The first wave of “say on pay” litigation involved lawsuits brought by shareholders following a negative advisory say on pay vote under the Dodd-Frank Act. The second wave of say on pay litigation, which picked up in 2012, involved plaintiffs’ efforts to enjoin upcoming shareholder votes on compensation or employee share plans on the grounds of inadequate or insufficient proxy disclosure.


Now there is a “third wave” of executive compensation litigation, according to a February 21, 2013 memo from the Pillsbury Winthrop Shaw Pittman law firm entitled “Proxy Season Brings a Third Wave of ‘Gotcha’ Shareholder Litigation” (here). In these third wave lawsuits, the plaintiffs allege that companies issued stock options or restricted stock units to executives in amounts that exceed the limits of the companies’ stock plans. According to the law firm memo, this latest litigation wave “has not crested yet.”


As the memo details, the first two waves of say on pay litigation has not been particularly successful for the plaintiffs. Indeed, the memo includes detailed appendices laying out how the cases have fared in the courts. Among other things, the statistics in the memo show that in most cases the companies targeted in the second wave cases successfully fought the plaintiffs’ efforts to obtain preliminary injunctions; according to the memo, “the plaintiffs’ bar was beaten in 80% of the motions for preliminary injunction.”


Faced with these setbacks, the plaintiffs bar “has turned to a new area of focus” and “is demonstrating its resourcefulness by brining a third wave of shareholder litigation.” The third wave, like the first two waves, concerns executive compensation.  However, the third wave lawsuits do not relate to the say on pay votes.


According to the memo, in the past two quarters, ten companies have been targeted by derivative shareholder litigation “alleging that those companies awarded executive compensation in violation of stock plans and thus filed purportedly false and misleading proxy statements.” While noting that it is far too early to tell how these cases ultimately will fare, or whether these derivative suits  will even survive motions to dismiss base on the insufficiency of the demand futility allegations,  the memo does note that “if the allegations are true, these suits stand a higher probability of success than the two prior litigation waves.” However, it is “too soon to tell if plaintiffs’ allegations based on reading the relevant plans and examining the awarded executive compensations are correct or based on erroneous analysis.”


The memo further notes that these third wave cases are “entirely preventable.” If the allegations are true that companies issued stock options to executives in excess of limits authorized by the relevant plans, then “those actions could have been prevented by complying with all limits established by the plans.” The memo suggests that “careful review of executive compensation plans by in-house and outside counsel and compensation consultants should ensure compliance with all governing plans.”


While I am sure readers of this blog will find the law firm memo interesting, I suspect readers will find the memo’s detailed appendices, laying out the filings tallies and disposition patterns of the three litigation wave, to be particularly helpful and interesting.


Special thanks to Sarah Good of the Pillsbury law firm for sending me a copy of the memo.


Worth Reading: One of the blogs that we follow is The D&O Discourse written by Douglas Greene of the Lane Powell law firm. Yesterday, Doug had a post that I thought would be of interest to readers of this blog, so I am linking to it here. In the post, Doug describes important securities and corporate governance cases that he will be watching in 2013, particularly the Allergan derivative case pending in the Delaware Supreme Court and the Amgen case pending in the U.S. Supreme Court. The post does a nice job laying out why he is watching these cases and why they may be important. He also has an interesting analysis of some unanticipated and arguably unintended consequences from the Supreme Court’s 2011 decision in the Matrixx Initiatives case.


And Finally: How did a Roman era brick with a cat’s paw print wind up at the Fort Vancouver historical site in Washington State? Good question, answered in a February 21, 2013 article in The Atlantic Monthly entitled "1 Kitty, 2 Empires: 2,000 Years in World History Told Through a Brick" (here).