Investors Bancorp Lawsuit

law

Award of Restrictive Stock Options and Recommendation to Restrict Stock Options

An Investors Bancorp lawsuit was recently overturned by the Delaware Court of Appeals. Investors Bancorp is a plaintiff in an action that targets and seeks to eliminate a class-action lawsuit filed against the company in 2021. The lawsuit was brought on behalf of three shareholders who are seeking damages for wrongful selling of their shares in Investors Bancorp (IBC). The shareholders are alleging they were intentionally kept out of a sales agreement by Management and that this information was known only to a few individuals. Management maintains the suit is based on lies.

Investors Bancorp Lawsuit

On appeal the Delaware Court of Appeals reversed the former decision of the trial court denying the shareholders’ claims of liability and fiduciary responsibility. Specifically, the court held that because Management was not a party to the original stockholder lawsuit it could not be found liable for the actions of its directors. Specifically the Delaware Court found that the fact that Management had no duty to act in good faith with respect to the stockholders’ agreements and representations at the time of the transaction did not give rise to a duty or call for a fiduciary responsibility claim against Management. Additionally, the trial court found that because the board of directors met several formal and informal agreement forms at different times during the course of the Company’s operation and business, there was no duty to transact business as it would be assumed to have if it were a major corporation.

The Delaware Court found that it was not its role to impose any formal business rules or a corporate code or by-laws on Investors Bancorp or on the directors or anyone else associated with the Company.

The decision was also not based on the theory that the board members owed a special or unique duty to the Company. Rather, it was concluded that given the fact that no duty was owed to the conduct of the Board was not subject to the traditional or common law principles of negligence or breach of the implied terms of the employment. In essence therefore the decision rested on the fact that while the existence of a duty to transact may exist with respect to other kinds of businesses, the mere existence of a duty to transact with Investors Bancorp was not required or entitled to the protection commonly held applicable to other companies.

The Delaware Court found that under the plain facts of the situation it was impossible for the Company to have any one of its directors deliberately intend to create a duty to do anything that would be perceived to be contrary to the general principles of business judgment or an ordinary principle of negligence.

In relation to the facts of the case it was held that even if it could be possible for a board to have such an intent it would be an extremely difficult and risky undertaking for such a board to undertake given that such an intention would be perceived as being in contravention of an ordinary principle of business judgment. Given that the Directors failed to establish that they had any such intent the Court found it irrelevant that whether the intention was sincere or intended is not relevant to the conclusion that the conduct of the Directors did in any way violate the present Employment Relations Act. It was also held that because the Directors failed to establish that they had any such intention they were not subject to the operation of s 5(d) of the act. That the intention was not unlawful in the ordinary sense was of no consequence in the view of the court in the exercise of its equitable power. As a result the claim was dismissed with prejudice.

The effect of the ruling was that the shareholders were not entitled to a further claim for compensation for breach of fiduciary duties. Although the shareholders knew that the directors had a duty to act reasonably and in the best interests of the company they were not entitled to additional damages for breach of that duty. That is to say that although they may have been owed compensation for other wrongs committed by the directors, the shareholders were not entitled to additional compensation for breach of the duty of loyalty owed to them by the directors. The effect of this was that no order could be made against the directors for breach of any duty of loyalty owed to the shareholders. This was not a constructive order as the shareholders had not suffered anything by the breach.

At first, this result seemed to justify the invalidity of the Bancro plan.

However, it was found that the dismissal of the shareholders’ right to a further claim for directors compensation for breach of fiduciary duty did not come about because of the business judgment rule. The Court found that there had been no award of damages notwithstanding that there had been a breach of fiduciary duty. In that regard, it was held that there had been no order for the directors to be punished for the breach of their duty of loyalty owed to the shareholders. They were not required to make any advance payment to the claimants.

The second step into the reasoning of the Equity Awards Review Board was the principle of equity compensation awards being mandatory in the context of the Australian case law.

Equity awards were discretionary in that only very large equity awards could be awarded. However, in the United States, they are mandatory according to the Holders Rights Act, although the scope of that right is much more limited. It is also worth noting that the Holders Rights Act is itself equity awards review procedure in that it requires the Board to consider and report on the extent of any non-compliance with its provisions-one of which is the requirement to determine whether an award would have any adverse effect on the financial position of the Company.

The Holders Rights Act also provides that the Board must provide notice to the Claimant that it is considering making an equity award. However, it should also ensure that the award is consistent with the objectives of the Company and consistent with the wider interests of the Company and its members. It should also be in the interests of the Claimant, its successors and other persons who may be interested in its stock or the dividend income it receives. There are many restrictions on the Company’s ability to award equity, with some restrictions based on the nature of the Company’s businesses and others based on the extent of its debts or assets.

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