By Jim Barrall, Partner, Latham & Watkins LLP
In a very important development in the current proxy disclosure litigation wars relating to annual meeting votes, last Thursday the Santa Clara County Superior Court sustained Symantec Corporation’s demurrer in Natalie Gordon vs. Symantec Corporation, et al., dismissing a shareholder lawsuit which had sought declaratory relief and damages against Symantec and its directors based on allegations that the directors had breached their fiduciary duties by failing to provide adequate disclosure to shareholders regarding Symantec’s say-on-pay vote in the company’s August 2012 proxy. The Symantec decision can be read here. (For background on the annual vote proxy disclosure litigation cases, see my February 5 post and Latham’s January 2013 Corporate Governance Commentary.)
While the court’s earlier denial of the plaintiff’s motion to preliminarily enjoin Symantec’s annual say-on-pay vote (in October 2012) was welcome and important news to public companies and their advisors (especially since the same court had previously granted a shareholder’s motion to preliminarily enjoin an equity plan approval vote in Stephen Knee v. Brocade Communications Systems In., et al.), as a decision on the merits, the court’s Thursday decision will be even more valuable than the injunction denial decision to companies in defending proxy disclosure lawsuits.
In its Symantec complaint, the plaintiff alleged on behalf of shareholders as a class that Symantec’s directors had breached their fiduciary duties to shareholders by failing to provide adequate disclosure in support of the company’s say-on-pay vote proposal, pointing to eight alleged deficiencies. Among the eight alleged deficiencies (proving that no good deed goes unpunished, no matter how well trumpeted) were that Symantec had failed to disclose how the board had determined to shift its executive officer pay targeting from 65th to 50th percentile of its peer group and how it had determined to increase officer ownership guidelines and implement a requirement that officers hold at least 50 percent of their after-tax equity grants.
After dispensing with some procedural issues, the court recited the applicable legal standards governing the adequacy of proxy disclosures, namely that directors have a duty to fully and fairly disclose all material information within their control when seeking shareholder action, and that information is material if there is a substantial likelihood that that a reasonable shareholder would view it as significantly altering the “total mix” of information if it were to be made available. The court then applied these standards to each of the alleged deficiencies and concluded that the additional disclosures sought by the plaintiff were not material in view of all of the other information in the proxy, and that the plaintiff had failed to state a cause of action. The court gave the plaintiff ten days leave to amend the complaint to attempt to state a cause of action.
Here are a few possible implications of the Symantec decision worth considering:
- A review of the court’s decision on each alleged disclosure deficiency in light of Symantec’s 2012 proxy disclosures should give companies substantial comfort that customary CD&A disclosures, absent unusual or bad facts, contain enough information on the material issues relating to executive compensation (as these disclosures have been developed over many years in response to demands by the proxy advisers and investors) so as not to require more specific and/or insignificant information of the type sought by the Symantec plaintiff. Most thoughtful and objective investors would generalize from the court’s holdings and say that shareholders generally have far more than enough disclosure about executive compensation matters to make their say-on-pay voting decisions and do not need shareholder lawsuits to produce more pages of immaterial information, as well as impose unnecessary costs and burdens on companies, none of which is in the interests of investors.
- The court’s decision may not only spell relief for companies in other say-on-pay proxy disclosure lawsuits that are now pending in the courts, but, coupled with recent decisions of other courts refusing to enjoin say-on-pay-votes, the decision could discourage the shareholder-plaintiff’s bar from filing additional say-on-pay disclosure suits except in unusual situations.
- The court’s decision may have the effect of concentrating the attacks of the shareholder-plaintiff’s bar on equity plan vote proxy disclosures, especially given that the same court had previously granted a preliminary injunction against Brocade’s equity plan vote. If so, this would be good news for some companies, and bad news for others.
- Those companies with 2013 equity plan votes should re-read the court’s decision in Brocade in light of the legal standards and analysis that the court employed in its Symantec decision. The Brocade decision can be read here.
- Such a review makes it clear that the pivotal allegation of the Brocade complaint was that the Brocade Compensation Committee had not only reviewed historical burn rate and overhang information (which were very well disclosed in the proxy), but had reviewed detailed projections regarding future stock allocation assumptions, modifications of grant practices, and grants of various types of awards to various groups of plan participants, which the court held were not fairly summarized by the proxy, were material and should have been disclosed to shareholders in summary fashion.
- So read, this is a fairly narrow point and should give companies with 2013 equity plan votes some comfort in view of the Symantec decision, namely that companies should disclose at least in fair summary fashion any categories of information that the board considered in determining how many shares to ask shareholders to approve. Companies that make this determination, as many do, based on the number that they believe shareholders will approve based on historical overhang and burn rate facts (as do proxy advisers and most institutional investors in analyzing dilution, value-transfer, and burn-rate under their voting policies) should disclose this; others which do more, such as analyzing possible future grant practices and projecting future share utilization should disclose this in summary fashion.
- All companies should keep in mind that Brocade was settled shortly after the court granted the plaintiff’s preliminary injunction motion and that the adequacy of the Brocade complaint and the veracity of its allegations were therefore never decided on the merits.
Bottom-line, while the Symantec decision is very good news for U.S. companies, it is just one decision, other cases are pending and more are likely to be filed, and the issues in these cases are factual and company-disclosure specific. Accordingly, no company with a say-on-pay or equity plan vote at its 2013 shareholders meeting should relax its vigilance in drafting its proxy and in being prepared to defend a preliminary injunction lawsuit if one is filed.
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 of the Lowell Milken Institute for Business Law and Policy. 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.