Nearly 2,200 issuers held “say-on-pay” votes in 2011.1 Shareholders have overwhelmingly voted in favor of the proposed compensation plans, rejecting management compensation proposals in only about 40 instances. The companies that lost the vote, however, have been frequent targets of shareholder derivative litigation. These actions have not yet resulted in substantive decisions and, until they do, more cases can be expected to be filed. The risk and likely spread of litigation following a non-binding shareholder vote disapproving executive compensation thus raises the stakes on say-on-pay votes in an unexpected way.
The Dodd-Frank Act provides that “say-on-pay” votes are non-binding and may not be construed as overruling a decision by, or modifying the fiduciary duties of, a board of directors.2
Notwithstanding the non-binding nature of “say-on-pay” votes and the express intent of Congress to avoid challenging a board of directors’ fiduciary duties, shareholders have launched lawsuits against at least seven companies, and their senior executive officers, directors and outside compensation consultants, as a result of negative “say-on-pay” votes.3
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