Federal Court Rejects Shareholder “Say-on-Pay” Suit

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The U.S. District Court for the Northern District of California on March 7, 2012 dismissed a derivative suit brought by shareholders of Intersil Corporation for breach of fiduciary duty premised on shareholders’ disapproval of the company’s executive compensation plan in a non-binding “say-on-pay” vote mandated under the Dodd-Frank Act. In dismissing the case, however, the court pointedly sought to determine what weight should be accorded negative “say-on-pay” votes.

Among the numerous requirements included in the Dodd-Frank Act, which was enacted in July 2010, was a requirement for all public companies to conduct a non-binding shareholder vote on executive compensation at least once every three years. Nearly 2,200 issuers held “say-on-pay” votes in 2011. 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, share-holders have launched lawsuits against a growing number of companies, and their senior executive officers, directors, and outside compensation consultants, as a result of negative “say-on-pay” votes.

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