If Fee-Shifting Bylaws Are Ever Put On Trial, This Case Should Be Exhibit A


Item 5.07(d) of Form 8-K requires issuers to disclose “the company’s decision in light of such vote as to how frequently the company will include a shareholder vote on the compensation of executives in its proxy materials until the next required vote on the frequency of shareholder votes on the compensation of executives.”  Now, consider the following fact pattern:

  • The company’s board of directors recommends that say-on-pay votes be held annually;
  • The company’s proxy statement includes the board’s recommendation;
  • The company holds its annual meeting and approximately 74% of the stockholders vote in favor of the executive compensation and annual say-on-pay proposals;
  • The company files a Form 8-K that states “Based on the vote indicated below, the results of the future advisory shareholder votes to approve the compensation of the company’s named executives is every year.”
  • The following year, the company circulates a proxy statement that includes a proposal on whether to approve named executive officer compensation.

One plaintiff’s law firm complained, sending the board a letter alleging that the board had violated the rules of the Securities and Exchange Commission by failing to disclose whether, and if so, how, the board considered the result of the say-on-pay vote and how frequently it has decided to hold future say-on-pay votes.  In my opinion, these allegations are so laughable that it is hard to believe that anyone expected them to be taken seriously.  The board recommended approval of executive compensation and annual votes, the stockholders voted overwhelmingly in favor of those results, and the board disclosed that future votes would be held annually.  Really, what more does a stockholder need to know?

Nonetheless, the board took the demand seriously and filed an amended Form 8-K to disclose in relevant part:

In light of such vote and consistent with the Board’s recommendation set forth in the Proxy Statement for the Meeting, the Company intends to hold a shareholder advisory vote on named executive officer compensation every year, until such time as another advisory vote is held, in accordance with Section 14A(a)(2) of the Securities Exchange Act of 1934, as amended, on the frequency of advisory votes on named executive officer compensation.

The company also mailed a letter to stockholders clarifying the obvious and amended its compensation committee charter to require the committee to consider the results of future say-on-pay votes.

Now, we get to the real point of the story.  After making these demands, the plaintiff filed a lawsuit seeking, with no irony, an “equitable assessment of attorneys’ fees”.  No, the plaintiff wasn’t asking the court to award fees against himself for wasting the stockholders’ money.  The plaintiff was seeking what is commonly referred to as a “mootness fee”.

In a rare written memorandum opinion, Vice Chancellor Sam Glasscock III rejected the claim, finding that “it is unclear to me how that information would be material to a reasonable stockholder . . .” and that the plaintiff “has presented no underlying meritorious claim for breach of fiduciary duty”.  Raul v. Astoria Fin. Corp., 2014 Del. Ch. LEXIS 103 (Del. Ch. 2014).



DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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