Experts disagree on validity of say-on-pay lawsuits

Author: Danielle Myles | Published: 22 Jul 2011

Disagreement has broken out over the legitimacy of US shareholder litigation spawned by failed say-on-pay votes during this year’s proxy season. But everyone agrees the industry should brace itself for a wave of similar suits in the coming months.

At least five lawsuits have been filed since January when, under Dodd-Frank, it became mandatory for pubic companies to put executive compensation to shareholders for an advisory vote. Two similar suits were filed last year.

In each of the seven cases, the board did not follow shareholders’ negative vote recommendations. They responded by filing derivate claims (on behalf of the company) claiming damages for breach of fiduciary duty, unjust enrichment and corporate waste.

Corporate practitioners say these lawsuits won’t succeed. They point out that Dodd-Frank does not make the shareholders’ recommendation binding. If Congress intended shareholders to dictate executive compensation, then this would have been explicit in the statute, the...