Over the last several years, plaintiffs’ lawyer have rushed to file “say on pay” lawsuits – either by filing an compensation-related lawsuit in the wake of a negative say on pay vote, or more recently by filing a lawsuit in advance of the vote, alleging that the compensation-related proxy disclosures were inadequate. As I previously noted, the post-vote cases have fared poorly. And a recent California state court decision in a case involving Symantec shows, the proxy disclosure cases continue to struggle as well.
A shareholder of Symantec had filed a putative class action on behalf of Symantec shareholders alleging that the compensation-related disclosures in the company’s proxy statement were inadequate to permit the shareholders to cast their advisory “say on pay” vote at the company’s 2012 shareholders’ meeting. The shareholder plaintiff had sought a preliminary injunction to require further disclosure. The court denied the motion for a preliminary injunction. The vote took place in October 2012.
After further proceedings, the Court allowed the plaintiff leave to file her complaint. In her amended complaint, the plaintiff continued to seek supplemental disclosure and also sought to have the court require the company to have another say on pay vote following the supplemental disclosure, asserting that that would allow the “informed shareholders to voice their opinions on Symantec’s executive compensation.”
The defendants filed a demurrer to the plaintiff’s amended complaint. The defendants argued that the plaintiffs amended allegations should be dismissed, among other reasons because the claims plaintiff asserted represented derivative claims, not direct claims.
In an August 2, 2013 ruling (here, refer to “Line 3”) California (Santa Clara County) Superior Court Judge James P. Kleinberg sustained the defendants’ demurrer with prejudice.
Judge Kleinberg found that the alleged harm that the plaintiff claimed had occurred or that would occur all represented an alleged injury to Symantec, not to the shareholders, and that any benefit that would be produced by the relief the plaintiff sought would inure to the benefits of Symantec. Judge Kleinberg noted that the plaintiff “does not allege how any of the purported omissions caused injury to the Symantec shareholders, and only alleges possible harm to Symantec.” He concluded that the plaintiff’s action therefore was a derivative suit, not a direct action.
However, Judge Kleinberg went on to say that even if the plaintiff has adequately alleged a direct disclosure claim, the plaintiff has failed to sufficiently allege the materiality of the allegedly omitted information. Both with respect to supposedly omitted performance metrics comparing the Symantec executives’ compensation scheme to the peer group and with respect to the summary of peer benchmarking analyses the board’s compensation committee used, Judge Kleinberg concluded, after a detailed review of the allegedly omitted information, that “none of the compensation related information [in the Proxy statement] is rendered misleading by omission of information.” He held that it is “not substantially likely” that the addition of the allegedly omitted information would have “altered the total mix of information available.”
It should be noted that Judge Kleinberg’s decision is in the form of a “tentative ruling.” Under the California procedural practice that I have always found a little puzzling, the parties have the option of contacting the court to “contest” the tentative ruling, which potentially could lead to further proceedings with respect to the demurrer, including among other things, oral argument or further briefing. I note the following assuming that the demurrer in the Symantec case will stand.
The Symantec case is not the first of the proxy disclosure say on pay cases to be dismissed. As discussed in a prior guest blog post on this site (here), in April 2013, Northern District of Illinois Judge Amy St. Eve dismissed with prejudice the plaintiffs’ proxy disclosure-related say on pay case involving AAR.
As the various say on pay cases continue to struggle in the courts, one obvious question is whether or not they will continue to be filed. As some readers may recall, a short time ago I published a post (here) citing a memorandum from the Haynes and Boone law firm that asked the question whether or not we had seen the last of new say on pay cases. In response to that post, I did receive communications from various readers suggesting that it might be a little premature to call the end of the wave of say on pay cases. Nevertheless, as the cases continue to struggle, there would seem to be significant questions why the plaintiffs would continue to file these cases.
Just the Same, Not Every Ruling in Say on Pay Cases in Going Against the Plaintiffs: In a July 31, 2013 opinion (here), the Ninth Circuit ruled that a say on pay case involving Pico Holdings had been improperly removed to federal court; the appellate court returned the case to the district for the case to be remanded to state court.
The plaintiffs had filed a shareholder derivative suit against certain directors and officer of Pico Holdings following a negative say on pay vote. The plaintiffs’ complaint, which they filed in state court, alleged that the company’s compensation practices violated California state law. The defendants removed the case to federal court. The federal court dismissed portions of the case and remanded the remaining portions of the case to state court for lack of jurisdiction.
The Ninth Circuit held that the district court lacked jurisdiction to do anything other than remand the case back to state court. The court held that the plaintiffs’ complaint in that case asserted state law causes of action, and that their allegations regarding the say-on-pay vote were insufficient to establish federal-question jurisdiction. The panel vacated the decisions of the district court with instructions to remand the case to state court.
Of most significant interest, the Ninth Circuit rejected the suggestion that a complaint alleging only state court claims nevertheless raised a federal question to support federal court jurisdiction merely because the complaint involved a say on pay vote required by the Dodd Frank Act. The court also rejected any suggestion that a federal question sufficient to support federal court jurisdiction merely because the defendants express an intention to assert a federal law defense, as a federal defense “is inadequate to confer federal jurisdiction.” The court also rejected the suggestion that the Dodd-Frank Act’s provisions represented a federal preemption so comprehensive as to supplant state law causes of action.
Though the plaintiffs are still a long way from winning the case, they have at least secured the right to go back to state court – where they had filed their lawsuit in the first place -- and to live for another day.