Say No More: The Latest Blow To Suits Challenging Proxy Disclosures About Say-On-Pay And Stock Incentive Plans

Over the past eighteen months, public companies have drafted their annual proxy statements knowing that they could become the next target of a new wave of disclosure lawsuits. Those suits have challenged the adequacy of disclosures on executive compensation in connection with say-on-pay votes mandated by Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), as well as votes on amendments to stock incentive plans.1

Public companies have been concerned that no matter the quality of disclosure, and regardless of a proxy statement's compliance with federal law and best practices, the proxy statement would be attacked for not saying enough. These claims have been modeled on disclosure claims pursued under state law routinely asserted in merger and acquisition litigation. As in the M&A context, plaintiffs would seek an injunction, here of the company's annual meeting.

Faced with the threat of an injunction, and the costs and disruption of expedited litigation, some companies agreed to make supplemental disclosures and pay six-figure settlements to plaintiffs' counsel. Other companies resisted. Those that did have now helped create a string of rulings that could put an end to the routine filing of these cases, the most recent of which was by a California judge in Mancuso v. The Clorox Company ("Clorox"). 2

MANCUSO V. THE CLOROX COMPANY: AN OVERVIEW

The Clorox case began as typical for this new type of disclosure suit. The plaintiff alleged that the proxy statement should have said more to enable shareholders to cast an informed vote on a non-binding say-on-pay proposal and a vote to increase the number of authorized shares for a stock incentive plan.

The plaintiff contended that the directors breached their fiduciary duties of care and loyalty under Delaware law by not disclosing a "fair summary" of information presented to the compensation committee by its independent compensation consultant, including comparative shareholder return data; analysis of peer compensation data; simulations of potential proxy recommendations by a proxy advisory firm; and reports on share usage, burn rate, and aggregate costs related to the company's stock incentive plan, particularly as compared to peers. The plaintiff claimed that shareholders would consider all this information material, a standard that requires showing that "there is a substantial likelihood that a reasonable stockholder would consider it important in deciding how to vote."3

The suit didn't seek damages. Instead, the plaintiff sought injunctive relief to block the shareholder vote on these proposals. The court initially rejected the claims when the plaintiff presented them on an expedited basis to obtain a preliminary injunction. On November 13, 2012, the court ruled that allowing a vote to go forward did not risk irreparable harm. The court also ruled that the plaintiff's evidentiary showing with respect to the merits of his disclosure claim were "meager, at best."4

The plaintiff then tried to pursue his claims after the shareholder vote overwhelmingly approved both challenged proposals. Following discovery, the court then rejected the claims on the merits after a bench trial based on a fully developed written record.

On September 23, the California court entered judgment in favor of defendants. The court held that there was no duty to say more in the proxy statement. After considering the evidentiary record, which included testimony from directors, a compensation consultant, and experts, the court concluded that plaintiff failed to meet his burden of showing the materiality of any undisclosed information presented to the compensation committee.5 The Clorox court emphasized that the challenged proxy statement at issue included "a wealth of information on the two Proposals, the approach of the compensation committee, the reasons for its recommendations, and the impact these proposals may have." The court pointed out that additional information was "available in the Company's other SEC filings and those of its peers."6 Under Delaware law, the court opined, "the duty to disclose 'is not a mandate for prolixity.'"7 The court also underscored that "[n]ot all information considered by a board is material and subject to disclosure to...