Just as the movies and TV seem to be filled with monsters coming back from the dead, so too it seems to be with litigation over executive compensation disclosures. We thought (hoped?) that the Faruqi firm may have lost interest in these lawsuits after a string of defeats. Apparently, we were wrong. They are now back at it. More importantly, a California State Court decision in the last week of June involving The Clorox Company may have given new life to this monster. And other similar cases on this issue are is still be filed or are ongoing.

This is shaping up to be a disturbing trend, as it is the third negative decision for corporations on executive compensation litigation in the last 30 days (I know that I still owe readers the second half of the discussion of Simon Properties case. I promise to provide that soon.).

The Faruqi firm originally sued Clorox and its directors in October 2012, shortly before its shareholders' meeting scheduled for November 14, 2012. The lawsuit alleged that the Proxy Statement filed by Clorox omitted material information regarding a request that Clorox shareholders approve an amendment to Clorox's 2005 Stock Incentive Plan that would add 2.9 million shares to the 4.2 million shares remaining available for issuance under the Plan. (The lawsuit also challenged disclosures regarding Say on Pay, but Faruqi has abandoned those claims – having never succeeded with one.) 

On November 13, 2012, the Court denied the plaintiff's motion for preliminary injunction of the shareholders' meeting on the basis that (i) plaintiffs had failed to establish that allowing the votes to go forward at the meeting posed any risk of interim, much less irreparable harm, and (ii) the parties' agreement that the shareholder actions could be voided by court order, proxies resolicited with full disclosure, and a new vote taken, if plaintiff were to ultimately prevail at trial. Interestingly, the plaintiff seems to have abandoned its claim for any form of monetary relief.

The Court's decision was not necessarily in favor of the plaintiffs. Instead, it was only a decision by the Court, with the consent of both parties, to decide the merits of the case based on the evidence submitted to date. 

In presenting and opposing the instant Motion, the parties have effectively laid out their entire respective cases. The experts have testified by way of declarations and have been cross-examined by way of deposition, and what appears to be the entire universe of documentary evidence has been submitted.

According to the Court, "as reflected by the volume of argument ink and evidentiary materials submitted by both sides, this case is about disclosures that were not made, and whether those disclosures are "material" within the meaning of that term as applied to proxy statements."

"So Mike," you say, "how can is this part of a disturbing trend if the Court has not yet issued a decision?" "Dummkopf!" I reply, "Don't you see that the company has already spent significant amounts of time and legal fees to defend this poor excuse for a lawsuit?" First off, the determination of "materiality" is a factual one that varies from case to case. If every court facing such a lawsuit were to conclude that it had to determine whether the allegedly omitted disclosure information was "material," it would be difficult for companies to have these claims dismissed at a preliminary stage. Second, most executive compensation (and litigation) professionals assumed that if we could avoid a preliminary injunction of the shareholders meeting, the threat would be over. The possibility that future litigation could reverse the results of the shareholder vote is almost too awful to contemplate (like the dead rising from the grave). 

As before (see my earlier blogs), the best approach for companies is to spend time on preparation and proxy drafting before the shareholder vote.