On September 26, 2012, the Eastern District of North Carolina dismissed a derivative suit brought against the directors and certain executive officers of Dex One Corporation following a negative say-on-pay vote. Haberland v. Bulkeley, 2012 WL 4788442 (E.D.N.C. Sept. 26, 2012) (Dever III, C.J.). Unlike other courts dismissing say-on-pay suits, the Eastern District of North Carolina did not reach the defendants’ demand futility and business judgment rule defenses, but instead dismissed the plaintiff’s claims on the merits.

Background

“Dex One is a ‘marketing solutions company’ incorporated under Delaware law and headquartered in Cary, North Carolina.” Id. at *1. On December 31, 2008, the New York Stock Exchange suspended trading of shares of RHD, Dex One’s predecessor company, due to a loss of market capitalization. Id. RHD filed for Chapter 11 bankruptcy in May 2009 and emerged from Chapter 11 in January 2010 as Dex One. Id. “On February 1, 2010, the New York Stock Exchange began trading Dex One stock at $33.56 per share.” Id. “By December 31, 2010, Dex One’s share price had fallen to $7.46, a 78[%] decline.” Id.

“On March 17, 2011, Dex One’s Board solicited a shareholder vote on, among other things, the [company’s] 2010 Executive Compensation Plan.” Id. at *4. The company’s 2011 Proxy Statement “recommended that Dex One shareholders vote to approve the 2010 Executive Compensation Plan” but “stated that the stockholder vote … was advisory only, and did not bind Dex One, its Board or its Compensation and Benefits Committee in any way.” Id. However, the Proxy Statement noted that if there was a significant negative vote, “the Board and the Compensation and Benefits Committee ‘[would] consider such stockholders’ concerns and the Compensation and Benefits Committee [would] evaluate whether any actions [were] necessary to address those concerns.’” Id.

On May 3, 2011, fifty-two percent of voting Dex One shareholders rejected the 2010 Executive Compensation Plan. Id. After “consider[ing] and investigat[ing] shareholder concerns,” the Compensation and Benefits Committee “decided not to amend or alter the 2010 Executive Compensation Plan, or to recoup any portion of the compensation paid under it.” Id. “The committee did, however, implement other changes to Dex One’s compensation practices in response to the May 3, 2011 negative sayon- pay vote.” Id.

On September 1, 2011, the plaintiff in the instant action brought suit alleging that Dex One’s directors and executive officers had breached their fiduciary duties in connection with the company’s 2010 Executive Compensation Plan and the say-on-pay vote. Id. at *5. The defendants moved to dismiss the plaintiff’s complaint. Id.

The Court Finds That the Defendants Did Not Misrepresent the 2010 Executive Compensation Plan as a Strict Pay-for-Performance Scheme

The plaintiff contended that the defendants had breached their fiduciary duties by “issuing a 2011 Proxy Statement that [allegedly] falsely and misleadingly described the 2010 Executive Compensation Plan as a strict pay-for-performance scheme.” Id. According to [Dex One’s] 2011 Proxy Statement:

The 2010 Executive Compensation Plan was designed to achieve six objectives: (1) to “enable the [c]ompany to attract and retain the key leadership talent required to successfully execute its business strategy”; (2) to “align executive pay with performance, both annual and long-term”; (3) to “ensure internal equity, both as compared to other executives based upon position and contributions, and to the broader employee population”; (4) to “strongly link the interests of executives to those of the [c]ompany’s shareholders and other key constituencies”; (5) to “keep the executive compensation practices transparent, in line with best practices in corporate governance”; and (6) to “administer executive compensation on a cost-effective and tax-efficient basis.”

Id. at *9. The court found that the plaintiff “[i]gnor[ed] four of these six objectives” and instead “seize[d] on enumerated goals (2) and (4) and argue[d] that they [were] the only objectives.” Id. The court explained that “the 2010 Executive Compensation Plan was more complex, more intricate, and more nuanced than [the plaintiff] allege[d].” Id.

“[E]ven if the 2011 Proxy Statement described the 2010 Executive Compensation Plan as a strict pay-forperformance scheme,” the court found that the plaintiff “fail[ed] to demonstrate that [the] defendants did not in fact pay for performance as actually measured under the plan.” Id. at *10. The plaintiff did not “challenge the propriety or prudence of, or business justification offered for, the metrics used to calculate [Dex One’s] annual incentive compensation or [long-term incentive plan] payments.” Id. “Rather,” the plaintiff “invent[ed] his own criteria” and “argue[d] that [Dex One’s executives] failed to meet them.” Id.

The Court Holds That the Defendants Had No Obligation to Disclose the Plaintiff’s Suit in Dex One’s 2012 Proxy Statement

In March 2012, Dex One distributed a proxy statement “solicit[ing] a shareholder vote to, among other things, re-elect the Board and approve the executive compensation plan for 2011.” Id. at *5. While the 2012 Proxy Statement discussed the negative say-on-pay vote and the Board’s response, it did not “expressly disclose this litigation.” Id. The plaintiff subsequently amended his complaint to allege that the defendants had “breached their fiduciary duties” by failing to disclose the existence of the plaintiff’s suit in the 2012 Proxy Statement. Id.

The court determined that “the mere fact of this litigation was not material” because the 2012 Proxy Statement, the 2011 Proxy Statement and the Form 8-K together “provided all of the facts underlying the claims raised in [the plaintiff’s] original complaint.” Id. at *12-13. “[E]ven if the fact of this litigation had been material,” the court held that the defendants “were not obligated to disclose it.” Id. at *13. The complaint “misrepresents the structure, components, nature, and purposes of the 2010 Executive Compensation Plan” and “misstates [the] defendants’ representations to shareholders before, and response after, the May 3, 2011 negative say-on-pay vote.” Id. Because the complaint “presents sensationalized and meritless allegations,” the court found that the defendants “bore no obligation to engage in self-flagellation by disclosing them.” Id.

The Court Holds That the Defendants Did Not Breach Their Fiduciary Duties by Increasing Executive Compensation in 2010

The plaintiff contended that the defendants had breached their fiduciary duties by increasing executive compensation in 2010 despite the company’s performance. Id. at *5. First, the court found that there were no allegations that Dex One’s executive officers “directly approved or authorized their 2010 compensation” or “aided and abetted the Board in approving and authorizing their 2010 compensation.” Id. at *14. The court further determined that “[a]s to the remaining defendants,” the plaintiff’s claim “rest[ed] on [the] flawed factual foundation” that the 2010 Executive Compensation Plan was “a strict pay-forperformance scheme.” Id.

The Court Finds That the Defendants Did Not Breach Their Fiduciary Duties by Failing to Amend the 2010 Executive Compensation Plan or Recoup Compensation Paid Thereunder

The plaintiff claimed that the defendants had breached their fiduciary duties by “failing to alter or amend the 2010 Executive Compensation Plan, to recoup any of the compensation paid under that plan, or to issue any other response to the May 3, 2011 negative say-on-pay vote.” Id. at *5. The court determined that there were no allegations that Dex One’s executive officers “had any direct duty to respond to the May 3, 2011 negative say-on-pay vote” or any factual allegations supporting the plaintiff’s claim that Dex One’s executive officers had “aided and abetted the Board and the Compensation and Benefits Committee” in their response to the vote. Id. at *15.

The court held that this claim “likewise fail[ed]” as to Dex One’s directors because the “plain language” of the Dodd-Frank Act “defeats the argument” that the directors had “any legal duty … to respond to the May 3, 2011 negative say-on-pay vote.”7 Id. at *16. Moreover, while the Board “promised [ ] to ‘consider’ stockholder concerns expressed through the vote,” this statement did not “change the advisory, non-binding nature of the say-on-pay vote, and did not obligate Dex One’s Board or Compensation and Benefits Committee to alter or amend the 2010 Executive Compensation Plan, or to recoup any part of the compensation paid under it, in response to a negative say-on-pay vote.” Id. “In any event, the information provided in the 2012 Proxy Statement demonstrates that the Board and the Compensation and Benefits Committee kept their promises.” Id.

The Court Finds No Basis for the Plaintiff’s Unjust Enrichment Claim

Finally, as to the plaintiff’s unjust enrichment claim, the court explained that the director defendants “were not compensated under the 2010 Executive Compensation Plan” and determined that the plaintiff had not “pled sufficient facts to hold [these defendants] liable on this unjust enrichment claim as aiders and abettors.” Id. at *17. The court further held that the unjust enrichment claim was meritless as to the executive officer defendants because it was based on a misunderstanding of the nature of Dex One’s Executive Compensation Plan. Id. Since the plaintiff “failed to plausibly allege that the 2010 Executive Compensation Plan, as actually conceived, resulted in unjust enrichment to” Dex One’s executive officers, the court held that the plaintiff’s “unjust enrichment claim fail[ed].” Id.