Ohio Federal Judge Denies Motion To Dismiss Shareholder 'Say On Pay' Lawsuit

Only small a small number of companies experienced a negative "say on pay" vote this past proxy season, but many of the companies that did found themselves hit with a shareholder lawsuit in the wake of the negative vote. Cincinnati Bell is one of the companies that with both a negative vote and subsequent shareholder lawsuit.  Now, in a September 20, 2001 opinion (here) that expressly references and even relies on the negative vote, Southern District of Ohio Judge Timothy S. Black denied the defendants' motion to dismiss the shareholder suit, finding that whether the defendants would be entitled to rely on the business judgment rule is a question for trial, and also finding that the shareholders' pre-lawsuit demand was excused.

Under Section 951 of the Dodd-Frank Act, reporting companies must seek a non-binding shareholder vote in the form of a resolution to approve the company's executive compensation plan at least every three years. Cincinnati Bell's 2011 proxy included a resolution seeking shareholder approval of its 2010 executive compensation plan. On May 3, 2011, 66% of the company's voting shareholders voted against the resolution.

Thereafter, a shareholder plaintiff filed a derivative lawsuit alleging that the company's board breached its fiduciary duty of loyalty when it approved large pay raises and bonuses to its top three executives in a year that, according to the plaintiff, the company performed poorly. The plaintiff's complaint specifically referenced the negative say of pay vote.

The defendant board members moved to dismiss, arguing that their actions with respect to executive compensation were protected by the business judgment rule, and arguing further that the plaintiff had failed to make the requisite pre-lawsuit demand that the board consider the claims that he asserted in his lawsuit.

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Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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