Ninth Circuit Vacates Dismissal And Remands Shareholder Derivative 'Say-On-Pay' Suits To California State Court

In Dennis v. Hart, 2013 U.S. App. LEXIS 15648 (9th Cir. July 31, 2013), the United States Court of Appeals for the Ninth Circuit held that plaintiffs' "say-on-pay" shareholder derivative suits alleging breach of fiduciary duty were improperly removed to federal court, vacated the district court's decisions and dismissed the parties' cross-appeals for lack of jurisdiction. The Ninth Circuit held that the federal court did not have jurisdiction to hear the action because defendants had held an advisory vote in compliance with the federal Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank Act"), 15 U.S.C. § 78n-1, and plaintiffs had only alleged state law causes of action. This holding indicates that challenges to board actions in response to "say-on-pay" votes are not enough to confer federal jurisdiction without additional, specific violations of federal law.

Plaintiffs alleged that in 2010, despite reporting negative net income and free cash flow, the board of directors of PICO Holdings, Inc. ("PICO") increased executive compensation. In a Dodd-Frank Act-mandated advisory vote held in May 2011, 61% of PICO's shareholders voted against the proposed 2010 compensation package. The board, however, took no action in response to the vote. Shareholders later filed derivative actions in California state court against PICO and its board members. Plaintiff Ronald Dennis asserted claims for breach of fiduciary duty, gross mismanagement, contribution and indemnification, and unjust enrichment. He also requested a declaration "that the adverse May 13, 2011 shareholder vote on the PICO Board's executive compensation rebutted the business judgment surrounding the PICO Board's decisions to increase executive compensation." Plaintiff George Assad asserted claims for unjust enrichment and breach of fiduciary duty relating to the Board's issuance of false and misleading statements, compensation practices, and the Board's lack of response to the say-on-pay vote.

Defendants removed the actions to federal court, and moved to dismiss. The United States District Court for the Southern District of California dismissed the request for declaratory judgment in Dennis for failure to state a claim, and determined the remaining claims should be remanded to state court. In Assad, the district court dismissed the breach of fiduciary claim due to the failure to respond to the say-on-pay vote, and determined the remaining claims should be remanded...