Imagine a lawsuit brought in the weeks leading up to your company's annual shareholders' meeting, which seeks to postpone that meeting based on inadequate proxy disclosures on executive compensation matters up for a shareholder vote. Now imagine that the lawsuit is successful – and you are forced to decide between (a) paying the class action lawyers hundreds of thousands of dollars of attorneys' fees and issuing enhanced disclosures or (b) fighting the matter through a preliminary injunction hearing, which may have the effect of delaying your shareholder meeting (and create additional legal fees). Does that sound like Armageddon? Well, it happened earlier this year and the lawyers who brought the lawsuit are seeking to duplicate their success – or achieve a large attorneys' fees award – against other public companies in the current proxy season.
As we have said in many previous blogs, shareholder derivative and class action litigation over executive compensation matters is on the rise and the plaintiffs' bar continues to develop new theories. Unfortunately, their latest theory involves efforts to derail annual shareholder meetings because of allegedly inadequate [proxy statement] disclosure issues.
In one remarkable case this year, plaintiffs' lawyers succeeded in obtaining a preliminary injunction of the shareholder vote to be held at the Company's annual meeting from a credulous state court in Santa Clara County California (where else). On the day of the shareholders meeting, the Company settled the litigation, allowing the annual meeting to go forward, by agreeing to:
- Postpone the shareholder vote for approval of a the restatement of the Company's Stock Plan to increase the Plan's authorized share reserves;
- File a Supplement to the 14A proxy statement containing extensive additional disclosure on the proposed Stock Plan and the Company's recent and projected future performance; and
- A payoff to the plaintiffs' lawyers of up to $625,000 in attorneys' fees and expenses.
It is too soon to push the panic button, but this could be very important to all public companies as they prepare their proxy statements for 2013, as the same lawyers have followed-up this month with a lawsuit against one of the nation's best-know and most respected companies. In this case, filed in the same California state court, the lawyers alleged that:
The [Board] recommends that its shareholders approve Proposal 2, a proposed amendment and restatement of the Company's Executive Incentive Plan (the "lncentive Plan"). Proposal 2 purports to leave the Incentive Plan substantially the same save for three new performance conditions. However, Proposal 2 is not fully and accurately described in the Proxy. In fact, the Proxy contains severe and material disclosure violations regarding the reasons for, and effects of, Proposal 2 and why it is in the best interest of shareholders.
The Company is under obligation pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to seek an advisory vote from its shareholders regarding executive compensation (a/k/a "Say-on-Pay"). Although characterized as an advisory vote, shareholders are entitled to make an informed vote on Say-on-Pay, which they are unable to do with the current, inadequate Proxy [Proposal 3].
As one who drafts these disclosures for a living, I assure you that the Company's proxy disclosure regarding the Shareholder Say on Pay and approval of an amended Incentive Plan was every bit as complete as those made by nearly every company in America. The good news is that the court declined to issue a preliminary injunction against the shareholder vote in at least one of these lawsuits, based on expert testimony to this effect.
We are following (and working on) these cases very closely. In the meantime, you may want to take extra care in drafting your disclosures this year.
On October 26, 1922, Lt. Cmdr. Godfrey Chevalier, piloted by Lieutenant Commander Godfrey, made the first successful landing on an aircraft carrier, flying an Aeromarine 39B and landing on the USS Langley.