As I have noted in prior posts (most recently here), plaintiffs’ lawyers have rushed to filed “say on pay” lawsuits, either after a negative vote on the advisory shareholder vote on executive compensation, or more recently before the vote occurs based on alleged deficiencies in the proxy materials related to the vote. In the latest in a now lengthening string of cases, yet another court has now rejected the plaintiffs’ “say on pay” claims. As discussed below, a California state court judge has rejected plaintiffs’ claims pertaining to the executive compensation proxy disclosures at Clorox Corporation. While this ruling and the other prior decisions could discourage plaintiffs’ lawyers from pursing these kinds of say on pay cases, it seems likely that executive compensation-related litigation will continue.
A special hat tip to Jordan Eth and Mark R.S. Foster of the Morrison & Foerster law firm, who discussed the Clorox decision in a September 25, 2013 memo, here.
The plaintiff first filed his lawsuit in California (Alameda County) Superior Court on October 10, 2012, seeking to enjoin the shareholder vote on compensation issues schedule to take place at the company’s annual shareholders meeting. The plaintiff alleged that that Proxy Statement Clorox filed in advance of the shareholders’ meeting omitted material information related to executive compensation. On November 13, 2013, Superior Court Judge Wynne Carvill denied the motion for preliminary injunction, concluding that the plaintiff had failed to show irreparable harm if the vote went forward, and finding that the plaintiff’s “evidentiary showing with respect to the merits of his claim was meager, at best.” The shareholder vote took place the next day.
The plaintiff subsequently filed an amended complaint seeking to have the shareholder vote set aside. The parties then filed cross-motions for summary judgment relying on expert witness statements and deposition testimony. On September 23, 2013, Judge Carvill entered judgment in the defendants’ favor in reliance on his August 21, 2013 tentative statement of decision in the case. (A copy of the tentative decision can be found here.)
In concluding that the defendants did not have a duty to say more in the proxy statement, Judge Carvill noted that
What the Plaintiff has done is simply discovered what additional information was presented to the [compensation committee] and not included or summarized completely in the Proxy and then described why such information would be “helpful.” Were this court to find on this record that material information was withheld, it would be a license to file suit when anything was withheld, for any information can always be labeled as potentially “helpful.” Delaware law provides no such license.
The Court’s decision in the Clorox case follows on several other recent cases in which the courts have dismissed plaintiffs’ claims based on alleged deficiencies in the proxy statements, including the August 2013 California state court decision in the Symantec case and Northern District of Illinois Amy St. Eve’s April 2013 decision in the proxy disclosure-related say on pay case involving AAR.
As the MoFo attorneys noted in their recent memo, these courts rejected the plaintiffs’ proxy statement disclosure claims and recognized “that the asserted claims were trying to impose new obligations.” The memo’s authors comment that the defendants’ recent track record in these cases “should deter plaintiffs counsel from bringing disclosure claims against public companies.”
Just the same, executive compensation remains, as the authors note, “a hot topic for shareholders, for proxy advisory firms, and for the SEC.” For that reason, companies can “expect continued scrutiny of their executive compensation decisions and disclosures.” Even if lawsuits related to say-on-pay disclosures “abate in light of recent rulings,” it can be expected that “plaintiffs’ counsel will continue to look for and find ways to target companies and their directors in this type of litigation.”
One place that plaintiffs’ lawyers may turn next as they continue to agitate on executive compensation issues is the SEC’s new pay ratio disclosure requirements. As I discussed in a post earlier this week, the SEC’s proposed new rule will not be finalized until after the comment period, and are unlikely to go into effect until 2015 or 2016. Nevertheless, the very existence of disclosure requirements creates an opening for plaintiffs’ to allege that companies did not follow the pay ratio disclosure guidelines or used calculations and comparisons that made the disclosure misleading.
The current round of say on pay litigation may or may not have finally played itself out. Either way, it seems likely that we will continue to see plaintiffs’ lawyers attempting to pursue compensation related claims.
Portions of the JOBS Act are Now in Effect, But Crowdfunding is Still a Long Way Off: An important provision of the JOBS Act went into effect earlier this week, but there has been some confusion in the mainstream media that what went into effect was the Act’s crowdfunding provision. However, as discussed in detail in a November 24, 2013 post on the New York Times You’re the Boss blog (here), “equity crowdfunding – as most people understand it – remains a long way off.”
What went into effect earlier this week is a new rule lifting the longstanding ban on “broadly advertising a private stock placement,” a restriction that has been in place since Congress enacted the Securities Act of 1933. The important thing to understand is that, with a few exceptions, this type of private offering can only be sold to an institutional investor or an accredited investor – someone meeting the specified net worth requirements. Under the new rules, companies may now advertise their private offerings widely, but they may only sell the stock to accredited investors.
The elimination of the general solicitation ban is something different than what is commonly known as crowdfunding. The JOBS Act crowdfunding provisions were meant to provide a way for ordinary people to make small investments in small companies. The law “limits how much investors can put into these stocks and restricts issuing companies to raising $1 million in a year.” The law also specifies the types of financial disclosures the company seeking to conduct a crowdfunding offering must provide investors.
None of these provisions apply to companies conducting a private placement offering. The company can “raise as much capital as they wish, [qualified[ investors can sink as much as they would like, and no financial disclosure is required.”
As the blog post points out, some of the confusion may have arisen from crowdfunding’s boosters, who are growing impatient that the SEC has not yet released its rules implementing crowdfunding. The SEC has “not yet even proposed these regulations, much less finalized them.” As a result, some of the platforms that were organized to try to facilitate crowdfunding are “attempting to turn themselves into platforms to facilitate private placements.” But if these would-be crowdfunding process participants are growing impatient, they may yet have much further to wait. It could be some time yet before the SEC releases its proposed crowdfunding rules.
In any event, if you have read this far, now you know that the recent implementation of the rules lifting the solicitation ban for private placements did not institute crowdfunding. It may be some time before crowdfunding gets off the ground. Now that you know, you have to make sure to point this out when you are around somebody that thinks that the recent JOBS Act provision implementation had anything to do with crowdfunding.
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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