In all the "excitement" over the recent epidemic of lawsuits over say on pay, I want to be sure that companies and their advisers do not overlook another type of shareholder derivative lawsuit being filed based on executive compensation and company performance. Like the Shareholder Say on Pay suits, the merits of these suits are highly questionable. However, fighting them can cost firms significant time and money, to say nothing of the embarrassment and bad publicity stemming from a firm being sued over its compensation practices.
In a similar vein to the SSOP lawsuits, we have seen a reappearance of shareholder derivative suits based on companies' Code Section 162(m) disclosures in the proxy statement. The 162(m) lawsuits generally allege that the company's proxy disclosures of the performance goals and/or its claims to follow a pay-for-performance philosophy are false and misleading. Paralleling the SSOP suits, the 162(m) suits further allege that because the disclosures are inadequate, the compensation in question is non-deductible and, therefore, it constitutes corporate waste, unjust enrichment of the executives, and a breach of the directors' duty of loyalty.
In April 2011, plaintiffs' lawyers filed a shareholder derivative ("strike") lawsuit (Abrams v. Wainscott) against AK Holdings alleging that its 2010 proxy statement contained false or misleading statements concerning compliance with Section 162(m). AK Holdings' 2010 proxy statement sought stockholders' approval of its Long Term Performance Plan and its Stock Incentive Plan, both of which the proxy claimed provided compensation to executives that was tax-deductible under Section 162(m). The complaint alleges that, while the shareholders had approved these compensation plans, portions of the plans allowed too much discretion to increase compensation and thus did not in fact comply with the tax deductibility requirements of Section 162(m). The complaint also alleged that the company would have paid this compensation regardless of the result of the stockholder vote, an interesting allegation considering that the shareholder vote in fact approved the compensation package.
In July 2011 the U.S. District Court for the District of Delaware allowed a similar shareholder derivative suit, Hoch v. Alexander, to continue against the officers and directors of Qualcomm, alleging that they issued a false or misleading proxy statement regarding the 162(m) tax-deductible status of executives' compensation.