A New Wave of Say-on-Pay and Executive Compensation Proxy Litigation


Nobody can accuse the plaintiffs’ shareholder bar of suffering from a lack of creativity or being easily dissuaded from purporting to represent shareholders. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) in July 2010. Section 951 of Dodd-Frank requires a shareholder advisory vote on executive compensation (a “say-on-pay” vote). The Dodd-Frank Act, however, “specifically provides” that the say-on-pay vote (1) “shall not be binding on the issuer or the board of directors,” and (2) does not “create or imply any change to the fiduciary duties of the board members.” 15 U.S.C. § 78n-1(c)). Nonetheless, the plaintiffs’ bar began filing shareholder derivative lawsuits alleging breach of fiduciary duty following an issuer’s failed say-on-pay vote. The vast majority of these cases have been dismissed because the plaintiff failed to make demand on the company’s board of directors before bringing suit. See Gordon v. Goodyear, 2012 WL 2885695, *10 (N.D. Ill. July 13, 2012) (collecting cases); see also Swanson v. Weil, 2012 WL 4442795 (D. Colo. Sept. 26, 2012); Haberland v. Bulkeley, No. 5:11-CV-463-D (E.D.N.C. Sept. 26, 2012).

As a result, the plaintiffs’ bar has resorted to a new attack: filing class action lawsuits against companies before the shareholder meeting to enjoin the say-on-pay vote based on alleged incomplete and misleading proxy disclosures. They also challenge disclosures in connection with any required vote in amending executive equity compensation plans, such as increasing the number of shares available for issuance.

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