Plaintiffs’ attorneys have continued to bring, or threaten, litigation against U.S. companies following the filing of their annual proxy statements. These complaints generally allege disclosure deficiencies in connection with the approval of equity compensation plans and/or the advisory shareholder “say-on-pay” vote and, as with merger-related “strike suits,” seek to enjoin the annual meeting. According to a new memo we just received from Sullivan & Cromwell, it seems likely that no level of disclosure can protect companies from receiving or being threatened with a complaint. Accordingly, companies should prepare to defend their disclosure in light of the increase in litigation. Here is an excerpt:
Beginning with the 2012 proxy season, plaintiffs’ attorneys have filed a number of suits, or publicly announced the launching of “investigations,” alleging disclosure deficiencies in connection with the approval of equity compensation plans and/or the advisory “say-on-pay” vote to approve executive compensation. Most complaints allege that the company’s board of directors breached its state law fiduciary duties by approving annual proxy statements that contain inadequate disclosure. Similar to merger-related “strike suits,” plaintiffs seek to enjoin the annual meeting until revised or additional disclosure is provided. However, because there is not much time (usually only 30 to 50 days) between filing the annual proxy materials and the annual shareholders’ meeting (as compared to the often longer period of time between filing a merger agreement and the vote to approve the agreement), these suits require companies to react quickly and decisively in a tight time frame. As a result, some targeted companies have agreed to a quick settlement with plaintiffs’ attorneys to avoid the risk of a costly delay, though most companies have not settled.
The complaints seeking to enjoin binding votes to authorize share increases or approve new equity compensation plans have alleged inadequate disclosure of, among other things, the rationale for the number of shares requested, estimated future stock grants, the company’s rate of granting shares in the past and the size of the overall equity pool relative to the total shares outstanding. “Say-on-pay” complaints have generally alleged disclosure deficiencies regarding, among other things, the decision process for selecting the company’s compensation consultant, the details of the consultant’s analysis and recommendations, the determination of the named executive officers’ compensation mix and performance metrics weighting and the company’s peer group composition. Most of these lawsuits have been brought in state court and by a single law firm, which also posts on its website the many “investigations” it has commenced as to the adequacy of proxy disclosure.
We are aware of only one case in which the plaintiff was successful in obtaining an injunction. Because of the cost and impact of postponing the annual meeting, though, a number of companies (including, for example, Martha Stewart Living Omnimedia, WebMD and H&R Block) have chosen to settle these cases. The settlements have resulted in legal fees for the plaintiffs and, in some cases, additional disclosure. This wave of litigation has not yet, however, resulted in any money for shareholders. Most courts that have considered the issue, including a New York court applying federal law in the recent Apple decision, have rejected plaintiffs’ arguments for an injunction.
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