By Jim Barrall, Partner, Latham & Watkins LLP
As a very busy proxy season is now upon us, US public companies should be aware that plaintiffs’ lawyers are increasing the burdens on and risks to all companies holding 2013 annual meetings, by filing shareholder meeting injunction lawsuits at an unprecedented rate, as reported by Emily Chasan in yesterday’s Wall Street Journal article, “Anxiety Stalks the Proxy Season”. These lawsuits seek to enjoin shareholder votes on company proposals requesting shareholder approval on say-on-pay, new equity plans (or amendments seeking to increase authorized share limits for current equity plans), and amendments to corporate charters. These suits, like the M&A transaction shareholder vote lawsuits which are filed in almost every public company deal (and on which the new wave of proxy suits are modeled), are class actions, filed in state courts and allege that directors breached their fiduciary duties by not disclosing all material facts in recommending the proxy proposals to shareholders. Some of these suits have been settled by the payment of plaintiffs’ legal fees and in some cases by the company’s agreeing to make additional disclosures before the meeting. In other cases, companies have vigorously opposed the suits, have succeeded in defeating injunction motions, and have continued to litigate the adequacy of their proxy disclosures on the merits. Here is a link to Latham’s recent Corporate Governance Commentary which discusses these suits and settlements, and provides general recommendations on how companies can best prepare to defend one: http://www.lw.com/thoughtLeadership/defending-latest-wave-proxy-litigation
As discussed in our Commentary, these suits are often (but not always) preceded by the issuance of a press release by the plaintiffs’ firm announcing an “investigation” of a company’s proxy shortly after it is filed and which is designed to attract shareholders who are willing to sue. Although it is very hard to find all of these investigations, suits, and settlements, given their disparate forums and ways in which they are resolved (including some by private settlement), as of today we know of 22 proxy injunction lawsuits which have been filed since the beginning of 2012 and 6 of which have been settled, and we are tracking at least 55 investigations announced since October 1. We are also tracking and analyzing the alleged disclosure deficiencies, supplemental disclosures made by settling companies, and new types of proxy disclosures being made by other companies which are apparently being made in response to these suits.
While most of these suits and investigations have been launched by one law firm, other plaintiffs’ lawyers are hopping on the bandwagon, and there is no reason to believe that the wave of suits and investigations has crested, or will any time soon. More likely, the wave will continue to grow unless and until a few cases work their way through the courts and the courts decide on the merits that proxy disclosures which already fall within the mainstream of the many pages of disclosures required by the SEC, the proxy advisory firms, and institutional shareholders are sufficient. Sadly, if this does not happen, companies likely will be at risk annually of being hit with proxy strike suits, and the cost of defense and settlement will just become another tax on being a US public company, just as it is part of the cost of doing an M&A deal.
Given the unpredictability of which companies will be targeted by these suits and the endless bits of disclosure which plaintiffs’ can assert are material and missing (no matter what the proxy says), there is little that companies can do to protect themselves from being investigated or sued. But given where these matters stand today, every public company with a shareholder vote in 2013 should consider itself to be a possible target and should act and disclose accordingly in order to be positioned to defend a suit as expeditiously as possible if one hits. This means Boards and Compensation Committees should thoughtfully deliberate on their 2013 recommended proxy proposals, build a careful record in Board and Compensation Committee minutes with respect the matters considered and any compensation consultant or other advisor recommendations on which they relied, and make sure that their proxies reflect these actions and record tightly and accurately. This also means that all companies should be monitoring the disposition of these suits and investigations, and responses to them, in real time, as the proxy season proceeds in order to be able to react to any twists and turns they might take. In the meantime, please see our Commentary for our thoughts on the current situation and what companies should be doing now.
About the Guest Blogger:
James D. C. Barrall is a partner in the Los Angeles office of Latham & Watkins LLP and is the Global Co-Chair of the firm’s Benefits and Compensation Practice. Mr. Barrall specializes in executive compensation, corporate governance, employee benefits and compensation related disclosure and regulatory matters.He is regularly interviewed and quoted by such publications as the Wall Street Journal, Agenda, The Conference Board, BloombergLaw, Compliance Week and Corporate Secretary.
Mr. Barrall is a frequent author, contributing editor and lecturer on executive compensation, corporate governance, disclosure and other regulatory matters. He is a co-author of the chapter on extensions of credit to directors and officers in the American Bar Association’s Practitioner’s Guide to the Sarbanes-Oxley Act.
Mr. Barrall is a member of the Board of Advisors of the UCLA School of Law and Founding Chair of the UCLA Law Firm Challenge. Mr. Barrall has lectured at the UCLA Law School, the UCLA Anderson School of Management and the Aresty Institute of Executive Education at the Wharton School, University of Pennsylvania.