The third proxy season of the Dodd-Frank Act’s mandatory shareholder "say-on-pay" advisory votes is well underway, and "round two" of shareholder say-on-pay litigation is in full swing. Unlike the first round of say-on-pay lawsuits, which were based on negative advisory votes that had already occurred, this second wave of shareholder litigation, which began in 2012, seeks to enjoin advisory votes on executive compensation based on allegedly deficient proxy disclosures. Some cases seek also to enjoin binding shareholder votes on proposals to issue additional shares of stock for equity incentive plans.
Because these lawyer-driven suits do not allege an actual violation of a disclosure statute or rule, every public company with a shareholder vote scheduled for the second half of 2013 is a potential target. The tight timeframe between the filing of a proxy statement and the annual shareholders’ meeting (usually 30 to 50 days) gives plaintiffs attorneys leverage to pressure targeted companies and boards to agree to a quick settlement to avoid the costly delay and disruption of their annual meeting. Such settlements usually involve the company’s agreement to amend its proxy with additional disclosures and payment of a plaintiff attorney fee. In many of these cases, however, courts have denied the plaintiff’s motion to enjoin the shareholder vote, and several courts have granted the defendants’ motion to dismiss the case altogether. Therefore, companies and their boards should develop a litigation strategy early on and be prepared to defend their proxy disclosures should they be sued.
