The Dodd-Frank Wall Street Reform Act (the “Dodd Frank Act”) requires publicly traded companies to include a separate shareholder resolution to approve executive compensation in their annual proxy statements at least once every three years. This rule is better known as “say-on-pay.” There have been numerous derivative law suits filed in both state and federal courts against companies whose shareholders have not approved the say-on-pay vote. Most recent is a derivative law suit brought against directors alleging excessive compensation and bonuses to executives. The directors approved the executive compensation in spite of a shareholder vote against the compensation.

This case is worth noting because it is the first say-on-pay law suit to have survived a motion to dismiss. The U.S. District Court for the Southern District of Ohio refused to grant the company’s motion because it had not proven that it had met its fiduciary duties. Applying the business judgment rule, the court found that directors face liability only if it is shown by clear and convincing evidence that their actions were undertaken with a “deliberate attempt to cause injury to the corporation” or “reckless disregard for the best interest of the corporation.” Informed decisions by disinterested directors are presumed to be the product of a valid business judgment and it is the plaintiff who bears the burden of establishing facts to rebut the business judgment rule’s presumption of good faith of the directors. The court ruled the plaintiff had pleaded a “plausible claim featuring allegations that would, if proven, overcome the business judgment rule.” The plaintiff’s alleged that the multimillion dollar bonuses approved by the directors during a time of the company’s declining financial performance violated the company’s pay-for-performance compensation policy and were not in the best interests of shareholders and therefore constituted an abuse of discretion.

Critics of the decision point to Section 951 of the Dodd-Frank Act, which provides that the say-on-pay vote shall not be binding on the issuer or the board of directors of an issuer, and may not be construed to create, change or add to the fiduciary duties of such issuer or board of directors.

The future of these derivative suits remains uncertain. While this case is the first say-on-pay suit to have survived a motion to dismiss, more recently, a Georgia court dismissed a say-on-pay lawsuit. The court concluded, among other things, that there is no authority that the say-on-pay vote is evidence when determining whether the business judgment rule is rebutted. It appears there is a “1-1 tie.”

NECA-IBEW Pension Fund v. Cox, et. al., U.S. District Court, 11-cv-00451, Southern District of Ohio, Western Division (Cincinnati).

Teamsters Local 237 Additional Security Benefit Fund v. Ian J. McCarthy, et. al., 2011-CV-197841, Superior Court of Fulton County (Atlanta).