Plaintiffs’ lawyers recently have seized upon negative shareholder advisory “say on pay” votes under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) as grounds to file lawsuits asserting a breach of fiduciary duty by boards of directors with respect to executive compensation. Commentators are surprised by these lawsuits, since Dodd-Frank explicitly states that shareholder say-on-pay votes may not be constructed to create additional fiduciary duties. However, multiple companies receiving negative votes on their say-on-pay proxy votes have been sued.
A couple of these lawsuits recently have been dismissed. For example, a federal court in Oregon rejected one such lawsuit on procedural grounds, applying Delaware corporate law in affirming the business judgment presumption for the directors. A federal court in California dismissed another such lawsuit for failure to state a claim, based on the text of Dodd-Frank. However, not all companies have been able to dismiss the lawsuits. Last year, a federal court in Ohio denied a company’s motion to dismiss the lawsuit against it.
Regardless of whether a company is able to dismiss these lawsuits, they are costly and can generate negative publicity. Consequently, companies should consider (1) focusing on clearly explaining their executive compensation programs and decisions in their upcoming proxy statements, and (2) reaching out to large shareholders to assess whether they have any concerns with the company’s executive compensation program, especially if there was a low approval rating on a prior advisory shareholder say-on-pay vote.