan foreclosed on any claims that grants under this annual limit because the stockholders effectively ratified any such grants by approving the plan. However, even though the Citrix plan included a limit on the total number of shares a beneficiary could receive in a calendar year, the court held that this limit was not meaningful. The court reasoned that because there was only a generic limit of one million shares per beneficiary per calendar year, which would have been worth over $55 million at the time of the action, and because this limit did not specifically apply to non-employee directors, the limitation was not meaningful and Citrix could not rely on the defense that the RSU grants were proper because they were did not exceed the generic limit contained in the stockholder-approved plan.

Although the decision was rendered at a procedural stage, the court’s interpretation of prior Delaware precedent is not likely to change after a trial. Therefore, companies should carefully consider their equity compensation plans and the process for determining director equity compensation. Specific attention should be paid to evaluating the maximum amount that a beneficiary could receive under the plan and whether the plan should treat all classes of beneficiaries (executives compared to non-employee directors) the same.