The Dismissal Order in a say-on-pay suit filed against Janus continues the almost unanimous trend of dismissal of these suits where pre-suit demand is not made on the board. The District Court’s opinion is a good summary of the reasoning that courts are applying to hold these say-on-pay suits to strict standards for pleadings to avoid the demand and business judgment rules. The court’s opinion does include one point that may point to the future of these suits. As the court stated:
“I also note that the result of the advisory say on pay vote cannot rebut the business judgment presumption because it occurred after the Board approved the 2010 executive compensation. Delaware law forbids using events subsequent to the challenged action to second guess a board’s business judgment.”
This raises two points on timing related to negative say-on-pay votes. First, as is obvious, it is very important that compensation committee take the say-on-pay vote into account for the next compensation setting. Also, the proxy needs to describe this process completely and clearly.
Second, the compensation committee may be implementing any modifications over time and should be protected. In the Janus case, for example, the 2010 compensation program received a negative say-on-pay vote at the 2011 annual meeting. By the time of that meeting, the 2011 compensation program was already in effect. So, the first opportunity to reflect fully the negative vote on 2010 pay would be the 2012 compensation package.
On that schedule, the 2011 negative say-on-pay vote could be used as the basis for a derivative suit after the 2013 proxy is filed disclosing the 2012 compensation decisions. So, there might be a new round of these suits in 2013.