Avoiding say-on-pay litigation 2.0

In my last blog post I discussed a recent court case that squashed plaintiffs' attempts to convert a negative Dodd-Frank say-on-pay vote into a private right of action. That type of litigation is referred to as say-on-pay 1.0 because, unfortunately, say-on-pay 2.0 litigation has emerged.

Say-on-pay 2.0 is making waves
The initial round of litigation surrounding this issue was brought forward by plaintiffs who claimed companies failed to take into account shareholders' negative say-on-pay vote and therefore breached their fiduciary duties. However, lawsuits that have emerged in recent months take a different approach. The new tact is for plaintiffs to allege that shareholders were not given adequate disclosure in regard to executive compensation and increased equity incentive plans. These suits first started hitting in the spring of 2012 and were initially almost all brought by the same single law firm, Faruqui & Faruqui. After a few initial "successes"—i.e. enhanced disclosure and the payment of a plaintiff fee settlement in exchange for plaintiffs dropping their suit—a rash of suits with similar allegations against other companies has followed. And, of course, more plaintiff firms have jumped onto the supposed gravy train.

The say-on-pay 2.0 suits call into question how much information can be considered "adequate" when it comes to say-on-pay votes and asking shareholders to authorize increases to equity plans. Put differently, since proxy disclosure is, by its nature, summary, plaintiffs can endlessly suggest that they need more than what was provided unless courts intervene.

With all the pressure already on compensation committees, here's one more thing: the committees might consider taking an additional look at their current disclosure practices.

Mitigating risk in light of these concerns
What can companies do to avoid this litigation? Now is the time to take a fresh look at your compensation and disclosure practices. It may be prudent to compare your disclosures to those of others in your industry, since you don't want to be at the back of the pack. For example, if all of your peer companies are disclosing "burn rates" for their equity plans, you may want to consider doing the same. You may also consider having an experienced litigator—preferably one knowledgeable of say-on-pay 2.0 litigation—review your proxy materials. Finally, recognize that if you are up against a wall on increasing the shares available for grant under your equity plan, you are in an especially vulnerable position. It's critical to avoid this situation where possible.

Of course, directors can do everything possible and still face litigation. Having taken proactive steps to make the plaintiff's case as frivolous as possible, however, will cause this litigation go away much faster than if a company's disclosure is much less thorough than that provided by peer companies. In the best case, the litigation will go away well before the self-insured retention of a company's D&O insurance policy has been breached.

The views expressed in this blog are solely those of the author. This blog should not be taken as insurance or legal advice for your particular situation. Questions? Comments? Concerns? Email: phuskins@woodruffsawyer.com.