(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.)
As an increasing number of companies have been hit (or threatened) by shareholder derivative lawsuits prior to their annual meeting, the number of articles, posts and other materials discussing these cases has also increased. A few of these articles, discussed below, should be on the reading list for anyone who might be faced with defending one of these actions.
The annual meeting lawsuits are filed after the mailing of the proxy statement, seeking to enjoin the shareholder vote or votes based on purported incomplete or misleading disclosures and claimed breaches of the directors’ fiduciary duties. I have called these cases the second generation of “Sue-on-Pay” lawsuits, because they focus mainly on the Say-on-Pay vote and, often, a separate shareholder vote to increase the share authorization of an equity plan. [A third type of claim, not compensation-related, sometimes relates to a shareholder vote to increase the share authorization under the corporation’s charter.]
Most of these lawsuits have been filed by the Faruqi & Faruqi law firm; a review of that firm’s web site shows that since the beginning of 2013, they have announced investigations relating to at least 20 companies’ annual meetings, a step often followed by the commencement of a derivative lawsuit. These cases have become more widely known as a result of a recent Wall Street Journal article, “Anxiety Stalks Proxy Season” by Emily Chasan.
A recent post by David Katz of the Wachtell, Lipton law firm, “The New Wave of Proxy Disclosure Litigation,” offers some very specific and helpful tips on advance preparation for the possibility of an annual meeting lawsuit. Katz first focuses on crafting proxy disclosures that are more likely to withstand challenge, and on advising the board of directors on the possible risk of litigation. Then he provides some tactical advice about steps that might help the company move quickly in the event of litigation:
Companies that are sued in this context and decide to vigorously contest the allegations frequently have been successful. One tactic that has been helpful in some cases is to procure affidavits from significant institutional shareholders to counter the allegations. Such an affidavit can be very persuasive to a court; moreover, in our experience, institutional shareholders generally are not supportive of this type of litigation. Having an institutional shareholder submit a declaration gives the lawyer defending the company the ability to draw a sharp contrast between the interests of shareholders and the interests of plaintiffs’ lawyers who file these lawsuits on behalf of small individual shareholders who often serve that function in multiple cases. Companies that engage regularly with their significant institutional shareholders are more likely to be able to leverage these relationships to procure support when confronted with these lawsuits. Companies have also successfully engaged experts in areas such as disclosure practices to effectively resist preliminary injunction motions. Prior planning is important to be able to marshal the resources necessary to defend against these lawsuits.
Another good post counsels that companies in the process of drafting their proxy statements should be cautious before trying to tailor their disclosures to avoid litigation. In “Changing Your Proxy Disclosures May Not Be the Right Way to Fend Off Annual Meeting Litigation”, Steve Seelig of Towers Watson goes through a laundry list of the types of proxy statement disclosures frequently sought by plaintiffs in these cases and analyzes in very specific terms whether it makes sense to address them in advance. For example:
Equity Plan and Share Authorization Votes . . . [W]e view the request for information on dilutive impact and estimates of run rates to be reasonable and relatively easy to fulfill. With this information, shareholders can see the current state and forecasts of future dilution, but we would only disclose forecasts based on historical patterns. . . . We are less enthusiastic about providing share usage projections developed for the compensation committee as these often contain hypotheticals that do not come to pass. . . .
Finally, the Society of Corporate Secretaries & Governance Professionals has made available the materials from a January webinar on “Protecting Your Company from Proxy Disclosure Litigation” (PDF). A panel of in-house counsel, outside counsel and a Society representative present a laundry list of steps that can serve as a checklist for a public company that wants to be as prepared as possible.
Or, if you don’t want to do advance planning, you can just file your proxy statement and collectively try to look invisible – maybe look into this company’s claims that it has created an invisibility cloak using its “Quantum Stealth” technology. Hey, buddy, does that cloak come in size “Corporate”?