1. Background: 2010-2011 and the “First Wave” of Say-on-Pay Suits

In 2010 and 2011, after the enactment of federal “say-on-pay” legislation in the Dodd-Frank Wall Street Reform and Consumer Protection Act,1 shareholder plaintiff firms filed several actions alleging breaches of fiduciary duties by directors of companies experiencing unfavorable say-on-pay votes during proxy season. In circumstances where shareholders expressed general dissatisfaction through non-binding say-on-pay “no” votes, suits were filed seeking to imply fiduciary malfeasance with regard to executive compensation. While a few initial suits settled, the majority were dismissed, with courts noting that Dodd-Frank’s say-on-pay provisions expressly do not “create or imply any change to the fiduciary duties” of directors or “create or imply any additional fiduciary duties.”2 Courts also found that a “negative” say-on-pay vote by itself failed to create a reasonable doubt that the challenged compensation decisions were a valid exercise of the directors’ business judgment.3

  1. 2012: The “Second Wave”

During 2012, a new wave of challenges over say-on-pay disclosures was launched, by one law firm in particular. Following the formula of typical M&A strike suits, the shareholder plaintiffs in these class action cases sought to enjoin the annual meeting and vote unless the company made additional compensation-related disclosures. The say-on-pay claims alleged that directors had breached their fiduciary duties by making materially deficient disclosures (and that the company aided and abetted the alleged breach). Some suits also challenged adoption of or amendments to equity incentive plans. A few federal suits included claims for proxy violations under Section 14 of the Securities and Exchange Act.

The typical complaint seeking an injunction of the annual meeting alleged that the proxy should include additional information regarding an array of details, including: (1) additional information regarding the company’s compensation consultant; (2) additional analysis of the compensation plans; and (3) where applicable, more information underlying the adoption of or changes to equity plans. Although many of the companies targeted in 2012 were Delaware corporations, the suits were filed entirely outside of Delaware (New York, California, Illinois, North Carolina, Utah, Missouri, Washington, and New Jersey). More than 20 suits were filed. More than 50 other companies and boards were named in law firm press releases announcing them as targets of investigation, but most were never sued.

These 2012 injunctive suits were largely unsuccessful. Two injunctions were issued and those matters were quickly settled. Both suits involved binding votes on changes to the companies’ equity incentive plans, not simply advisory say-on-pay votes.4 A few defendant companies chose to settle by issuing supplemental compensation disclosures (and paying plaintiffs’ attorney fees). In other actions, where companies and boards stood their ground, courts denied injunctive relief and/or dismissed suits on a number of grounds, including:

  1. the “say-on-pay” vote does not create or expand directors’ fiduciary duties;5
  2. plaintiffs’ failure to demonstrate the materiality of “omitted” information;6
  3. no irreparable harm: courts held that “any claim of irreparable injury . . . is purely speculative given the advisory nature of the [say-on-pay] vote.”7

 

  1. The 2013 Proxy Season

As the 2013 proxy season kicked off, there was a great deal of speculation among public companies, their counsel, and commentators over whether the say-on-pay injunction challenges would continue. It seemed that they would. In March 2013, the partner at the firm responsible for launching most of the 2012 suits posted a vigorous online rebuttal to defense counsel and courts who had dealt fatal blows to these cases last year.8

As companies began filing proxies, a number of them were put on notice that they were subject to “investigation” over executive compensation issues. Notably, the press releases announcing these investigations made no reference to say-on-pay votes or related disclosures. Instead, the companies and proxies targeted for investigation appeared to be those which had included adoption of or amendment to equity incentive plans on the annual meeting ballots. There remained the possibility that alleged say-on-pay disclosure deficiencies might be tacked onto subsequent complaints over these equity incentive provisions. However, not only did this not occur, but no injunctive lawsuits materialized – challenging say-on-pay or equity incentive plans. Indeed, no companies appear to have been targeted for say-on-pay injunctive suits in advance of annual meetings during the 2013 proxy season.9

What accounts for the lack of action? It could be that the attorneys previously responsible for these suits have simply turned their attention to different issues or have become distracted by other matters. It could be that after the 2012 decisions finding there was no risk of irreparable harm in advisory say-on-pay votes, plaintiffs’ counsel discovered that the threat of injunctive action had lost its in terrorem effect. Whatever the reasons, like the early “no vote” fiduciary suits in 2010 and 2011, this latest attempt to refashion Dodd-Frank’s say-on-pay requirement into an annual litigation phenomenon appears to have waned. Although the immediate injunctive threat to companies and boards is diminished, the combination of Dodd-Frank, executive compensation, and annual meetings remains fertile ground for potential shareholder action. Is a “third wave” of say-on-pay litigation inevitable?