The D & O Diary
Guest Post: As Proxy Season Begins, the Dodd-Frank Say-on-Pay Cases Are on the Brink of Death
As I have previously noted on this blog (most recently here), plaintiffs’ lawyers recently have evolved a new approach to litigation relating to the advisory “say on pay” vote required under the Dodd-Frank Act. Under this most recent version of the say on pay litigation, the plaintiffs’ lawyers seek to enjoin upcoming shareholder votes on compensation or employee share plans on the grounds of inadequate or insufficient disclosure.
On April 3, 2013, Northern District of Illinois Judge Amy St. Eve entered an order granting the motion to dismiss of the defendants in one of these latest say on pay cases. A copy of Judge St. Eve’s April 3 opinion can be found here. An April 4, 2013 Reuters by Nate Raymond about Judge St. Eve’s decision can be found here.
As reflected in Claire Zilman's April 4, 2013 Am Law Litigation Daily article about Judge St. Eve's April 3 ruling (here), the defendants in the case before Judge St. Eve were represented by the Katten Muchin Rosenman LLP law firm. In the following guest post, Bruce G. Vanyo, Michael J. Lohnes and Christina L. Costley of the Katten Muchin law firm take a detailed look at Judge St. Eve’s ruling and discuss the significance of the decision, including possible implications of the decision for other pending say on pay cases as well as other cases that may be raised in connection with the upcoming proxy season.
I will like to thank Bruce, Michael and Christina for their willingness to publish their article on my site. I welcome guest posts from responsible commentators on topics relevant to this blog. Any readers who are interested in publishing a guest post on this site are encouraged to contact me directly. Bruce, Michael and Christina’s guest post follows:
The Dodd-Frank say-on-pay strike suits, if not yet dead, are close. Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), 15 U.S.C. § 78n-1, requires that public companies permit shareholders to cast advisory votes on executive compensation at least once every three years. Though the Dodd-Frank Act specifically stated it did not “create or imply any change to the fiduciary duties” or “create or imply any additional fiduciary duties,” the plaintiffs’ bar immediately began bringing suits for breach of fiduciary duty following any negative say-on-pay vote. Plaintiffs initially brought the lawsuits after companies’ annual meetings and framed them as derivative claims for waste. In 2011 and early 2012, courts consistently dismissed these cases at the pleading stage, holding that plaintiffs could not plead demand futility based on a board’s decision to disregard an advisory vote. See Gordon v. Goodyear, No. 12 C 0369, 2012 WL 2885695, at *9-10 (N.D. Ill. July 13, 2012).
In mid-2012, the plaintiffs’ bar tried a new approach. Instead of bringing derivative suits after a negative say-on-pay vote, they began bringing direct suits seeking to enjoin the say-on-pay vote before it occurred. The real goal, of course, was settlement: if the corporate defendant would agree to make modest additional disclosures, and agree to an attorneys’ fee settlement in the range of $100-$500K, plaintiffs would immediately dismiss the case. Though the cases had little substance, the expense of fighting them and the risks posed by a forced delay of an annual meeting still drove settlements. Some companies chose to fight, however, and in every “pure” say-on-pay case brought, courts refused to issue injunctions. But, because the complaints alleged material omissions (materiality is ordinarily not a matter that can be resolved on the pleadings) most companies answered the complaint instead of moving to dismiss and found themselves in protracted litigation as a result. One notable exception was the Symantec case, which was dismissed by a California state court on the pleadings.
On April 3, 2013, the United States District Court for the Northern District of Illinois issued the first federal court decision on this issue in Noble v. AAR Corp., No. 12-C-7973 (N.D. Ill. April 3, 2013). AAR and its directors had already successfully opposed plaintiffs’ motion for a preliminary injunction. Following the decision on the preliminary injunction defendants immediately moved to dismiss and stay discovery. The court granted the motion to stay discovery and postponed all further hearings. Six months later, the court issued a written decision granting with prejudice defendants’ first motion to dismiss. First, the court held that a corporation cannot face liability under the Dodd-Frank Act for omitting information in its proxy statements not required to be disclosed by the applicable federal regulations, Items 402 and 407. Second, the court held, after a say-on-pay vote has occurred, plaintiffs cannot plead a direct cause of action because no injury personal to the shareholder exists. Instead, the court held, any claim that remains can be brought only as a derivative claim for waste. The court called plaintiff’s efforts to maintain the claim as a direct action “painting a derivative claim with a disclosure coating.”
The implications of AAR should be far-reaching. The AAR judge also issued the decision in Goodyear, a widely cited decision largely responsible for dispensing of plaintiffs’ efforts to bring post-vote say-on-pay claims. By holding that plaintiffs cannot bring a pre-vote breach of fiduciary duty claim based on the Dodd-Frank Act when a company has already complied with federal regulations, the court offers corporations comfort that strict compliance with pre-existing disclosure regulations should suffice to fend off lawsuits even at the pleading stage. And, by finding that the claim can only be maintained as a derivative action for waste, the court signaled to the plaintiffs’ bar that any attempt to bring a claim based on executive compensation must be strong enough to survive heightened demand futility analysis. In effect, the court has given corporations a way out of these cases at the pleading stage, before they are forced into prolonged and expensive discovery and summary judgment motions, and thus given effect to the Dodd-Frank Act’s stated intent to avoid creating a new basis for litigation.
The AAR decision comes just as proxy season is beginning. The proliferation of say-on-pay cases filed in mid- to late 2012 suggested that 2013 proxy season was going to be a mess, with lawsuits being filed in connection with every say-on-pay vote. The AAR decision will go a long ways towards preventing that. The number of say-on-pay investigation notices has already been declining relative to the number of proxy statements being filed, but with AAR, defense counsel will have a concrete tool and a well-reasoned opinion to give other courts comfort that these lawsuits should be dismissed early. The threat is not gone entirely, however, as a second wave of cases related to share authorization and equity compensation have received a relatively warmer reception by courts and have been picking up steam as proxy season continues.
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