Insights Features Article by Robbins Umeda LLP* Attorneys on Say-on-Pay Litigation

Robbins Umeda LLP partner George Aguilar and associate Conrad Stephens discuss Say-on-Pay litigation in the November 2011 edition of Insights: The Corporate and Securities Law Advisor.

CEO Pay and Corporate Compensation

The article, Say-on-Pay and Rebutting the Business Judgment Rule, examines some of the first cases brought by shareholders against company directors who approved executive salaries and bonuses into the tens of millions of dollars after company shareholders had voted against the compensation packages.  Decisions in two such Say-on-Pay cases have reached contrary results, and the authors say the current climate suggests that these claims will continue to be pressed by shareholders determined to challenge enormous compensation packages to under-performing corporate executives.  The authors encourage company directors to closely tie their compensation decisions to tangible financial performance and considerations, and encourage shareholders to pursue their rights when company directors fall short of their duty of loyalty to the company.

Dodd-Frank Act and Say-on-Pay

Following the onset of the recent financial crisis, the U.S. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) on July 21, 2010.   Section 951 of the Dodd-Frank Act included Say-on-Pay provisions that for the first time require public companies to hold a non-binding shareholder vote on executive compensation at least once every three years.  The first proxy season wherein shareholders were given the opportunity to voice their Say-on-Pay occurred in 2011.  Following the 2011 proxy season, substantive legal battles on executive compensation and the Say-on-Pay provisions of Dodd-Frank have made their way to trial courts across the country.

Say-on-Pay and Rebutting the Business Judgment Rule

Corporate counsel for some of these public companies argue that the business judgment rule protects the actions of board directors in paying out an executive compensation plan that has not been approved by shareholders.  George Aguilar and Conrad Stephens look at a recent federal district court ruling that found the presumptions of the business judgment rule rebutted and a complaint adequately pled a breach of the duty of loyalty and demand futility where directors, in the midst of poor company financial performance and required to apply a company’s compensation policy that explicitly links pay to performance, approved a shareholder-rejected executive compensation plan.  This holding and another recent ruling suggest that a shareholder bringing a shareholder derivative action may satisfactorily plead claims for a breach of the duty of loyalty and demand futility where there is a failed Say-on-Pay vote coupled with specific factual allegations about a company’s declining financial performance, a company’s pay for performance policy, and director votes for executive compensation that are outside the bounds of what that compensation policy and performance warrant.

Interested shareholders should contact Robbins Umeda LLP to discuss Say-on-Pay litigation.

Insights: The Corporate and Securities Law Advisor is a monthly publication that covers law developments in corporate and securities law on the state, national, and international levels.

* The firm name changed from Robbins Umeda LLP to Robbins Arroyo LLP on January 1, 2013.

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