Yesterday, a panel of the California Court of Appeal added to the growing list of opinions rejecting suits triggered by failed say-on-pay votes. Some may be surprised that this case, which involves a Delaware corporation, was in the California courts of all, but the Ninth Circuit has held that the Dodd-Frank Act's say-on-pay mandate did not by itself confer jurisdiction on the federal courts. Dennis v. Hart, 2013 U.S. App. LEXIS 15648 (9th Cir. July 31, 2013). I discuss the case in Ninth Circuit Says Say-On-Pay Suit Should Stay In California Court.
Four Things To Know About Say-On-Pay Votes
In the opinion issued yesterday, Justice Sandy R. Kriegler listed four important attributes of say-on-pay votes (plaintiffs' firms would do well to ruminate on each of these before filing another failed say-on-pay complaint):
- They are explicitly nonbinding;
- They may not be construed to overrule a decision by the Board of Directors;
- They do not create or change directors' fiduciary duties; and
- They do not restrict or limit the ability of shareholders to make proposals for inclusion in proxy materials relating to executive compensation.
Charter Township of Clinton Police and Fire Ret. Sys. v. Martin, Cal. Ct. Appeal Case No. B241087 (Sept. 17, 2013), citing Raul v. Rynd, 2013 U.S. Dist. LEXIS 35256 (D. Del. Mar. 14, 2013).
Do Directors Issue Proxy Statements?
In Martin, the defendants (the company's directors, executive officers and compensation consultant) demurred (California's analogue to a motion to dismiss) on the grounds that the defendants had failed to plead pre-suit demand futility adequately. The Court of Appeal affirmed on this basis, applying Delaware's two-pronged test for demand futility established in Aronson v. Lewis, 473 A.2d 805 (Del. 1984) overruled on other grounds in Brehm v. Eisner, 746 A.2d 244 (Del. 2000). The court's application of Aronson and the cases cited should be familiar to anyone who has litigated the issue. I did note the Court's discussion of the plaintiff's allegation that the board issued an allegedly misleading proxy. The Court faulted the plaintiff's allegations for being conclusory because it failed to explain how an individual director is able to "issue" a proxy on behalf of the corporation. The Court went on to say that even if the plaintiff had alleged that the directors had signed the proxy, that allegation alone would not establish potential liability of the directors.
When it comes to failed say-on-pay votes, it seems that plaintiffs' firms are operating under the theory that if you take enough swings, a ball will eventually land on the green. Although the plaintiff in Martin was swinging without a club, Justice Richard M. Mosk's concurrence and dissent may provide some hope for plaintiffs. He agreed that simply alleging a failed say-on-pay is insufficient, but found that the plaintiff had alleged sufficient additional facts.
Director or Shareholder Primacy?
Perhaps, the majority and dissenting views can be explained by the statements that they make about governance. The majority cited Aronson: "A Cardinal precept of the General Corporation Law of the State of Delaware is that directors, rather than the shareholders, manage the business and affairs of the corporation." The dissent ends with "In connection with the increasing number of shareholder derivative actions concerning executive compensation, '[t]he issue of shareholders being able to control executive compensation will be part of the legal discussion for the foreseeable future.'" quoting Nelson, Ending the Silence: Shareholders Derivative Suits and Amending the Dodd-Frank Act so "Say on Pay" Votes May be Heard in the Boardroom, 20 U. Miami Bus. L. Rev. 149, 209 (2012).
