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Say-on-Pay Litigation. Hosted by. Tom Bosch and Dave Meyers from Troutman Sanders, LLP and Brad Robinson from Eagle Rock Proxy Advisors. Say-on-Pay Litigation. Co-Sponsored by. Tom Bosch – Partner – Troutman Sanders LLP.

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say on pay litigation

Say-on-Pay Litigation

Hosted by

Tom Bosch and Dave Meyers from Troutman Sanders, LLP


Brad Robinson from Eagle Rock Proxy Advisors

say on pay litigation1

Say-on-Pay Litigation

Co-Sponsored by

tom bosch partner troutman sanders llp

Tom Bosch – Partner – Troutman Sanders LLP

Tom Bosch is a partner in Troutman Sanders LLP's Atlanta, Georgia office. Tom's practice focuses on corporate and securities litigation, including cases involving allegations of fraud, breach of fiduciary duty, and a variety of other business torts. He regularly represents companies and management in disputes arising from mergers and acquisitions, securities offerings, and financing transactions. He also counsels clients on corporate governance and related issues.

david meyers partner troutman sanders llp

David Meyers – Partner – Troutman Sanders LLP

Dave Meyers is a partner in Troutman Sanders LLP's Richmond, Virginia office. Dave serves as the co-practice group leader for the firm's Corporate practice group. His practice focuses on the representation of public companies in connection with corporate governance, securities regulation, security offerings and mergers and acquisitions. Dave is a graduate of the University of Virginia Law School where he served on the Articles Review Board of the Virginia Law Review, and received his B.S. degree with Distinction from the McIntire School of Commerce of the University of Virginia.

brad robinson managing director eagle rock

Brad Robinson – Managing Director – Eagle Rock

Brad is responsible for Eagle Rock's corporate governance advisory services and assists clients in analyzing and shaping their governance policies and practices. Prior to joining Eagle Rock, Brad was a member of the research team at Proxy Governance, Inc., a proxy advisory firm for institutional investors, where he worked extensively with industry experts focusing on a range of issues, from executive compensation policy, poison pills, and private placements, to proxy contests. Brad has co-authored a study examining the voting policies and practices of major exchange-traded-funds. Previously, Brad held a position as a Series 7 and 52 licensed stockbroker. Brad received a Bachelor of Arts degree in Philosophy and Psychology from the University of Rochester and a Juris Doctor from the University of Pittsburgh Law School.

say on pay litigation overview
Say-on-Pay Litigation Overview
  • Executive Comp. Litigation is Not New
    • E.g., cases arising under I.R.C. § 162(m)
  • Say-on-Pay Litigation is a Recent Phenomenon
    • Result of Dodd-Frank Act § 941 – the Say-on-Pay Statute
  • Two Primary Waves
    • 2011 – First Wave – Derivative Claims for Breach of Fiduciary Duty
    • 2012-2013 – Direct Disclosure Claims Seeking to Enjoin Annual Shareholders Meetings
  • Outliers/Third Wave
    • Claims Based on Problems with Comp. Plans
say on pay litigation overview1
Say-on-Pay Litigation Overview
  • Defendant Companies Prevailed in Most First-Wave and Second-Wave Litigation that Did Not Settle
  • Some Cause for Concern Related to Third-Wave/Outlier Litigation that Did Not Settle
    • But, Careful Planning Should Minimize Risk
say on pay statute
Say-on-Pay Statute
  • Section 951 of Dodd-Frank Act
  • Public companies are required to permit shareholders to render non-binding executive comp. vote at least once every three years.
  • Votes required:
    • Advisory vote to approve executive comp.
    • Advisory vote to determine how often company will hold shareholder vote on executive comp.
    • Disclosure of golden parachutes in connection with votes to approve M&A transactions and, in certain circumstances, conduct advisory vote
say on pay statute cont d
Say-on-Pay Statute (Cont’d)
  • Shareholder vote is advisory
  • Dodd-Frank explicitly provides that shareholder vote may not be construed to:
    • Overrule a decision by the company or its Board;
    • Create any additional fiduciary duties for companies or directors; or
    • Imply any change to existing fiduciary duties
  • Does not create private right of action
first wave basic characteristics
First Wave – Basic Characteristics
  • Filed in 2011 after first round of shareholder advisory votes
  • Over 25 lawsuits following failed say-on-pay votes
  • Derivative claims asserted on behalf of companies against their Boards
  • Failed to gain any traction and continue to be dismissed
first wave typical allegations
First Wave – Typical Allegations
  • False and misleading proxy statement against Board
    • State law and § 14(a)
    • E.g., allegation that proxy indicated that pay was purely performance based, but awards were made even in face of declining performance
  • Breach of fiduciary duty and waste of corporate assets against Board
    • Granting awards during declining performance
    • Failing to rescind awards after negative vote
  • Unjust enrichment against officers who received awards
  • Breach of contract and aiding and abetting breach of fiduciary duty against comp. consultants
first wave dismissals
First Wave – Dismissals
  • Most First-Wave cases have been dismissed at the pleadings stage
    • Exception – Cincinnati Bell (S.D. Ohio) – widely criticized
  • Basis for dismissals:
    • Failure to demonstrate demand futility
      • Majority of Board disinterested and independent
      • No reason to question good faith
    • No violation of stated policies shown
      • i.e., drop in stock price does not mean comp. not appropriate
    • After-the-fact shareholder vote cannot rebut business judgment rule
    • Express Terms of Say-on-Pay Statute
first wave lessons learned
First Wave – Lessons Learned
  • Courts are very reluctant to second-guess business judgment of Boards
  • Size and structure of executive comp. are matters of judgment left to Boards
  • Boards, not shareholders, should determine the compensation of each executive
  • If there is any valid basis for executive comp. decisions, they will not be actionable under First-Wave theories
second wave basic characteristics
Second Wave – Basic Characteristics
  • Filed in 2012 after first wave lost steam
  • Over 20 lawsuits filed in 2012 and a handful in Q1 2013
  • Direct actions alleging false and misleading Say-on-Pay disclosures and seeking to enjoin annual shareholder vote
    • Breach of fiduciary duties re: disclosure
    • Section 14(a)
  • Modeled after shareholder challenges to M&A transactions
  • Failed to gain significant traction but several settlements may encourage continued filings
second wave two types of claims
Second Wave – Two Types of Claims

Say-on-Pay Vote – Focus of Claims:

  • Information considered by Board in recommending vote to shareholders
  • Reasons for proposal
  • Effects of proposal
  • Why proposal is in shareholders’ best interests
  • Peer group selection
  • Compensation consultants
  • Mix of compensation

Binding Vote Re: Equity Incentive Plan– Focus of Claims:

  • Dilutive impact of authorizing and/or issuing additional shares
  • Expert analysis
  • Criteria considered by Board
  • Determination of number of additional shares requested to be authorized
second wave results
Second Wave – Results

Say-on-Pay Vote:

  • Settlement
  • Injunction denied
      • Disclosures consistent with custom
      • Advisory vote
  • Voluntary dismissal
  • Dismissal
      • Materiality
      • Additional disclosures not required by state law
      • No direct claim

Binding Vote Re: Equity Incentive Plans

  • Settlement
  • Injunctions denied
      • Merits and no irreparable harm
  • Injunctions granted
      • Irreparable harm
  • Settlement after injunction
second wave equity incentive plan case study
Second Wave – Equity Incentive Plan Case Study
  • Brocade Communications Systems, Inc. (Cal. Super. Ct. Apr. 10, 2012)
    • Company sought to increase number of shares available for issuance under stock incentive plan
    • Plaintiff complained that proxy omitted information or misled shareholders regarding:
      • Internal projections regarding stock grants and share repurchases – dilutive impact
      • Share repurchase plan – dilutive impact
      • Board analysis, including peer analysis
    • Injunction granted due to risk of irreparable harm
  • Same court has denied injunctions and dismissed lawsuits in Say-on-Pay advisory vote cases
second wave lessons learned
Second Wave – Lessons Learned
  • Companies have had success fighting:
    • Claims re: advisory votes highly unlikely to lead to injunction
    • Absent special circumstances -- i.e., Third Wave – most courts have declined to enjoin votes regarding equity incentive plans
  • Plaintiffs’ firms have slowed but not stopped
    • Risk of injunction is still too great for some companies and settlement price has been lower than M&A litigation -- $100k - $500k
  • Plaintiffs’ firms are resourceful
    • Beware of Third Wave
outliers third wave basic characteristics
Outliers/Third Wave – Basic Characteristics
  • Not new and not always pure Say-on-Pay litigation
    • But renewed focus by plaintiffs’ firms in connection with failures of First Wave and Second Wave
  • Plaintiffs’ firms attempting to seize upon errors made by companies and easily verifiable misleading disclosures
    • E.g., I.R.C. § 162(m); equity incentive plans
  • Mix of direct and derivative claims
  • Too early and perhaps to fact-based to predict long-term success of Outliers/Third Wave
outliers third wave i r c 162 m
Outliers/Third Wave – I.R.C. §162(m)
  • 162(m) provides for tax-deductibility of compensation in excess of $1 million that is performance-based and meets certain criteria
  • Under Delaware law, there is no broadly applicable fiduciary duty to minimize taxes
  • Earlier litigation dealt with claims in which companies made:
    • Unqualified statements regarding compliance with § 162(m) or tax-deductibility of specific compensation
    • Disclosures indicating non-deductible awards would be made if shareholders did not approve plan – i.e., coercive votes
i r c 162 m recent plaintiffs successes
I.R.C. §162(m) – Recent Plaintiffs’ Successes
  • Resnik v. Woertz (D. Del. Mar. 2011)
    • Acher-Daniels Midland
    • Derivative claims survived dismissal
    • Aggregate performance-based awards could reach up to $1.26 billion and majority of Board eligible to participate
    • Misleading statements:
      • Proxy represented that performance-based comp. plan was designed to comply with Section 162(m); however, tax deductibility of awards previously had expired
      • Proxy failed to disclose performance goals with specificity
    • Substantial financial interest of directors was sufficient to create reasonable doubt regarding independence and disinterestedness
i r c 162 m recent plaintiffs successes1
I.R.C. §162(m) – Recent Plaintiffs’ Successes
  • Hoch v. Alexander (D. Del. July 2011)
    • Qualcom
    • Derivative claims survived dismissal
    • Company sought approval for amendment to equity plan, but stated that awards would be given under prior plan if new plan not approved – i.e., coercive vote
    • Demand futility established because of Board’s interest in payments under the plan
outliers third wave equity incentive plans
Outliers/Third Wave – Equity Incentive Plans
  • Typical Say-on-Pay claims, but with a hook
  • St. Louis Police Retirement Sys. v. Severson (N.D. Cal. Oct. 2012)
    • Abaxis
    • Court granted preliminary injunction in part
    • Company sought to eliminate equity plan’s restricted stock limit but did not fully disclose material facts regarding:
      • Previous violations of restricted stock limit
      • Consequences of failure to approve amendment (though this had been previously disclosed
    • After injunction, company filed supplemental disclosures and amendment to plan passed
outliers third wave lessons learned
Outliers/Third Wave – Lessons Learned
  • “What’s Old is New Again”
    • Likely end to shotgun approach will not end litigation
  • Law developed in First Wave and Second Wave is very favorable for companies that comply with substantive rules and disclosure obligations
  • Companies put at risk by careless mistakes
    • E.g., failure to comply with terms of equity plans and/or sloppy disclosures
reducing litigation risk education
Reducing Litigation Risk(Education)
  • Compensation Committee Education
    • Supplement Comp Committee education with up to date developments in compensation litigation.
    • Keeping the Committee informed should be continuous if possible – updates can be given to the Committee between meetings as well as at more formal education settings.
reducing litigation risk proxy language
Reducing Litigation Risk(Proxy Language)
  • Shareholders will expect follow through on definitive statements by the company/board of actions that will be taken depending on the results of a say-on-pay vote.
    • Unless necessary, avoid statements of this kind. (Special circumstances only…)
  • “Pay-for-Performance” programs should be followed to the letter.
    • Programs should be implemented and administered carefully and awards should be checked for compliance.
    • Metrics should be described in sufficient detail.
reducing litigation risk comp plan planning and language
Reducing Litigation Risk(Comp Plan: Planning and Language)
  • Get approval early.
    • Get approval before you need it. This will avoid or reduce the risks associated with share problems, shareholder feedback issues, negative proxy advisor reports.
  • Section 162(m) plans should be completely and accurately described.
    • As with Pay-for-Performance, plan should be administered carefully and in compliance with its terms.
reducing litigation risk compensation plan prep
Reducing Litigation Risk(Compensation Plan Prep)
  • Amending or Replacing Equity Plans
    • Whether amending or replacing, describe the methodology used to determine the number of additional shares, dilutive impact and expected and/or historical usage rates (burn rate, SVT rate, etc.), and the effect of the plan on shares currently outstanding under other existing compensation plans.
    • When adding a new plan instead of amending and existing plan, include rationale for doing so (e.g., administrative ease, clarification of provisions, best practices shift).
reducing litigation risk section 162 m compliance
Reducing Litigation Risk(Section 162(m) Compliance)
  • Don’t Guarantee: Even if a plan is designed to comply with Section 162(m), avoid making statements in an annual proxy statement that could be interpreted to guarantee that payments under the plan will be tax-deductible in all circumstances.
  • Use phrases that include “intended to” and similar words.
reducing litigation risk director compensation plans
Reducing Litigation Risk(Director Compensation Plans)
  • Apply the same standards of administrative care to Director compensation.
  • Companies should consider whether compensation plans for directors should be separate Executive Compensation Plans.
    • Reduces risk of conflict of interest.
    • Compensation consultants can more easily be separated.
    • Shareholders can weigh in separately and problems can be dealt with separately.
reducing litigation risk know your peers
Reducing Litigation Risk(Know Your Peers)
  • Be aware of peer and industry compensation standards.
    • This should apply to both compensation plans and say on pay proposals, and extend to disclosure as well as policy.
    • As much as is possible, avoid the litigation “whack-a-mole” that comes with being a compensation outlier.
conclusion questions

Conclusion & Questions

Contact Info:

Brad Robinson:

Tom Bosch:

Dave Meyers: