Earlier this month, the U.S. District Court for the District of Delaware allowed a shareholder derivative ("strike") lawsuit to continue against the officers and directors of Qualcomm, alleging that they issued a false or misleading proxy statement regarding the 162(m) tax-deductible status of executives' compensation (Hoch v. Alexander). I have not seen a lawsuit like this in the last several years (see "162(m) Disclosure - The Shaev Case"), so I thought I might bring it to readers' attention.

In its 2011 proxy statement, Qualcomm sought stockholders' approval of an amendment of its Long Term Incentive Plan, which included an increase in the share reserve by 65,000,000 shares. In the required summary of the Plan, under the heading "Federal Income Tax Information," the proxy statement included the following routine paragraph:

Potential Limitation on Company Deductions. In accordance with applicable regulations issued under Section 162(m), compensation attributable to stock options and stock appreciation rights will qualify as performance-based compensation, provided that: (1) the 2006 LTIP contains a per-employee limitation on the number of shares for which options or stock appreciation rights may be granted during a specified period; (2) the per-employee limitation is approved by the stockholders; (3) the option is granted by a compensation committee comprised solely of outside directors (as defined in Section 162(m) of the Code); and (4) the exercise price of the option or right is not less than the fair market value of the stock on the date of grant. For the above reasons, our 2006 LTIP provides for an annual per employee limitation as required under Section 162(m), and our Compensation Committee is comprised solely of outside directors. Accordingly, options or stock appreciation rights granted by the Compensation Committee qualify as performance-based compensation, and the other awards subject to performance goals may also qualify.

The strike suit alleges that the representations about the availability of tax deductions were materially false or misleading: "Because the defendants would still pay performance-based compensation under the 2006 LTIP as unamended, regardless of stockholder approval, no vote of the stockholders would make such payments deductible . . . Therefore, contrary to the representations and omissions in the Proxy Statement, awards under the 2006 LTIP as amended will not be tax-deductible even if the stockholders approve it." 

Wow, that is a reach. Plaintiffs are arguing essentially that the whole stockholder approval process is a sham because the company would pay these amounts no matter what. It seems incomprehensible that a court would uphold such an absurd and unprecedented claim, but we thought you would like to know that such claims have been, and continue to be, made over the years.

The case is far from over. This ruling only allows the lawsuit to continue despite the fact that plaintiffs did not make the required "demand" on the company before filing suit. Again, the claims seem ridiculous, but we report and you decide.