I am pleased to publish below a guest post from Bruce Vanyo, Richard Zelichov and Christina Costley of the Katten Muchin Rosenman law firm These three attorneys’ post addresses a new approach that plaintiffs’ lawyers are taking to “say on pay” challenges – that is, a preemptive attack in the form of a lawsuit seeking to enjoin the vote based on alleged misrepresentations in the proxy statement


I would like to thank Bruce, Richard and Christina for their willingness to publish their article on this site. I welcome guest posts from responsible commentators on topics of interest to readers of this blog. Any readers who are interested in publishing a guest post on this site are encourage to contact me directly. Here is their guest post:


Nobody can accuse the plaintiff’s shareholder bar for suffering from a lack of creativity or being easily dissuaded from purporting to represent shareholders. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) in July 2010. Section 951 of Dodd-Frank requires a stockholder advisory vote on executive compensation (a “say-on-pay” vote). The Dodd-Frank Act, however, “specifically provides” that the say-on-pay vote (1) “shall not be binding on the issuer or the board of directors;” and (2) does not “create or imply any change to the fiduciary duties of the board members.” 15 U.S.C. § 78n-1(c)). Nonetheless, the plaintiff’s bar began filing stockholder derivative lawsuits alleging breach of fiduciary duty after any negative say-on-pay vote. The vast majority of these cases have been dismissed because the plaintiff failed to make demand on the company’s board of directors before bringing suit and such See Gordon v. Goodyear, 2012 WL 2885695, *10 (N.D. Ill. July 13, 2012) (collecting cases); see also Swanson v. Weil, 2012 WL 4442795 (D. Colo. Sept. 26, 2012); Haberland v. Bulkeley, No. 5:11-CV-463-D (E.D.N.C. Sept. 26, 2012).


As a result, the plaintiff’s bar has resorted to a new attack based on a tactic developed from the merger cases: suing companies before the say-on-pay vote to enjoin the vote based on alleged misleading disclosures. In the last month or so, Plaintiffs’ shareholder lawyers have issued over 30 notices of investigation concerning such suits, and over the course of the last year, they have sued over 20 companies. The complaints assert two theories (either alone or in combination). They assert that the proxy statement fails to disclose material facts necessary for the shareholders to cast an informed vote on executive compensation and/or they assert that the proxy fails to disclose material facts necessary for the shareholders to determine whether to increase the number of shares available to be granted to executives and employees as incentive compensation under company plans providing for such grants. The two theories are slightly different because the shareholder vote on executive compensation is purely advisory and exists solely because of the Dodd-Frank Act while the vote on increasing the number of shares available under a stock plan is required either by state law or the company’s articles of incorporation, bylaws or listing standards of the exchange on which the company trades.


While the trend has picked up recently, the first such case was filed on January 13, 2012 against AmDocs Ltd. in New York County Supreme Court. Plaintiff sought injunctive relief based on a proposal to increase the number of shares available under an equity incentive plan. Plaintiff did not challenge the proposal, but rather, the adequacy of the disclosures in the proxy statement regarding the proposal. The alleged omissions – the equity value of the shares; the timing of the issuance; the “dilutive impact” that the shares might have; the reason for issuing more shares when the existing incentive plan still had shares available; and the reason “why” the company was granting to shares to executives at an increasing rate, though management had not improved the Company’s performance – were not material, and basically amounted to asking “why” in connection with a shareholder vote plaintiff opposed. Defendants (represented by Katten Muchin Rosenman LLP) removed to the Southern District of New York, moved to dismiss, and opposed plaintiff’s request for a preliminary injunction. Plaintiff then voluntarily dismissed the claim.


Despite their initial loss in the case against AmDocs, plaintiffs have surprisingly had success in some of these cases. Specifically, in a case concerning Brocade Communications Systems, Inc., a plaintiff sought injunctive relief based on alleged omissions regarding a proposal to increase the number of shares in an equity options plan. Plaintiff argued the proxy: (1) omitted internal projections regarding future stock grants/share repurchases and their dilutive impact; (2) misled shareholders by claiming a repurchase plan would reduce potential dilution; and (3) failed to include a “fair summary” of the board’s analysis, including its equity utilization compared to peer companies. On April 10, 2012, the court enjoined the annual vote and required Brocade to disclose its internal projections regarding future stock grants. Similarly, WebMd, H&R Block and NeoStem settled cases filed against them by agreeing to additional disclosures requested by the plaintiff.


Plaintiff’s streak of success, however, recently came to halt in another case defended by Katten Muchin Rosenman LLP. On October 2, 2012, a plaintiff filed a complaint in DuPage County, Illinois seeking to enjoin a say on pay vote alleging, among other things, that the proxy statement omitted material information regarding peer companies and fees paid to compensation consultant. The case was removed to the Northern District of Illinois and the plaintiff set the hearing on the TRO nearly immediately. With just four business days in which to oppose, we filed a comprehensive brief opposing Plaintiff’s motion, and distinguishing the other cases in which the plaintiff had had success. At a hearing on October 9, 2012, the District Court denied Plaintiff’s Motion for a temporary restraining order.


In short, the plaintiffs’ shareholders bar continues to explore options to take advantage of the Dodd-Frank Act’s say on pay provisions. They have had some success and companies must be vigilant to defend their practices as compliant with all applicable law and not subject to injunction.