Defense firm vows to put an end to new wave of say-on-pay suits
Have you heard about the latest innovation of creative plaintiffs’ lawyers? As my Reuters colleague Nate Raymond reported Friday in a comprehensive piece on the trend that’s spawned a recent round of law firm client alerts, the New York shop Faruqi & Faruqi has filed almost two dozen suits asserting that corporate boards breached their fiduciary duties in connection with shareholder advisory votes on executive compensation. But unlike last year’s mostly unsuccessful suits against the boards of companies whose shareholders voted down pay packages, the Faruqi suits have been filed in advance of say-on-pay votes at annual shareholder meetings, with claims based on allegedly inadequate disclosures in proxy materials. As leverage, the suits seek to enjoin shareholder meetings. So far, according to Raymond, these say-on-pay injunction suits have produced a few beefed-up disclosures but no cash for shareholders. They’ve also netted the Faruqi firm legal fees, including $625,000 in one settlement.
A notable feature of the say-on-pay injunction litigation is venue. Faruqi has been filing the cases in state courts outside of Delaware. A couple defendants have attempted to remove the suits to federal court, but in May U.S. District Judge Thomas Griesa of Manhattan sent a say-on-pay complaint against Martha Stewart Living and its board back to state court; in July U.S. District Judge Susan Illston of San Francisco did the same with a suit against Ultratech and its board.
On Thursday, Faruqi & Faruqi won another forum fight in a say-on-pay injunction case. U.S. District JudgeSaundra Armstrong of Oakland, California, granted the plaintiffs’ firm’s motion to remand its suit against Accuray and its board to Superior Court in Santa Clara. But Accuray’s lawyer, Boris Feldman of Wilson Sonsini Goodrich & Rosati, told me Friday that he believes Armstrong is wrong on the law and that his theory on the proper jurisdiction for say-on-pay suits will ultimately doom the plaintiffs’ cause.
Here’s the theory. Advisory shareholder votes on executive compensation were imposed by Congress in the Dodd-Frank Act of 2010. Dodd-Frank is, obviously, a federal law. So, as Wilson Sonsini explained in a brief opposing remand in the Accuray case, a suit based on say-on-pay disclosures arises under federal law and thus belongs in federal court. “Because plaintiff’s breach of fiduciary duty claims are premised on the sufficiency of the say-on-pay disclosures required by Dodd-Frank and governed by detailed SEC regulations, they pose substantial federal questions,” the brief said. “The determination that plaintiff seeks here — a finding that state law somehow requires Accuray to disclose more details in a say-on-pay proposal than is mandated by the SEC pursuant to the authority delegated to it by Congress — clearly involves the interpretation and application of the Exchange Act, the Dodd-Frank amendments thereto, and the rules and regulations promulgated thereunder.”
But there’s more. As Feldman explained to me, Dodd-Frank does not include mention of any private cause of action deriving from say-on-pay votes. So if federal courts have jurisdiction over say-on-pay disclosure cases, he said, defendants will have powerful arguments that the suits should be tossed for failure to state a claim. And according to Feldman, even if Delaware corporate law does impose state law say-on-pay disclosure obligations — a question that will ultimately have to be answered by the Delaware Supreme Court — he will argue that the state law claims are pre-empted by Dodd-Frank. “I’m going to get this to federal court regardless,” he said.
Accuray won’t be the vehicle, however. In her decision to remand, the judge in that case said that plaintiffs could assert a state law breach of fiduciary duty claim that the board failed to disclose material information without alleging a violation of Dodd-Frank. And besides, she said, the Accuray complaint included a claim that didn’t even involve the upcoming say-on-pay vote but rather a proposal to increase the number of corporate shares. “Since plaintiff’s breach of fiduciary duty claim may therefore be resolved without involving ‘a substantial, disputed federal question,’ removal jurisdiction is lacking,” she said.
Remand rulings can’t be appealed, so whatever remains of the Accuray case will take place in state court. The shareholder vote the suit sought to enjoin took place as scheduled on Friday, but according to Feldman, the breach of fiduciary duty case wil l continue. (I reached out to Faruqi partner Juan Monteverde but didn’t hear back.) Feldman said he is debating whether to ask the California state courts to certify the question of whether Delaware state law imposes say-on-pay disclosure obligations to the Delaware high court or to file a declaratory judgment case seeking an answer to that question in Delaware Chancery Court. Depending on what Delaware ultimately decides, Feldman said, he’ll either argue that there are no state law claims based on say-on-pay disclosures or that those claims are pre-empted by federal law.
If he’s right, say-on-pay injunction suits will be another footnote in shareholder litigation history.
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