By Jim Barrall, Partner, Latham & Watkins LLP
Last Wednesday the U.S. District Court for the Northern District of Illinois issued its very important decision in Paul Noble vs. AAR Corp, et al., dismissing a shareholder plaintiff’s lawsuit which alleged that the directors of AAR Corp had violated their fiduciary duties to shareholders by not addressing certain questions in AAR’s 2012 proxy, which disclosures the plaintiff alleged were material to the company’s say-on-pay vote. This decision follows another company victory on similar facts, Natalie Gordon vs. Symantec Corporation, et al., decided on February 21, but plows new legal ground that hopefully will influence how the courts handle other pending proxy disclosure lawsuits and deter the plaintiffs’ bar from filing new ones. (See my February 24 post on the Symantec decision and on the other proxy vote disclosure litigation cases filed this and last proxy season.)
Like Symantec, AAR Corp started as a shareholder plaintiff’s lawsuit filed by the law firm of Faruqi & Faruqi LLP seeking to enjoin the company’s 2012 say-on-pay vote, resulted shortly thereafter in the Court’s denial of the motion to enjoin the vote, and culminated in the Court order months later dismissing the lawsuit on the merits. In AAR Corp, following the approach of the other proxy injunction lawsuits filed by the Faruqi firm, the plaintiff alleged that the company’s proxy failed to disclose information that was material to shareholders in voting on the company’s pay plans by not disclosing why the Board’s Compensation Committee had switched compensation consultants, why certain companies were removed from and others were added to the company’s peer group, why the company benchmarked officer compensation against that of its peers, and why it had made certain other compensation decisions.
Like the Court in Symantec, the Court in AAR Corp. applied Delaware law on the fiduciary duties of directors, which requires a Board to disclose material information when seeking shareholder action. However, very notably, the Court did not parse AAR Corp’s 40 pages of proxy disclosures on its compensation plans, or discuss the plaintiff’s alleged deficiencies, to evaluate the plaintiff’s claim. Instead, the Court drew a clear and bright line, holding that as a matter of law, the only proxy disclosures which are required with respect to a say-on-pay vote are those which are required by the Section 951 of the Dodd-Frank Act (which mandates say-on-pay votes) and the SEC’s comprehensive rules in Item 402 of Regulation S-K (which specify in great detail the tabular and narrative executive compensation disclosures required in annual meeting proxies) and rejected the plaintiff’s attempt to create additional disclosure obligations. The Court also held that even if there had been disclosure breaches, the plaintiff would not have suffered any injury and any injury would have been to the corporation, and as such it would need to be asserted in a shareholder derivative lawsuit, not a direct suit.
So while US public companies filing proxies seeking shareholder approval on their say-on-pay and equity plan approval votes are not out of the woods and need to be ever vigilant in making sure that their proxies are accurate and satisfy the applicable legal requirements, the decisions in the proxy injunction cases are decidedly breaking in their favor, which is in the interest not only of companies but of investors who do not need more inconsequential compensation disclosure minutiae or to have their investments taxed by annual legal fees settlements. As of today, the state of play on the proxy vote injunction lawsuits is that the Faruqi plaintiffs succeeded in obtaining a preliminary injunction and substantial legal fees settlement in one case, then scored several quick legal fees settlements without having to litigate their preliminary injunction claims, then lost motions to obtain preliminary injunctions in several cases where companies refused to settle, and most importantly as a matter of legal precedent, in the only two decisions on the merits, have seen their lawsuits dismissed for failing to state causes of action in Symantec and AAR Corp. We can only hope that this trend continues and that this wave of suits will pass, just as did the wave of 2011 lawsuits attacking companies which received less than majority shareholder support for their 2010 say-on-pay votes.
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 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.