Preparing for Shareholder Say-on-Pay Litigation in the 2013 Proxy Season

“Following the enactment of the Dodd-Frank Act, plaintiff’s firms began filing shareholder actions against executive officers, directors, and compensation consultants of companies that failed to obtain the approval of a majority of their shareholders for executive compensation proposals.” (Perkins Coie)

Blame it on Dodd-Frank… One of the key provisions of the landmark financial reform legislation requires public companies to conduct regular shareholder votes on executive compensation. These so-called “say-on-pay” votes are not binding, but corporations that ignore negative votes do so at their own peril. From law firm Fenwick & West:

“In 2011 (the first year the requirement was in effect) … [a] number of derivative suits were filed in various courts around the country, based principally on the theory that a negative vote supported a finding that directors had breached their fiduciary duties with regard to executive compensation.”

Those initial lawsuits ultimately proved to be unsuccessful (for the most part), but say-on-pay litigation has not gone away. Again, Fenwick & West:

“[P]laintiffs’ lawyers have adopted a new tactic: filing class action suits (most often in state courts) challenging the sufficiency of disclosures relating to say-on-pay votes and other compensation-related proposals… Thus far, these class actions have typically not alleged that the challenged proxy statements are false or inaccurate, or that they fail to comply with applicable SEC requirements. Instead, claims are premised on the theory that the directors breached their fiduciary duties by failing to furnish additional information necessary for shareholders to vote on the say-on-pay or other compensation-related proposals.”

For your reference, three considerations when preparing for the 2013 proxy season:

1. Expect an increase in lawsuits:

“Over the past several months, plaintiffs’ lawyers have stepped up attacks on executive compensation disclosures in proxy statements. Although to date most of these attacks have been unsuccessful, the number of case filings is expected to increase in the weeks ahead as more companies head into this proxy season.” (Fenwick & West)

2. Act quickly to defend say-on-pay litigation:

“Although some companies have chosen to settle these types of actions, recently some companies who mounted aggressive defenses have prevailed and obtained dismissals… Although these dismissals may discourage plaintiffs’ firms from continuing to pursue these types of actions, companies should be prepared to act quickly to defend actions and avoid interference with their annual meeting schedule.” (Perkins Coie)

3. Ensure that disclosures meet all applicable regulations:

“Companies with a low or negative say-on-pay vote and companies seeking authorization for additional share issuances pursuant to equity incentive plans should take a careful look at their disclosure to ensure that it complies with Items 402 and 407 of Regulation S-K and Item 10 of Schedule 14A, as well as consider enhanced disclosures to reduce the possibility of litigation. This enhanced disclosure could include, for example, more information on the company’s internal equity usage calculations and planning. In this regard, companies should also be mindful that the new disclosure requirements related to compensation consultant conflicts of interest in Item 407(e)(3) of Regulation S-K are effective as of January 1, 2013.” (Wilson Sonsini)

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