The onslaught of litigation filed after the advent three years ago of the Dodd-Frank “say on pay” requirements may finally be winding down. According to a June 23, 2014 memorandum from the Pillsbury law firm entitled “Is Proxy Disclosure Shareholder Litigation on Executive Compensation Finally Over?” (here), the litigation came in three distinctive waves. The first two waves have died down and the third wave is waning, and we may be nearing the point where we can close the book on what has largely proven to be a less than successful plaintiffs’ litigation approach.
The first of the three waves of shareholder litigation involved lawsuits filed against companies that experienced a negative say on pay vote. (Readers will recall that the Dodd-Frank Act included provisions requiring listed companies to hold a nonbinding shareholder vote on executive compensation, an arrangement commonly referred to as “say on pay.”) This phase in the litigation progression has long been over. The last of these lawsuits were filed in September 2012. Overall there were a total of 24 of these cases filed that were not consolidated, involving 21 companies. Motions to dismiss were granted in 50% of the cases. Five of the cases settled. A very small number of these cases remain pending.
The second wave of these executive compensation related lawsuits involved an effort by plaintiffs to enjoin annual meetings by contending that the disclosure in proxy statements regarding executive compensation was inadequate. Although these lawsuits involve many of the same features as M&A litigation — including the pressure on defendants to settle to avoid complicating a pending event — as it turned has out, many companies involved in these cases, unlike companies in M&A related litigation, chose to fight rather than to settle. And “when those companies fight, they win.”
According to the memo, there were 31 of these second wave lawsuits filed in total. Nearly 40 percent of these cases have resulted in a denial of the motion to enjoin the annual meeting and over 25 percent have been voluntarily dismissed. Plaintiffs have prevailed on motions to preliminarily enjoin the annual meeting, in whole or in part, in only two cases: In April 2012, in a case involving Brocade; and in October 2012, in a case involving Abaxis. Only two of these second wave cases have been filed recently, with one in December 2013 and another in January 2014. The motion for preliminary injunction was denied in both of these more recent cases.
In the third phase of this executive compensation-related shareholder litigation, the lawsuits alleged that the executive compensation award was not made in compliance with the relevant plan. The kinds of allegations raised in these cases fall in three categories: (1) that the amount of shares awarded under a stock incentive plan exceed the maximum annual limit imposed by the plan; (2) that the award was made under a stock incentive plan that had lapsed due the board’s failure to seek shareholder re-approval; (3) that the Board had made a stock award that was not tax deductible under the relevant provisions of the federal tax laws.
According to the memo there have been a total of 34 of these third wave cases filed that have not been consolidated, involving 29 companies. Motions to dismiss have been granted in 20 percent of these cases and denied in 9 percent of the cases. Dismissal motions remain pending in another 20 percent of the cases. 24 percent of the cases have settled, but as the memo details, in the cases that have settled, the plaintiffs have had a difficult time obtaining a fee award in the amount sought. In several key cases, the amount of the award has only been a small fraction of the fees sought. The fee award decisions “may give plaintiffs’ counsel pause in considering whether or not to file third wave cases in the future.”
In any event, the kinds of issues that have led to these third wave lawsuits are preventable. The memo concludes with a short summary of the steps that companies can take to ensure that questions are not raised later about whether or not a stock award is in compliance with the operative stock compensation plan. These steps include taking care to ensure that no award exceeds limits in the plan; ensuring that the plan is re-approved every five years; and ensuring that the proxy materials do not guarantee that every stock award will be exempt from tax deduction limits under the Internal Revenue Code.
The memo includes a detailed appendix incorporating extensive numerical details and analysis of each of the three successive waves.
Special thanks to Sarah Good of the Pillsbury law firm for sending me a copy of the memo.