(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)
In recent weeks, there have been several important developments in litigation against companies that have experienced negative Say-on-Pay votes – what I refer to as “Sue-on-Pay” cases. It’s a good time to put these events into perspective. For public companies concerned about the adverse consequences of a failed Say-on-Pay vote, the recent litigation developments present a classic “good news - bad news” situation.
The good news for corporate boards is that two Sue-on-Pay cases have been dismissed in recent weeks:
- The U.S. District Court for the Southern District of California granted defendants’ motion to dismiss in a Say-on-Pay lawsuit involving Pico Holding, Inc. As Mike Melbinger pointed out in the Melbinger Disclosure Blog on CompensationStandards.com (subscription site), the court dismissed the plaintiffs’ case for failure to state a claim. The court relied on the language in Section 952(c) of the Dodd-Frank Act, which specifically provides that “ . . . the shareholder vote . . . may not be construed . . . to create or imply any change to the fiduciary duties of such issuer or board of directors . . . [or] any additional fiduciary duties for such issuer or board of directors. . . .”
- In early January, the U.S. District Court for the District of Oregon also dismissed the Say-on-Pay lawsuit involving Umpqua Holdings, Inc. Similar to the Pico case, the court relied in part on the language in 952(c). As reported in theCorporateCounsel.net Blog, the court did not follow the reasoning of the U.S. District Court for the Southern District of Ohio, which declined to dismiss the federal Sue on Pay lawsuit involving Cincinnati Bell. The federal Cincinnati Bell decision was discussed in this prior post. [Note: After posting, I became aware that the Umpqua court dismissed the case without prejudice, meaning that the case may be revived.]
On the other hand, there was bad news recently for companies that may lose Say-on-Pay votes in the future. In December 2011, Cincinnati Bell announced that it has agreed to settle the shareholder derivative lawsuit in state court related to its negative Say-on-Pay vote (as opposed to the federal court case discussed above). The settlement in the state court case appears to be similar to that in the KeyCorp litigation, announced in March 2011. In these settlements, the defendants agree to make various changes in governance practices, and the company agrees to pay the legal fees of the plaintiffs’ law firms. In the KeyCorp case, the legal fees were $1.75 million. The fees in the Cincinnati Bell state case are still subject to negotiation and final approval (probably in April 2012), but presumably they will be substantial.
It is encouraging that the California federal judge in the Pico Holding case and the Oregon Federal judge in the Umpqua Holdings case followed the lead of a Georgia state court in the case involving Beazer Homes in August 2011, as reported in this blog post. These courts promptly dismissed the stockholder claims that resulted from the failed Say-on-Pay vote. More courts appear to be reading Section 952(c) of the Dodd-Frank Act as meaning what it says – the Say-on-Pay vote does not “create or imply any change” to the fiduciary duties of the company or the board. Therefore, the vote cannot be used to rebut the business judgment rule or to provide evidence that the directors breached their duties. Assuming the vast majority of courts reach this result eventually, then plaintiffs’ counsel will be discouraged from bringing such claims.
However, the settlement in the Cincinnati Bell state court litigation is likely to have the opposite effect. The announcement of the second settlement of such a case less than a year after the KeyCorp settlement, probably involving another large award of attorneys fees, is likely to encourage further litigation in the short term. This factor raises the stakes further for the 2012 Say-on-Pay vote, making it even more important for the management and boards of directors of public companies to engage with their shareholders, carefully draft their proxy statement disclosures and document their compensation decisions, and minimize the chances of a failed Say-on-Pay vote.