We have previously discussed a wave of “say-on-pay” lawsuits focused on allegedly inadequate proxy disclosures (in a memo, article, and memo). At least six courts (four state and two federal) have denied requests for injunctive relief against say-on-pay votes. Now, a federal court that had already denied preliminary injunctive relief has dismissed the complaint with prejudice. Noble v. AAR Corp., No. 12 C 7973 (N.D. Ill. Apr. 3, 2013).

Applying Delaware and federal law, the Northern District of Illinois held that Delaware law did not require a company soliciting proxies in advisory say-on-pay vote to disclose information beyond that specified in Regulation S-K:

…continue reading: Federal Court Dismisses Delaware Law Compensation Disclosure Claim

This post addresses an emerging litigation trend that entails a higher degree of litigation risk than in past years. Companies familiar with shareholder litigation in the context of mergers and acquisitions transactions know that virtually all material corporate transactions attract plaintiffs’ lawyers who, suing on behalf of shareholders, allege that proxy materials published ahead of a shareholder vote are, for one reason or another, false or misleading. These plaintiffs’ lawyers typically seek a quick settlement in which the issuer avoids a possible injunction delaying the shareholder vote on the proposed transaction by publishing “corrected” disclosure. In return, the plaintiffs’ lawyers demand a fee for the purported “benefit” to the shareholder class.

This proxy season, there has been an uptick in the number of cases in which plaintiffs’ lawyers assert similar claims in connection with “say-on-pay” proxy disclosures and approval of equity incentive plans. Although many of these cases have been dismissed, or motions for preliminary injunctive relief have been denied by the courts, some issuers are electing to settle such claims to avoid even a remote possibility of a delayed annual shareholder meeting and the burden and expense associated with litigation. Recent press reports highlight this growing trend. [1] We outline below the current trend and several suggested strategies for addressing this new proxy litigation.

…continue reading: Plaintiffs’ Lawyers Target “Say-on-Pay” Disclosures in Annual Proxy Statements

The say-on-pay advisory vote requirements of the Dodd-Frank Act of 2010 have turned out to be a fertile source of nuisance litigation filed by aggressive plaintiffs’ lawyers. The first wave of lawsuits generally consisted of after-the-fact actions targeting companies that experienced failed say-on-pay advisory votes. These initial cases, which appeared primarily to be attempts to extort settlements, were nearly all dismissed on procedural grounds. The current wave, embodied by a recent spate of lawsuits filed primarily by a single plaintiffs’ law firm, is potentially more problematic from a practical perspective for targeted companies, even though the claims involved appear to have even less basis in law or fact. The pattern of these recent actions is for a lawsuit to be filed in state court sometime between the filing of the definitive proxy statement and the date of the annual meeting, alleging that the proxy disclosure is inadequate with respect to executive compensation (or relating to the authorization or issuance of additional common shares for equity incentive plans), claiming breach of fiduciary duty by directors, and calling for the shareholder meeting to be enjoined until additional disclosure is made.

Directors and corporate managers need to be prepared for this type of proxy disclosure litigation, particularly since it appears that little can be done to prevent such lawsuits from being brought. Boards of companies that are targeted in this manner may feel significant pressure to settle because they do not want to postpone the annual meeting or, worse, face the possibility that the required say-on-pay advisory vote or other needed votes could be enjoined. However, it is worth noting that the earlier wave of lawsuits that targeted companies with failed say-on-pay votes has subsided, undoubtedly due to the discouraging results obtained by the plaintiffs in court. The same fate is likely to befall the current wave, but only if companies are willing to fight these lawsuits in court so that the plaintiffs and their attorneys encounter judicial skepticism and dismissal rather than the rewards of a quick and lucrative settlement.

…continue reading: The New Wave of Proxy Disclosure Litigation

I. Introduction

In the current environment and in the wake of Dodd-Frank (and, before that, TARP) mandated rules requiring shareholder advisory votes on executive compensation, shareholder-plaintiffs have more aggressively challenged executive compensation decisions. In recent months, an active plaintiffs’ bar has filed a series of cases, which generally fall into three broad categories:

• “say-on-pay” litigation;
• litigation relating to annual proxy disclosure, particularly with respect to equity compensation plans and say-on-pay proposals; and
• litigation relating to Section 162(m) of the Internal Revenue Code.

While most of these challenges have failed on substantive or procedural grounds or both, some have been more successful, and the plaintiffs’ strategies continue to evolve. Notably, even unsuccessful claims can result in costly disruptions and/or reputational harm, especially where injunctions against annual shareholder meetings are threatened.

In this memorandum, we:

…continue reading: Recent Developments in Executive Compensation Litigation

A number of derivative suits have been filed in recent months alleging that the senior executive compensation plans at public companies do not comply with Section 162(m) of the Internal Revenue Code. Section 162(m) provides that any compensation paid to the CEO and next three highest compensated proxy officers (other than the CFO) in excess of $1 million per year is not tax deductible unless, among other things, the compensation is subject to objective performance metrics that have been disclosed to and approved by shareholders. The complaints generally allege that the performance goals established by the plans are not sufficiently objective to comply with Section 162(m) and that the purported failure of the plans to comply with Section 162(m) renders the required proxy disclosure false and misleading in violation of Section 14(a) of the Securities Exchange Act. In addition, the complaints allege that the provision of non-deductible compensation to senior executives constitutes waste, unjust enrichment of the executives and a breach of the directors’ duty of loyalty.

…continue reading: Avoiding Shareholder Suits Challenging Executive Compensation

Study Summary

At a time when engagement is front and center in the public debate about corporate America, this study provides the first-ever benchmarking of the level of engagement between investors and public corporations (issuers) in the United States. As evidenced by the provisions of the Dodd-Frank legislation, various SEC rule-makings and the lawsuits contesting them, engagement has emerged as a central governance process for public companies in America. Despite that fact, there has never been a comprehensive picture of investor/corporate engagement and thus no consensus definition of engagement. This study attempts to rectify that lack. It surveyed 335 issuers of stock and 161 investors, including both asset owners (e.g. pension funds, trusts, etc.) and asset managers.

…continue reading: The State of Engagement between U.S. Corporations and Shareholders

As the SEC staff has acknowledged, the new enhanced proxy disclosure rules — requiring information about board qualifications, leadership and oversight — are the latest installment in the ongoing effort to push companies to provide more “analysis” and not just “discussion” in their disclosures. They are also the latest installment in what some characterize as the SEC’s ongoing effort to regulate corporate governance by the imposition of targeted disclosure obligations, notwithstanding that the SEC lacks a clear mandate to regulate corporate governance, an area traditionally the province of state law’s more laissez-faire approach.

In crafting the new required disclosures about board qualifications, leadership and role in risk oversight both during the rapidly approaching 2010 proxy season, and also in preparing the Compensation Discussion and Analysis (CD&A) in current filings, boards and their advisors should heed the SEC’s not-so-positive feed back with respect to CD&A disclosure compliance. In that context, the SEC has lamented that “far too many companies continue to describe — in exhaustive detail — the framework in which they made the compensation decision, rather than the decision itself. The result is that the “how” and the “why” get lost in all the detail.” [1]

…continue reading: The New Enhanced Proxy Disclosure Rules: Putting More “A” and Less “D” in CD&A

At an open meeting held on December 16, 2009, the Securities and Exchange Commission (“SEC”) approved a set of proposed rules to enhance the information provided to shareholders in company proxy statements regarding a number of risk oversight, compensation, board leadership and composition and other corporate governance matters.  The SEC approved the final rules by a 4-to-1 vote, with Commissioner Kathleen Casey dissenting.  The SEC released the text of the final rules on the same date they were adopted, with the 129 page adopting release available here.

The new rules have an effective date of February 28, 2010, except that a rule change on how equity awards are reported in the Summary Compensation Table applies to all companies with fiscal years ending after December 20, 2009.  Because all of the rule changes other than the equity reporting rule call for enhanced disclosures, companies presumably could, but would not be required to, voluntarily comply with all of the new rules even if they file their definitive proxy statements before February 28, 2010.

…continue reading: SEC Adopts Final Rules on Enhanced Proxy Statement Disclosures

(Editor’s Note: This article by Joseph E. Bachelder III previously appeared in the New York Law Journal.)

On July 17, the Securities and Exchange Commission (SEC) published in the Federal Register proposed changes in proxy statement disclosure rules affecting executive compensation as well as other matters. On July 31 the House of Representatives passed the Corporate and Financial Institution Compensation Fairness Act of 2009 (H.R. 3269) (the Compensation Fairness Act or the act). The bill, received in the Senate Aug. 3, has been referred to the Senate Committee on Banking, Housing, and Urban Affairs. It is not known when, after the recess, the committee plans to take up consideration of the bill. This column will examine both of these developments (discussion of the SEC proposals is limited to those involving executive compensation).

Proposed Disclosure Rules
The proposed new rules affecting disclosure of executive compensation by companies subject to the disclosure rules of the Securities Exchange Act of 1934 (the 1934 Act) concern (a) disclosure of the impact of compensation policies and practices generally on risks of the employer, (b) the reporting of stock option and other equity awards in the Summary Compensation Table and (c) the reporting on compensation consultants.

Reporting on Risk-Related Aspects of Compensation. The proposed rules require companies to evaluate in the Compensation Discussion and Analysis (CD&A) those risks arising from general compensation policies and overall practices at the company that may have a material effect on the company. 17 CFR 229.402(b)(2). Disclosure is not limited to compensation arrangements with named executive officers. The proposed rules describe situations that may require particular attention in the CD&A such as compensation policies at business units that carry a significant share of the overall enterprise’s risk or units that vary significantly from the risk/reward structure of the company.

The proposed rules also suggest examples of issues that should be addressed such as compensation policies that may have special impact on risk (e.g., short-term versus long-term awards and how they relate to business results, short-term versus long-term), policies involving adjustments for changes in risk evaluation and how the company monitors its own responsiveness to changes in its risk environment. The proposed rules emphasize that the situations and the examples of issues described are illustrations only and not exclusive statements as to what should be disclosed.

…continue reading: Proposed Pay Reform Rules Raise Questions

For those that regularly read my blog, you know I was happy to see the SEC propose a requirement that would force companies to disclose the voting totals from their shareholder meetings more timely. It has always amazed me that some companies stonewall on the vote results – it’s a poor PR move as it riles shareholders (see this example) and they have to disclose it eventually. But I imagine they do this in the hope that shareholders – and the financial press – will lose interest in the story.

The SEC proposes that disclosure be made within four business days after the end of a shareholder meeting (on a Form 8-K or a periodic report). For a contested director election, the 8-K would be due within 4 business days after the preliminary voting results are determined. The proposal begs the question as to when “preliminary voting results are ‘determined’” (i.e. trigger date). Maybe I’m missing it, but there doesn’t seem to be any exception for other types of contested matters? Anyways, if it’s a contested director election, there could be two Form 8-Ks – one within four business days after the meeting’s end based on a preliminary vote and another one within four business days of the final vote being certified.

Importance of Tabulation Process

On page 44 of the SEC’s proposing release, the SEC provides its discussion of this proposal – and a cost analysis is on page 96. Understandably, there is not a detailed discussion of the tabulation process and what’s involved. But as I wrote about in the Fall ’08 issue of InvestorRelationships.com (it’s free; just need to input contact info) – in my interview with Carl Hagberg – the time is now for companies to rethink how they process their votes as well as who they hire to do it.

For starters, you probably want to hire only those inspectors that have a well-defined process about how they inspect – and you probably should hire only those inspectors whom you feel comfortable would pass muster under the pressures of litigation (eg. an entity that is independent – perhaps one is not your transfer agent). With the loss of broker nonvotes, we can expect closer elections and more litigation over voting results. You need to protect yourself and not rely on procedures that historically have been pretty loose.

…continue reading: Musings: SEC’s Proposal to Report Voting Results