Is it possible that we seen the last of "Say-On-Pay"
lawsuits? Or are we just awaiting the next round of post-Dodd Frank executive
compensation-related litigation? Those are the questions asked in a June 12,
2013 memorandum entitled "Has Another Wave of 'Say-On-Pay' Litigation Come to
an End?" (here) by
Nicholas Even of the Haynes
and Boone law firm. Whatever may lie ahead, the latest round of Say-On-Pay
litigation seems to have come to a close.
First, a little background. One of the changes introduced
in Dodd-Frank's many provisions was a requirement that reporting companies hold
a periodic shareholder vote on executive compensation. Even though the vote
was, by the Act's terms, to be purely advisory, and even though the Act
expressly stated that the shareholder vote "may not be construed" to "create or
imply any change to the fiduciary duties of such issuer or board of directors"
or to "create or imply any additional fiduciary duties for such issuer or board
of directors," shareholder plaintiffs (and their attorneys) sought
to pursue breach of fiduciary duty lawsuits against companies whose
shareholder votes resulted in a "no" vote on executive compensation issues.
These "first wave" say-on-pay lawsuits, mostly filed in
2011, proved to be unsuccessful. So in 2012, the shareholder plaintiffs tried a
different approach. Borrowing a page from the M&A-related litigation play
book, the shareholder plaintiffs (largely represented by a single law firm) filed
lawsuits seeking to enjoin the annual meeting unless the company made
additional compensation related disclosures. Ultimately, more
than 20 of these "new wave' say on pay lawsuits were filed.
The second wave of say on pay lawsuits proved largely
unsuccessful as well. As outlined in the law firm's memo, there were two
injunctions issued and those cases were quickly settled. Several other
companies chose to settle by issuing supplemental disclosures. Generally, in
the other cases, the courts denied the injunctive relief and/or dismissed the
cases. (Refer here
for further discussion of these issues.)
As the 2013 proxy season began, there
was significant concern that there would be further waves of executive
compensation-related litigation. As the law firm memo notes, a number of
companies were put on notice that they were under "investigation" over
compensation related issues. But a funny thing has happened. According to the
law firm memo, "no injunctive lawsuits materialized, either challenging the
say-on-pay or equity incentive plans." Specifically, "no companies appear
to have been targeted for say-on-pay injunctive suits in advance of annual
meetings during the 2013 proxy season."
The law firm memo's author speculates that the reason for
the absence of litigation could be that "the attorneys previously responsible
for these suits have simply turned their attention to different issues or have
become distracted with other matters." It could also be that after the many
denials of injunctive relief in the 2012 say-on-pay cases, the plaintiffs'
counsel "discovered that the threat of injunctive action has lost its in
Whatever the reason, the "latest attempt to refashion
Dodd-Frank's say on pay requirement into an annual litigation phenomenon
appears to have waned." Nevertheless, even if the immediate injunctive threat
has "diminished," it remains that "the combination of Dodd-Frank, executive
compensation, and annual meetings remains fertile ground for potential
shareholder action." The law firm memo's author concludes with the question
whether "a 'third wave' of say-on-pay litigation" is "inevitable?"
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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