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Robert Daines
Note: This article has been updated.
A new type of securities lawsuit against corporations over say-on-pay advisory votes is so similar to shareholder suits filed over mergers and acquisitions that a new M&A litigation study includes a look at the say-on-pay suits.
According to “Shareholder Litigation Involving Mergers and Acquisitions” [PDF], the new suits are being filed by the same plaintiff law firms that file M&A actions. The report, released this week by Cornerstone Research, was written by Olga Koumrian, a principal of Cornerstone, along with Robert Daines, a Stanford law and business professor.
The shareholder litigants make the same claims about a company’s faulty disclosure, and they pursue the same general strategy of seeking an injunction in hopes of getting a quick settlement, according to Daines, who is also co-director of Stanford’s Rock Center on Corporate Governance.
At least 24 of these lawsuits were filed last year. And plaintiff law firms recently announced investigations of 33 more companies, the study states.
The suits stem from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which requires a say-on-pay advisory vote on executive compensation each year. So the new litigation attacks the adequacy of compensation disclosures in annual proxy statements, including the increases in the number of stock shares authorized for equity compensation plans, explains the study.
It shows the number of these lawsuits rose steadily through 2012, from two in the first quarter to 12 in the fourth quarter of the year.
Both types of suits pursue the same general strategy, “which is to get an injunction against holding a [shareholder] vote in order to increase the settlement value,” Daines told CorpCounsel.com.
And as with the merger litigation, he said, companies are generally settling to make the cases go away. Settlements generally include more disclosure of information, no cash for investors, and several hundred thousand dollars in plaintiff attorney fees.
“As the 2013 proxy season approaches, it is too early to tell how much plaintiff law firms will expand this litigation, the report says.
While the bulk of the 2012 litigation was filed by a single plaintiff law firm (Faruqi & Faruqi), two more firms (the Lifshitz law firm of New York and Levi & Korsinsky) have recently announced similar investigations of 16 public companies in December and 17 companies in January—an increase over the average number in the prior months, according to the report.
“On the other hand, actual lawsuit filings of this type have declined from the October 2012 high [of 9]. We know of only two complaints filed in the first two months of 2013, against PriceSmart Inc. in January and Apple Inc. in February,” it adds.
Winston & Strawn partner Michael Melbinger, who authors an executive compensation blog, wrote about the trend in January, saying there is no merit to 99 percent of the lawsuits.
“However,” he added, “the consequences of postponing the annual shareholders meeting are so high and the period between the lawsuit and the meeting is so short, that many companies have paid settlements of between $250,000-$650,000 and made an amended [Securities and Exchange Commission] filing just to make the lawsuit go away.”
But Daines said, “I think the tough question for corporate counsel is whether to fight or to settle now for a small amount. The risk [of settling] is you may find yourself dealing with it every year.”
He added, “In any one case, it may be cheaper to settle, but some companies have made the decision that it’s in their long-term best interests to fight.”
Indeed, some companies are deciding to make a stand.
Symantec Corp, one of the first to do so, won the fight over a preliminary injunction last October. And on February 22 it got the case against it dismissed in what is believed to be the first ruling of its kind.
Judge James Kleinberg of California Superior Court in Santa Clara County granted Symantec's dismissal motion, but also granted the plaintiffs leave to amend the suit.
However, Sarah Good, a partner at Pillsbury Winthrop Shaw Pittman who has been following the say-on-pay litigation, told Reuters that Judge Kleinberg’s ruling left little room for plaintiff’s to amend their complaint.
Symantec general counsel Scott Taylor declined comment this week. A company spokesman said there would be no statement on the dismissal until the plaintiff decides whether to file an amended complaint.
“We’re still in the middle of seeing how all this sorts out,” Stanford’s Daines said. “There’s good reason to think that more disclosure about compensation doesn’t really help . . . and can just exacerbate the problem because CEOs see what others make and just want more.
“Even if you are concerned about CEO compensation, there is no reason to think this [litigation] is a cure.”
