Lawsuits Stemming From Supposedly Bon-binding “Say-on-Pay” Votes
Under the Dodd-Frank Act, the mandatory “say-on-pay” rules, in which shareholders get to vote on executive compensation levels, are non-binding. According to the new regulations, which were signed into law in July of 2010, directors and executives are not required to abide by these “say-on-pay” measures, as they are only intended to serve an advisory purpose. Despite their non-binding nature, half a dozen class action lawsuits have already been brought against directors and officers for ignoring the results of these votes.
These lawsuits can be very problematic for a company. Not only are the companies typically under pressure to settle claims quickly to keep legal fees down, regardless of whether they are at fault or not, but such suits can also increase the cost of directors and officers liability insurance.
Yet another area of concern stems from the fact that these actions are not just being brought against the companies themselves. Third-party compensation consultants are also being named as defendants in the lawsuits. As a result, the cost to companies to obtain compensation advice in the future might be prohibitively expensive, as compensation consultants begin to realize they are susceptible to litigation and start to work in potential litigation defense costs into the fees they charge.
In addition to the six suits that have already been filed, class actions law firms have collectively announced that another eighteen investigations are currently underway. Most of these types of suits, which are typically filed as shareholder derivative suits on behalf of the corporation, charge companies with not changing their practices or allege that the directors breached their fiduciary duties by ignoring the shareholder votes. Since the enactment of the new regulations, smaller companies have been more likely to lose their say-on-pay votes. Besides smaller companies (market caps of less than $1 billion), companies involved in the energy, construction and manufacturing industries have thus far experienced the most failed votes.
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