March 22, 2013

Delaware Federal Court Dismisses Say-on-Pay Case

Here’s news from Wachtell Lipton’s David Katz, Warren Stern & Kim Goldberg culled from this memo:

Reaffirming that the advisory “say-on-pay” vote required by the Dodd-Frank Act cannot be used to attack directors’ executive compensation decisions, the United States District Court for the District of Delaware recently dismissed a derivative complaint brought after a negative say-on-pay vote. The court, applying Delaware law, found that the plaintiff had not pleaded facts sufficient to show that demand would have been futile, or to state a claim upon which relief could be granted. Raul v. Rynd, C.A. No. 11-560-LPS (D. Del. March 14, 2013).

The complaint was filed in 2011, and was one of a number of similar lawsuits filed after Dodd-Frank’s requirement for advisory votes on compensation came into effect. The plaintiff challenged the board’s compensation decisions, alleging that increased compensation in a year when the company posted a net operating loss and negative shareholder return violated the company’s pay-for-performance philosophy and rendered the company’s compensation disclosures in its proxy statement misleading. The plaintiff asserted that the negative shareholder advisory vote rebutted the presumption of business judgment surrounding the board’s compensation decisions.

In dismissing the complaint, the court found that the plaintiff “misconstrue[d] the effect of the shareholder vote” and “mischaracterize[d]” the compensation plan, holding that the plaintiff’s allegations based on the advisory vote “fail to recognize the[] realities of Dodd-Frank” — namely, that the Act “explicitly prohibits construing the shareholder vote as ‘overruling’ the Board’s compensation decision” or altering directors’ fiduciary duties. The court further noted that the plaintiff’s “selective” characterization of the company’s compensation philosophy as “pay for performance” excluded the other goals discussed in the company’s proxy statement.

The Raul decision reinforces the Dodd-Frank Act’s bar on attempts to use the advisory shareholder vote to overrule directors’ business judgment on matters of executive compensation. The decision recognizes that directors should be permitted to determine appropriate compensation for executives in accordance with their company’s overall compensation philosophy — including such motivations as attracting, retaining, and incentivizing executives — without fear that they will be subject to liability should shareholders express disagreement with those judgments through an advisory say-on-pay vote.

Swiss to Vote Again on Executive Pay: Mandatory Pay Ratio Cap!

In the US, the corporate world is worried about disclosing pay ratios. In Switzerland, they are looking to cap CEO pay compared to the lowest paid employee at no more than 12:1. Here’s news from this excerpt of a WSJ article:

Switzerland is expected to vote later this year on a proposal to place further limits on executive pay, the latest effort to govern corporate compensation in a country that recently approved some of the world’s strictest say-on-pay rules. The Young Socialists, the youth wing of the left-leaning Social Democratic Party of Switzerland, have collected more than 100,000 signatures–the threshold needed to call a vote–in support of a referendum to limit executive salaries to 12 times those of a company’s lowest-paid employee. The campaign, dubbed the 1:12 Initiative for Fair Pay, is named for the organizers’ belief that no one in a company should earn more in one month than the lowest-paid employee makes in a year.

On Thursday, the Council of States, Switzerland’s upper house, will debate what recommendation it should give on the initiative, which voters are expected to consider in September or November. Two other government bodies have already recommended a rejection of the pay proposal.

The referendum will be the second time Swiss voters have been asked to weigh in on the country’s corporate-pay structure this year. This month they overwhelmingly approved the Minder Initiative, named for its creator, businessman and politician Thomas Minder, and also known as the “Rip-Off Initiative.” The plan allows the government to draft sweeping controls on compensation, such as requiring a binding shareholder vote on pay, as well as fines and jail time for violations.

And, as noted in this Reuters article, the Germans have started on work on their own set of new rules to rein in excessive pay…

More on our “Proxy Season Blog”

We continue to post new items regularly on our “Proxy Season Blog” for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Toronto Stock Exchange Mandates Annual Board Elections; Proposes Majority Vote Standard
– Checklist: Annual Meeting Location & Venue Considerations
– Is Your General Counsel an “Executive Officer”? Not Necessarily
– Binding Bylaw Proposals for Independent Chairman by Norges Bank
– US Proxy Season Review: ESG Proposals

– Broc Romanek