Ninth Circuit Vacates Dismissal and Remands Shareholder Derivative "Say-on-Pay" Suits to California State Court

by Sheppard Mullin Richter & Hampton LLP

In Dennis v. Hart, 2013 U.S. App. LEXIS 15648 (9th Cir. July 31, 2013), the United States Court of Appeals for the Ninth Circuit held that plaintiffs’ “say-on-pay” shareholder derivative suits alleging breach of fiduciary duty were improperly removed to federal court, vacated the district court’s decisions and dismissed the parties’ cross-appeals for lack of jurisdiction. The Ninth Circuit held that the federal court did not have jurisdiction to hear the action because defendants had held an advisory vote in compliance with the federal Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), 15 U.S.C. § 78n-1, and plaintiffs had only alleged state law causes of action. This holding indicates that challenges to board actions in response to “say-on-pay” votes are not enough to confer federal jurisdiction without additional, specific violations of federal law.

Plaintiffs alleged that in 2010, despite reporting negative net income and free cash flow, the board of directors of PICO Holdings, Inc. (“PICO”) increased executive compensation. In a Dodd-Frank Act-mandated advisory vote held in May 2011, 61% of PICO’s shareholders voted against the proposed 2010 compensation package. The board, however, took no action in response to the vote. Shareholders later filed derivative actions in California state court against PICO and its board members. Plaintiff Ronald Dennis asserted claims for breach of fiduciary duty, gross mismanagement, contribution and indemnification, and unjust enrichment. He also requested a declaration “that the adverse May 13, 2011 shareholder vote on the PICO Board’s executive compensation rebutted the business judgment surrounding the PICO Board’s decisions to increase executive compensation.” Plaintiff George Assad asserted claims for unjust enrichment and breach of fiduciary duty relating to the Board’s issuance of false and misleading statements, compensation practices, and the Board’s lack of response to the say-on-pay vote.

Defendants removed the actions to federal court, and moved to dismiss. The United States District Court for the Southern District of California dismissed the request for declaratory judgment in Dennis for failure to state a claim, and determined the remaining claims should be remanded to state court. In Assad, the district court dismissed the breach of fiduciary claim due to the failure to respond to the say-on-pay vote, and determined the remaining claims should be remanded to state court. Plaintiffs appealed.

The Ninth Circuit reversed, holding that the district court lacked jurisdiction to do anything other than remand the cases to state court. The Ninth Circuit addressed and dismissed three potential avenues for defendants to assert federal jurisdiction: (1) Section 27 of the Securities Exchange Act of 1934 (“1934 Act”), 15 U.S.C. § 78aa, (2) the “significant federal issue” rule and (3) the complete preemption doctrine.

Defendants first argued that Section 27 of the 1934 Act provided the federal court with jurisdiction because Section 27 “vests federal courts with exclusive jurisdiction over actions ‘brought to enforce any liability or duty created by [the 1934 Act] or the rules and regulations thereunder.’” However, the Ninth Circuit held that “[n]othing in either complaint alleges any . . . violation of the say-on-pay provision or any other provision of the [1934] Act. On the contrary, the parties agree that PICO did what the Act requires: it held a vote.” The Court disagreed with defendants’ reliance on Sparta Surgical Corp. v. National Association of Securities Dealers, Inc., 159 F.3d 1209 (9th Cir. 1998), holding that while “Sparta’s complaint sought relief based upon violation of exchange rules[,]” plaintiffs here acknowledge that PICO complied with the act and instead only allege state law violations.

Defendants next argued that because Congress went to great lengths to ensure that say-on-pay votes were considered only advisory and would not create any new causes of action, Congress’ “desire to preclude liability” is a significant federal issue that confers jurisdiction. The Ninth Circuit again disagreed, holding that while defendants likely had a “very strong federal defense,” a federal defense does not confer federal jurisdiction.

Defendants finally argued that the doctrine of complete preemption conferred federal jurisdiction. The Ninth Circuit disagreed once again, holding that “[c]omplete preemption is a limited doctrine that applies only where a federal statutory scheme is so comprehensive that it entirely supplants state law causes of action.” The Court held that “[n]othing in the [1934] Act . . . specifically suggests that Congress intended to totally displace state law. On the contrary, we have recognized that the [1934] Act does not so fully displace state law as to invoke complete preemption.” The Court also noted that complete preemption did not apply because (1) the parties agreed that plaintiffs had not alleged a federal cause of action and (2) the Dodd-Frank Act expressly “created no new fiduciary duties and explicitly preserved existing state laws.”

Although this decision appears to limit the ability of defendants to remove to federal court claims attacking board responses to Dodd-Frank Act “say-on-pay” votes, it does not address other bases for removal, such as the Securities Litigation Uniform Standards Act of 1998, 15 U.S.C. § 78bb(f)(2). With the flood of “say-on-pay” cases receding over the past twelve months, the question of federal jurisdiction over “say-on-pay” cases may become less significant.


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.

© Sheppard Mullin Richter & Hampton LLP | Attorney Advertising

Written by:

Sheppard Mullin Richter & Hampton LLP

Sheppard Mullin Richter & Hampton LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.