Fear of Litigation Hovers Over Proxy Season

By Cydney Posner

An article in this morning's Wall Street Journal discusses the wave of litigation over proxy disclosure that is casting a pall over this year's proxy season. The lawsuits, filed primarily by one New York law firm, seek to halt the companies' annual meetings, claiming that boards of directors are not providing enough information about executive compensation. The claims demand more details, such as the justification for hiring a particular compensation consultant or more details regarding  compensation at peer group companies. Since last March, the firm "has filed more than 15 lawsuits and announced more than 50 investigations into allegedly missing corporate disclosures. The law firm claims boards have breached their fiduciary duty by excluding minute details that shareholders need to make informed decisions on key issues, such as advisory votes on executive compensation, or votes to authorize companies to replenish stock used to pay employees." The plaintiff's firm has even gone so far as to try to force one large company to release its compensation consultant's report, as well as internal memos related to executive pay discussions.

The article suggests that, so far,  most companies sued "are pushing for quick dismissals, saying their disclosures are already more than adequate and big investors haven't asked for this type of information." Some companies are enhancing their proxy disclosures on a prophylactic basis. One of the challenges identified in the article is that companies must comply with "principles-based" disclosure, which does not prescribe in detail what must be disclosed, but instead asks that companies provide a narrative about executive compensation addressing a number of issues. As a result, the adequacy of disclosure can be a matter of judgment, and "potential claims about disclosure shortcomings could be bottomless because of the loose guidelines surrounding the disclosures and the fact that every public company must file a proxy."

In one case last year, the defendant company argued in court filings that the suit was just "a hold-up," pointing out that 40 out of 70 pages of its proxy dealt with executive compensation and that proxy adviser Glass Lewis had found the disclosure to be "exemplary" that year. The court denied the plaintiff's request to halt the meeting. In another case, the company filed a declaration from a large institutional holder saying that the disclosures were sufficient, and the suit was withdrawn.  Some companies, however, have agreed to cash settlements. In one case last year, the law firm won an injunction blocking the shareholder vote at the annual meeting, and the company settled and agreed to more disclosures about the additional plan share reserve. The article notes that "a handful of other plaintiffs' law firms are starting to follow  the lead of the NY plaintiffs' firm."

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