Recently, two say-on-pay related derivative suits were dismissed by courts in California and Maryland.
On March 6, 2012, the Superior Court of California, County of Los Angeles, dismissed a shareholder's derivative suit (LASC Case No. BC454543) filed against a company's board of directors and certain senior officers of the company, as well as the company's executive compensation consultant. The suit alleged that the company overpaid its senior management in 2010, and that a majority of the company's shareholders rejected the board's business judgment by voting against the board's recommended approval of the allegedly excessive 2010 executive compensation awards. The suit also alleged that the board breached its fiduciary duties and the compensation consultant aided and abetted the breach. The court sustained the company's demurrer without leave to amend on the grounds that the plaintiff failed to establish demand futility based on the say-on-pay vote and otherwise failed to establish facts sufficient to sustain its claim. The court noted that "[t]he Dodd-Frank Act did not create any binding obligation on the Board [via the requirement to hold an advisory vote on say on pay.]"
In a similar case, on March 12, 2012, the United States District Court for the District of Maryland dismissed a shareholder's derivative suit (Civil No. JKB-11-3116) on behalf of a company against various officers and directors of the company, alleging issuance of a false and misleading proxy statement, breach of fiduciary duty and unjust enrichment based on the board's failure to rescind its approval of the company's compensation plan following a say-on-pay vote in which a majority of the shares voted rejected the plan. The court granted the company's motion to dismiss on the grounds that the plaintiff failed to establish demand futility based on the say-on-pay vote. The court noted that, "[a]lthough it can be reasonably argued that a 'say on pay' vote provided the board an opportunity to reconsider its decision regarding executive compensation, it should not be seen as the equivalent of a pre-suit demand. A shareholder advisory vote is fundamentally different from a demand for litigation."
By holding that say-on-pay votes do not qualify as pre-suit demands for purposes of derivative actions, the results of these two cases provide a setback to shareholders and shareholder rights activists seeking to give additional teeth to the Dodd-Frank Act and the say-on-pay rules.
Jacobs Engineering Group, Inc. Consolidated Shareholder Derivative Litigation, Superior Court of California, County of Los Angeles, Case No. BC454543 (March 6, 2012)
Arnold Weinberg, Derivatively on behalf of BioMed Realty Trust, Inc. v. Alan D. Gold et al., United States District Court for the District of Maryland, Civil No. JKB-11-3116 (March 12, 2012)