Is it possible that we seen the last of “Say-On-Pay” lawsuits? Or are we just awaiting the next round of post-Dodd Frank executive compensation-related litigation? Those are the questions asked in a June 12, 2013 memorandum entitled “Has Another Wave of ‘Say-On-Pay’ Litigation Come to an End?” (here) by Nicholas Even of the Haynes and Boone law firm. Whatever may lie ahead, the latest round of Say-On-Pay litigation seems to have come to a close.
First, a little background. One of the changes introduced in Dodd-Frank’s many provisions was a requirement that reporting companies hold a periodic shareholder vote on executive compensation. Even though the vote was, by the Act’s terms, to be purely advisory, and even though the Act expressly stated that the shareholder vote “may not be construed” to “create or imply any change to the fiduciary duties of such issuer or board of directors” or to “create or imply any additional fiduciary duties for such issuer or board of directors,” shareholder plaintiffs (and their attorneys) sought to pursue breach of fiduciary duty lawsuits against companies whose shareholder votes resulted in a “no” vote on executive compensation issues.
These “first wave” say-on-pay lawsuits, mostly filed in 2011, proved to be unsuccessful. So in 2012, the shareholder plaintiffs tried a different approach. Borrowing a page from the M&A-related litigation play book, the shareholder plaintiffs (largely represented by a single law firm) filed lawsuits seeking to enjoin the annual meeting unless the company made additional compensation related disclosures. Ultimately, more than 20 of these “new wave’ say on pay lawsuits were filed.
The second wave of say on pay lawsuits proved largely unsuccessful as well. As outlined in the law firm’s memo, there were two injunctions issued and those cases were quickly settled. Several other companies chose to settle by issuing supplemental disclosures. Generally, in the other cases, the courts denied the injunctive relief and/or dismissed the cases. (Refer here for further discussion of these issues.)
As the 2013 proxy season began, there was significant concern that there would be further waves of executive compensation-related litigation. As the law firm memo notes, a number of companies were put on notice that they were under “investigation” over compensation related issues. But a funny thing has happened. According to the law firm memo, “no injunctive lawsuits materialized, either challenging the say-on-pay or equity incentive plans.” Specifically, “no companies appear to have been targeted for say-on-pay injunctive suits in advance of annual meetings during the 2013 proxy season.”
The law firm memo’s author speculates that the reason for the absence of litigation could be that “the attorneys previously responsible for these suits have simply turned their attention to different issues or have become distracted with other matters.” It could also be that after the many denials of injunctive relief in the 2012 say-on-pay cases, the plaintiffs’ counsel “discovered that the threat of injunctive action has lost its in terrorem effect.”
Whatever the reason, the “latest attempt to refashion Dodd-Frank’s say on pay requirement into an annual litigation phenomenon appears to have waned.” Nevertheless, even if the immediate injunctive threat has “diminished,” it remains that “the combination of Dodd-Frank, executive compensation, and annual meetings remains fertile ground for potential shareholder action.” The law firm memo’s author concludes with the question whether “a ‘third wave’ of say-on-pay litigation” is “inevitable?”