Those of us who have received a letter from a plaintiffs’ law firm alleging inadequate disclosures as to executive compensation in the 14A proxy statement and threatening litigation know that one of the first issues we face is whether to file a Supplement to the proxy statement containing additional disclosure as to the challenges matter (or an amendment on Form 8-K/A, pursuant to Item 5.07(d)). Although companies often “stick to their guns” as to the existing disclosures and gird themselves for battle, some companies do file a supplement to the proxy. When a company files a supplement to its proxy, the plaintiff’s firm usually will demand attorneys’ fees from the company and, if the company demurs, file a lawsuit seeking attorneys’ fees.
That is what happened in Raul v. Astoria Financial Corporation. Ten days after Astoria filed its 2012 proxy statement, a plaintiffs firm sent a demand letter to the Astoria board, asserting that, “[i]n violation of Securities and Exchange Commission (‘SEC’) regulation disclosure standards and the Astoria Board’s duty of candor,” the Astoria board “concealed material and required information concerning the Company’s executive compensation policies and practices in the 2012 Proxy Statement” by failing to disclose “whether, and if so, how, the Astoria Board considered the results of the 2011 say-on-pay vote,” and “how frequently it has decided to hold future say-on-pay votes.” [Emphasis in original]
That same month, Astoria filed with the SEC, pursuant to Item 5.07(d), an amendment on Form 8-K/A, which disclosed that, in light of the shareholder advisory vote at the 2011 Annual Meeting on the frequency of shareholder votes on approval of the compensation of the company’s named executive officers, the Company intends to hold a say-on-pay vote every year. Astoria also mailed a letter to its shareholders, which, among other things, clarified whether and how the company considered the results of the shareholder advisory vote on the approval of the compensation.
The plaintiffs firm then demanded attorneys’ fees and, when Astoria refused, filed suit “seeking an equitable assessment of attorneys’ fees,” and alleging that the plaintiff’s efforts to remedy the disclosure violations identified in its demand conferred upon Astoria a benefit justifying an award of fees.
Under the corporate benefit doctrine in Delaware, a plaintiff may receive attorneys’ fees where (i) the underlying cause of action was meritorious when filed; (ii) the action producing benefit to the corporation was taken by the defendants before a judicial resolution was achieved; and (iii) the resulting corporate benefit was causally related to the lawsuit. In Raul v. Astoria Financial Corporation, the Court declined to award attorneys’ fees to plaintiff under corporate benefit doctrine:
Our law provides that if the actions of the board of directors were such that, at the time a demand was made, a suit based on those actions would have survived a motion to dismiss, and a material corporate benefit resulted, the attorneys’ fees incurred by the stockholder may be recovered despite the fact that no suit was ever filed. If, on the other hand, the stockholder has simply done the company a good turn by bringing to the attention of the board an action that it ultimately decides to take, she is not entitled to coerced payment of her attorneys’ fees by the stockholders at large. Finding that the demand at issue here falls into the latter category, I decline to shift fees onto the corporation and its stockholders.
The decision in Raul v. Astoria Financial Corporation should be reassuring to any company facing the decision of whether to file a supplement to the proxy statement to address disclosure issues raised by a plaintiffs’ firm, which are not material, but which could be clarified with some additional disclosure.