The Conference Board Governance Center Blog

Apr
08
2014

Proxy Season 2014 Update: Proxy Vote Injunction Lawsuits

By Jim Barrall, Partner, Latham & Watkins LLP

Early last year, I wrote on the new wave of proxy injunction lawsuits and investigations which were aimed at enjoining shareholder votes on say-on-pay proposals and proposals to approve increases in shares authorized under company equity plans, alleging breaches of fiduciary duties by Boards of Directors and companies for failure to provide adequate disclosure about the votes. In that post I linked to Latham’s Corporate Governance Commentary on defending against these lawsuits and discussed the emerging trend as of that date. Subsequently, I wrote posts on two important company victories in lawsuits brought to enjoin say-on-pay votes in Natalie Gordon vs. Symantec Corporation and Paul Noble vs. AAR Corp. As of then, lawsuits seeking to enjoin votes by shareholders on say-on-pay and equity plan proposals had then been filed against more than 22 public companies by plaintiffs represented by the law firm of Faruqi & Faruqi LLP.

Since the spring of 2013, the Faruqi firm has continued to file proxy injunction lawsuits, to issue press releases stating that it is investigating possible claims of breaches of fiduciary duty in connection with proxy votes and to make settlement demands on companies. Probably as a result of the plaintiffs’ defeats in the Symantec and AAR Corp. cases and the fact that the plaintiffs’ only success in obtaining a preliminary injunction against any vote came in the Brocade case (which involved an equity plan vote and resulted in a recovery of $625,000 of legal fees), the subsequent proxy lawsuits, investigations and demands have concentrated on equity plan share increase votes, rather than say-on-pay votes.

While the full extent of the proxy injunction lawsuits, investigations, and demands is not easy to track, it appears that in 2013 the Faruqi firm issued press releases announcing investigations of approximately 90 company proxies and has already publicized 35 such investigations in 2014. In addition, while the pace of lawsuit filings slowed after the early months of 2013, more than a few companies have since been sued to enjoin their equity plan votes or have received demand letters which have not resulted in lawsuits in some cases. However, one thing is undeniable based on the public record: since the spring of 2013 three more major proxy injunction cases alleging deficient proxy disclosure have gone down to defeat, Morrison vs. The Hain Celestial Group, Inc., Mancuso vs. The Clorox Company and most recently, Masters vs. Avanir Pharmaceuticals, Inc. Also, it appears that while the plaintiffs have managed to settle a few plan vote cases for legal fees and supplemental proxy disclosures in advance of scheduled shareholder meetings, they have not succeeded in enjoining any proxy votes in 2013 or to date in 2014.

In the Hain Celestial case, the Nassau County New York Supreme Court denied the plaintiffs’ motion to enjoin say-on-pay and equity plan votes and then seven months later dismissed the plaintiff’s complaint for failing to make a pre-suit demand on the company’s Board and for failing to identify material information allegedly omitted from the company’s proxy. In the Clorox case, the Alameda County California Superior Court similarly denied the plaintiffs’ motion to enjoin say-on-pay and equity plan votes and eight months later ruled for the company on the merits, rejecting the plaintiffs’ claims that the company’s proxy failed to include material information on the proposals, holding that Delaware law did not require proxies to contain information that might be “helpful.” Finally, in the Avanir case, decided this February, the U.S. District Court for the Central District of California, in a strong and closely reasoned decision, rejected the plaintiffs’ contention that the company’s proxy failed to include material information on the company’s equity plan vote and denied their motion to enjoin the vote.

While the number of filed proxy injunction lawsuits appears to be dropping and one would think that the unbroken string of court decisions against plaintiffs alleging breaches of fiduciary duty with respect to proxy vote disclosures might bring an end to these types of actions, it is not clear that this will be the case, based on the number of investigations that have been launched and the number of non-public demands for settlement that have been made this year. So again this proxy season,  companies, especially those submitting equity plan proposals to shareholder votes, need to continue to be vigilant in making sure that their proxies contain all the information required by the SEC’s proxy rules and fairly summarize all information considered by the Board in recommending the proposals that a reasonable shareholder would view as material to its voting decision, all as discussed in last year’s blog posts and the subsequent decisions in Hain Celestial, Clorox and Avanir.  While history has proven that no amount of proxy disclosure can guarantee that a company won’t be targeted by a proxy injunction lawsuit, the court decisions strongly favor companies and provide them with good roadmaps for building their defenses in advance of any such attack. 

About the Guest Blogger:

James D. C. Barrall, Partner, Latham & Watkins LLP

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 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.



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