wave of "say on pay" litigation involved lawsuits brought by shareholders
following a negative advisory say on pay vote under the Dodd-Frank Act. The second
wave of say on pay litigation, which picked up in 2012, involved
plaintiffs' efforts to enjoin upcoming shareholder votes on compensation or
employee share plans on the grounds of inadequate or insufficient proxy
Now there is a "third wave" of executive compensation
litigation, according to a February 21, 2013 memo from the Pillsbury Winthrop
Shaw Pittman law firm entitled "Proxy Season Brings a Third Wave of 'Gotcha'
Shareholder Litigation" (here).
In these third wave lawsuits, the plaintiffs allege that companies issued stock
options or restricted stock units to executives in amounts that exceed the
limits of the companies' stock plans. According to the law firm memo, this
latest litigation wave "has not crested yet."
As the memo details, the first two waves of say on pay
litigation has not been particularly successful for the plaintiffs. Indeed, the
memo includes detailed appendices laying out how the cases have fared in the
courts. Among other things, the statistics in the memo show that in most cases
the companies targeted in the second wave cases successfully fought the
plaintiffs' efforts to obtain preliminary injunctions; according to the memo,
"the plaintiffs' bar was beaten in 80% of the motions for preliminary
Faced with these setbacks, the plaintiffs bar "has turned
to a new area of focus" and "is demonstrating its resourcefulness by brining a third
wave of shareholder litigation." The third wave, like the first two waves,
concerns executive compensation. However, the third wave lawsuits do not
relate to the say on pay votes.
According to the memo, in the past two quarters, ten
companies have been targeted by derivative shareholder litigation "alleging
that those companies awarded executive compensation in violation of stock plans
and thus filed purportedly false and misleading proxy statements." While noting
that it is far too early to tell how these cases ultimately will fare, or
whether these derivative suits will even survive motions to dismiss base
on the insufficiency of the demand futility allegations, the memo does
note that "if the allegations are true, these suits stand a higher probability
of success than the two prior litigation waves." However, it is "too soon to
tell if plaintiffs' allegations based on reading the relevant plans and
examining the awarded executive compensations are correct or based on erroneous
The memo further notes that these third wave cases are
"entirely preventable." If the allegations are true that companies issued stock
options to executives in excess of limits authorized by the relevant plans,
then "those actions could have been prevented by complying with all limits
established by the plans." The memo suggests that "careful review of executive
compensation plans by in-house and outside counsel and compensation consultants
should ensure compliance with all governing plans."
While I am sure readers of this blog will find the law
firm memo interesting, I suspect readers will find the memo's detailed
appendices, laying out the filings tallies and disposition patterns of the
three litigation wave, to be particularly helpful and interesting.
Special thanks to Sarah Good of the Pillsbury
law firm for sending me a copy of the memo.
Worth Reading: One
of the blogs that we follow is The
D&O Discourse written by Douglas Greene of
the Lane Powell law firm. Yesterday, Doug had a post that I thought would be of
interest to readers of this blog, so I am linking to it here.
In the post, Doug describes important securities and corporate governance cases
that he will be watching in 2013, particularly the Allergan derivative case
pending in the Delaware Supreme Court and the Amgen case pending in the U.S.
Supreme Court. The post does a nice job laying out why he is watching these
cases and why they may be important. He also has an interesting analysis of
some unanticipated and arguably unintended consequences from the Supreme
Court's 2011 decision in the Matrixx Initiatives case.
And Finally: How
did a Roman era brick with a cat's paw print wind up at the Fort Vancouver
historical site in Washington State? Good question, answered in a February
21, 2013 article in The Atlantic Monthly entitled "1 Kitty, 2
Empires: 2,000 Years in World History Told Through a
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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