As readers know, I have been blogging on the new form of lawsuit over companies' executive compensation disclosures that has appeared in the last year since the first two cases (Martha Stewart and Brocade). Although the plaintiffs' lawyers have not had much success in court (2 wins, 8 losses at the preliminary injunction stage), they continue to announce "investigations" (trolling for a plaintiff/shareholder) and send threatening letters. Calendar year companies (approximately two-thirds of the Russell 3000) have only begun to file their proxy statements this month and will continue throughout April. The executive compensation and shareholder litigation professionals, and their clients, remain in suspense over how many of these proxies will draw an investigation, a letter and/or a lawsuit. (P.S. For those – like us – who were hoping that the Faruqi firm would be distracted by the recent sexual harassment lawsuit filed against the partner who has been filing these disclosure suits, we regret to say that we have continued to receive letters and have had contact subsequent to that filing.)
I am not going to repeat the extensive analysis of these cases from prior blogs, but I did want to contribute some (hopefully) useful advice to companies that have not yet filed their proxy statements and are seeking approval of a new or amended plan stock plan (including those seeking only approval of additional authorized shares or performance goals for 162(m)). In a measured response to the plaintiffs' claims in many of these lawsuits and letters, we have been suggesting additional disclosure regarding dilution and other data that would allow that figure to be calculated, including the following tweaks (to the extent not already in the disclosure):
- Be sure the disclosure addresses how the Company/Committee arrived at the number of additional authorized shares being requested (e.g., "our independent comp consultant ran a share value transfer model used by some advisors [the ISS SVT formula] . . . and recommended . . . ").
- Consider stating how long the Company/Committee estimates the additional authorized shares will last (e.g., "based on our historic and projected future usage patterns, the compensation committee estimated that these shares will be sufficient to provide grants for the next five years").
- Disclose the number of shares already awarded so far in 2013.
- Regarding the Equity Compensation Plan Information Table required in the proxy in a year when approval of additional shares is sought, attempt to bring down the figures to be current as of the filing date. Counsel does not need to recreate the whole table. It just needs give an updated number of outstanding award shares and those remaining available for future awards in the narrative.
- Disclose the stock price on day of proxy filing (or closing price on day before).
Companies should consider organizing a rapid response team of inside and outside counsel for immediate action if a lawsuit is filed or threatened after the company is files its proxy. Engaging a rapid response team that can respond to plaintiffs' informational or demand letters before they file suit (the plaintiffs' lawyers typically send a demand or informational letter before filing suit) can be useful in dissuading plaintiffs' lawyers from proceeding with their suit. Half the battle may be demonstrating to them that the company won't just rollover and pay tribute, and won't have to scramble to address a threatened lawsuit and risk postponing its meeting.