Another Thing to Think About this Proxy Season: Don’t’ Forget the IRC Section 162(m) Proxy Lawsuits
By Jim Barrall, Partner, Latham & Watkins LLP
In addition to thinking about the lawsuits seeking to enjoin 2013 say-on-pay, equity plan, and other shareholder votes (See my latest Conference Board Governance Center blog on these cases: An Important Company Victory in the Proxy Disclosure Litigation Wars), as companies draft equity and cash incentive plans and proxies for shareholder approval, they also need to pay attention to a second strain of compensation proxy vote lawsuits, which have targeted ten or so companies (that we know of) in 2011 and 2012 and at least a couple in the last week. These suits allege that directors breached their fiduciary duties to shareholders by making material misstatements (and/or omitting to disclose material information) in company proxies regarding the terms and tax consequences of equity and cash incentive plans which have been designed to allow companies to pay “performance-based” compensation which is not subject to the $1 Million deduction cap of Section 162(m) of the Internal Revenue Code.
Unlike the proxy vote injunction cases, the Section 162(m) suits are generally derivative suits, seek damages after the vote and not to enjoin votes, and are filed in the company’s state of incorporation, often Delaware. As with respect to the proxy vote injunction suits, there are no magic potions that will protect a company from being sued or guarantee a victory in the courts if a suit is filed, but there are measures that companies can take to reduce the risk of a loss on the merits, and possibly even to improve their chances of not being sued.
Latham & Watkins’ recent Corporate Governance Commentary, Preparing for Possible IRC Section 162(m) Litigation this Proxy Season, provides an overview of the Section 162(m) cases and practical guidance on the drafting of plans and proxies that can help reduce a company’s exposure to such suits.
An important caveat as you read the Commentary: Section 162(m) and its rules are highly technical and hardly intuitive, and their application to any plan or proxy is highly dependent on the facts of the individual case. So it is important that companies concerned about these matters obtain specific and nuanced advice about how best to satisfy the technical Section 162(m) requirements and fulfill their disclosure obligations under the statute and corporate and securities laws, as well as bolster their legal defenses against a Section 162(m) suit, if one hits.
About the Guest Blogger:
James D. C. Barrall, Partner, Latham & Watkins LLP
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 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.