Since our article entitled Lawsuits in the Wake of Say-On-Pay, two new say-on-pay lawsuits have been filed, four of the six lawsuits covered in our original article have had changes in status, and two courts in ruling on motions to dismiss have reached opposite conclusions regarding the viability of say-on-pay claims. This note provides an update on developments in this rapidly changing new area.
Our original article, which first appeared in the June 2011 issue of Securities Update, discussed the requirement of the Dodd-Frank Act that public companies put certain executive compensation decisions up for periodic “advisory” shareholder votes, and the development that lawsuits were being filed against directors (and other defendants) for approving pay packages later rejected by the shareholders. The article noted six early lawsuits filed based on negative shareholder say-on-pay votes and is available here: www.drinkerbiddle.com/securitiesupdate062011.
This update briefly addresses two new lawsuits, as well as the current status of some of the lawsuits we noted in that article. There have now been two court rulings on motions to dismiss say-on-pay suits. Because the two courts reached opposite conclusions, it is still unsettled as to whether these suits will be found to state viable causes of action.
The following lawsuits were noted in our June 2011 article: Occidental Petroleum Corporation (Gusinsky v. Irani, BC442658 (Cal. Super., filed July 29, 2010)); KeyCorp (King v. Meyer, CV 10730994 (Ohio Com. Pleas, filed July 6, 2010)); Beazer Homes USA (Teamsters Local 237 v. McCarthy, 2011CV 197841 (Ga. Super., filed March 15, 2011)); Umpqua Holdings Corporation (Plumbers Local No. 137 Pension Fund v. Davis, CV 11 633 AC (D. Or., filed May 25, 2011)); Jacobs Engineering Group (Witmer v. Martin, BC454543 (Cal. Super., filed February 4, 2011)); and Hercules Offshore, Inc. (Matthews v. Rynd, 2011 34508 (Tex. Dist., filed June 8, 2011)).
Since our June 2011 article was published, at least two notable lawsuits have been filed in connection with negative shareholder say-on-pay votes: Cincinnati Bell Inc. (NECA-IBEW Pension Fund v. Cox, 1:11-cv-451 (S.D. Ohio, filed July 5, 2011)) and Dex One Corporation (Haberland v. Bulkeley, 5:11cv-00463-D (E.D.N.C., filed September 1, 2011)). The complaints filed against Cincinnati Bell and Dex One generally follow the same “blueprint” as the lawsuits noted in our June 2011 article, and the plaintiffs in these recent cases assert similar causes of action against the defendant directors and officers, including breach of fiduciary duty and unjust enrichment. One notable exception is that unlike the other lawsuits, the Dex One complaint did not name the company’s compensation consulting firm as a defendant.
Current Status of Lawsuits
Below is a summary of the current status of some of the lawsuits that we noted in our June 2011 article, based on disclosures in SEC or court filings.
Occidental Petroleum. According to the Form 10-K filed by Occidental Petroleum Corporation on Feb. 24, 2011, the lawsuit was settled in February 2011, and the plaintiffs dismissed the case with prejudice. The details of the settlement have not been disclosed in Occidental’s SEC filings.
KeyCorp. According to the Form 8-K filed by KeyCorp on March 25, 2011, the lawsuit was settled in March 2011. Under the settlement, the company agreed, among other things, to certain corporate governance enhancements with respect to executive compensation, the shortening of the exercise period for certain options granted to KeyCorp’s chief executive officer, the payment of $1.75 million in plaintiffs’ legal fees, and the payment of $2,500 to each of the two named plaintiffs.
Umpqua Holdings. According to the Form 10-Q filed by Umpqua Holdings Corporation on Aug. 5, 2011, Umpqua Holdings’ directors and officers have filed a motion to dismiss the suit, and the plaintiffs have voluntarily dismissed the defendant compensation consulting firm from the lawsuit.
The First Dismissal Rulings: Two Courts Reach Opposite Conclusions
Beazer Homes: Dismissal Granted. In an order issued on Sept. 16, 2011, the Georgia state trial court granted the defendants’ motion to dismiss the lawsuit on all counts. The court held, among other things, that the adverse shareholder say on pay vote failed to rebut the presumption under the business judgment rule that the directors acted in good faith when the board approved the executive officers’ compensation. The court stated that the plaintiffs’ complaint failed to allege particular facts that raised a reasonable doubt that the directors failed to exercise valid business judgment, and that the plaintiffs’ “[h]indsight second guessing [was] fundamentally inconsistent with the business judgment analysis.” The court also stated that the plaintiffs’ contention that the Beazer’s shareholders’ “independent business judgment” rebuts (or indeed even serves as evidence to rebut) the presumption that the directors were entitled to business judgment protection had no support under Delaware law or the Dodd Frank Act, noting that the Dodd-Frank Act specifically provides that the shareholder vote is advisory only (i.e., nonbinding) and in no way alters a director’s fiduciary duties.
Cincinnati Bell: Dismissal Denied. Conversely, in an order issued on Sept. 21, 2011, the U.S. District Court for the Southern District of Ohio denied the defendants’ motion to dismiss the lawsuit. The judge relied, among other things, on the shareholders’ “overwhelming rejection” of a compensation plan granting large pay increases despite the company’s declining performance as the basis for a “plausible claim” that the directors breached their fiduciary duties in approving pay increases that were contrary to the best interests of the shareholders. Although the court relied on the negative shareholder vote, at the pleading stage, as sufficient to meet the plaintiffs’ burden to allege specific facts and not merely conclusions in order to avoid dismissal, the court noted that at trial, where evidence will be introduced and evaluated by the court and the jury, the plaintiffs “may well not be able to prove” that the directors acted in bad faith when they approved the executive compensation increases.
Given that the first two courts to rule on motions to dismiss came to opposite conclusions, uncertainty is likely to continue for some time before a consensus emerges as to the legal validity of these “say-on-pay” claims. In this environment, we continue to recommend that public companies and their boards take the steps outlined in our June 2011 article to limit litigation risk.