Proxy Season Brings a Third Wave of “Gotcha” Shareholder Litigation

Proxy season is upon us and the plaintiffs’ bar is demonstrating its resourcefulness by bringing a third wave of shareholder litigation. This new wave, which has not crested yet, consists of a return to derivative shareholder suits but no longer concerning say-on-pay votes. Instead, these lawsuits are focused on “gotcha” allegations that companies issued stock options or restricted stock units to executives in amounts that exceed the limits of those companies’ stock plans. These lawsuits are easily preventable with careful planning by Compensation Committees and their in-house and outside counsel to ensure that all stock grants and executive compensation proposals are in compliance with the company’s stock plan.

Since the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010 (“Dodd-Frank Act”), which requires a say-on-pay advisory vote on executive compensation, the plaintiffs’ securities bar has been busy filing lawsuits and issuing press releases “investigating” companies concerning say-on-pay votes and/or executive compensation matters. As discussed in our November 19, 2012 Client Alert, Plaintiffs’ Firms Gaining Steam in New Wave of Say-on-Pay Shareholder Suits?, there have been two distinct waves of shareholder litigation over the past couple of years. Now, there has been a third one consisting of derivative shareholder suits alleging that companies approved executive compensation in violation of stock plans.

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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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