Does a negative “Say on Pay” vote trigger a breach of fiduciary duty claim?

The Dodd-Frank Act, passed in 2010, includes the so-called “Say on Pay” provision for publicly traded companies. This provision requires that, at least once every three years, the shareholders of a publicly traded company must vote on its executive compensation arrangements. In addition, the shareholders also vote at least once every six years on the frequency of the “say on pay” vote.  Shareholders are able to elect whether the vote will happen once every one, two, or three years.  In most companies, the shareholders have chosen to have the “say on pay” vote conducted annually.  Publicly traded companies are also required  to disclose, in any proxy solicitation asking for the approval of a merger, acquisition, or other sale of the company, any compensation from “golden parachutes” that would be triggered.  Shareholders also have a chance to “approve” (or not approve) such golden parachute payments.

However, except for the vote on the frequency of “say on pay” votes, none of these votes are actually binding.  They are simply there to provide an outlet for the shareholders to express their views on management’s compensation.  In addition, the law specifically states that the vote doesn’t create any new or alter existing fiduciary duties of the company’s board of directors.  To date, only 37 companies’ boards have received a negative “say on pay” vote.

However, a number of creative plaintiff’s lawyers have tried to use a negative “say on pay” vote as evidence of a breach of fiduciary duty.  How have these claims fared?  Not very well.  Below is a quick summary of the cases where this line of reasoning has been used and the results thus far:

Teamsters Local 237 Additional Security Benefit Fund, derivatively on behalf of Beazer Homes USA, Inc. v. McCarthy (Georgia Superior Court; decided September 16, 2011).  This case, litigated in Georgia Superior Court applying Delaware corporate law, arose out of a negative “say on pay” vote that occurred after the board voted to increase executive compensation.  The court reasoned that because the negative vote occurred after the board’s action, the negative vote could not be used to prove a breach of fiduciary duty by the board.  In addition, the court ruled that, under Delaware law, the negative vote of the shareholders could not be used as evidence to rebut the business judgment rule presumption.[1] (Unfortunately, the ruling was given orally and no written opinion was issued to date, limiting its precedential value).

NECA-IBEW Pension Fund, derivatively on behalf of Cincinnati Bell, Inc. v. Cox (Southern District of Ohio; decided September 20, 2011).  Here, a federal court applying Ohio corporate law, refused to dismiss a similar case prior to discovery and trial.  The basis used is that Ohio law differs from Delaware law.  While Ohio has its own version of the business judgment rule, according to the court, it “imposes a burden of proof, not a burden of pleading” which effectively means a board can’t have the case dismissed prior to discovery (or even trial).  Thus Ohio corporate law would seem to be more friendly territory for plaintiff’s attorneys in “say on pay” suits.

Plumbers Local No. 137 Pension Fund v. Davis (U.S. Federal Court, District of Oregon; decided January 11, 2012).  This case is another “say on pay” suit involving a company called Umpqua Holdings Corporation.  In this case, a magistrate judge recommended that the case be dismissed.  The court applied Oregon corporate law, though the court noted that Delaware law often provides guidance for Oregon courts in areas of corporate law that are undeveloped.  The court adopted the holding of Beazer and criticized the holding of Cincinnati Bell, rejecting the notion that a negative “say on pay” vote can rebut the presumption of the business judgment rule.

Laborers’ Local v. Intersil (Northern District of California; decided March 7, 2012).  Here, a federal court applied Delaware law and dismissed a derivative claim against a board of directors based on a negative “say on pay” vote.  The court held that a “say on pay” vote “alone is not enough to rebut the presumption of the business judgment rule.”  The opinion also criticized the Cincinnati Bell decision.

The Cincinnati Bell decision has caused great concern within corporate America.  It has the possibility of encouraging further lawsuits each and every time the shareholders of a corporation vote against the company’s compensation package.  That said, other courts appear to be rejecting its holding, which may in the long run establish a firm rule that negative “say on pay” votes may not be used as evidence of a breach of fiduciary duty by a board.


[1] Essentially, the business judgment rule, under Delaware corporate law provides that a court will not substitute its own notions of what is or is not sound business judgment if the directors of a corporation “acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.”

This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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Alexander J. Davie

Alexander J. Davie

Alexander Davie is a corporate and securities attorney based in Nashville, Tennessee. Businesses of many varieties rely on his counsel and judgment throughout all stages of their growth. In particular, fund managers and investment management professionals seek the expertise Alex gained when he served as general counsel to a private investment fund. Alex also has significant experience and enjoys working with companies and entrepreneurial ventures, especially within the technology industry. As a believer in technology's ability to enrich people's lives and allowing people to connect with each other in new ways, he is passionate about helping tech startups achieve success. He is active in Nashville's startup community as a mentor at the Nashville Entrepreneur Center and participates in numerous other events geared towards making Nashville a nationally ranked location for starting a business.

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