Pursuant to the Dodd-Frank Act, public companies are required to seek a non-binding shareholder vote approving the company’s executive compensation at least every three years. While the say-on-pay vote is non-binding, shareholders have fi led lawsuits against a number of companies as a result of a negative say-on-pay vote. In late September, the United States District Court for the Southern District of Ohio refused to grant a motion to dismiss and allowed a lawsuit over a company’s negative say-on-pay vote to proceed.9
In May 2011, Cincinnati Bell’s say-on-pay vote failed. Thereafter, a shareholder fi led a lawsuit alleging that the company’s board breached its duty of loyalty when it approved large pay raises and bonuses to its executives in a year that the company performed poorly. Cincinnati Bell’s offi cers and directors moved to dismiss the lawsuit, arguing, in part, that the board’s actions with respect to executive compensation were protected by the business judgment rule. In refusing to grant the motion to dismiss, Judge Black found that whether the defendants would be entitled to rely on the business judgment rule was a question of fact for trial and cited the plaintiff’s assertion “that the negative shareholder advisory vote on executive compensation… provides direct and probative evidence that the 2010 executive compensation was not in the best interests of the Cincinnati Bell shareholders.”
In contrast to early predictions that say-on-play lawsuits would be seen as frivolous, the Ohio court’s refusal to grant the motion to dismiss in the Cincinnati Bell case makes it likely that we will see more lawsuits as a result of failed sayon- pay votes. Therefore, in an effort to avoid a negative say-on-pay vote, it is important that companies carefully prepare the executive compensation disclosure in their proxy statement, including their description of the company’s compensation policies and the board’s actions related to executive compensation.