​​​​Shareholder Derivative Litigation

relating to Compensation and Benefit Decisions

Shareholder Derivative Claims (against Board Members) 
Nature of Complaint
BankingUnsafe or excessive incentive compensation
Director Compensation
Excessive Compensation
Excessive Severance
Proxy DisclosureChallenges based on allegedly false and misleading proxy statement disclosures other than re pay for performance, severance, and stock plan proposals.
Mergers_and_AcquisitionsFocus on executive pay and loyalty in transactional context.
Stock Plans Challenges to stockholder approval of equity compensation plans due to inaccurate proxy statement disclosures, such as Code §162(m). 
Stock Awards These cases involve allegations of abuse in the making of awards - from backdating to spring-loading to timing the market
      See generally: Risk Management Advice for Compensation Committees 

Procedural Considerations - and Precautions against Litigation:

  • Forum Selection
  • Internal Statutes of Limitation (shortening the time periods otherwise allowed by law)


2013.Aug.08  DE Federal District Court Refuses to Dismiss Claim Alleging Violation of Stock Plan Limits
A shareholder derivative action has avoided dismissal despite the absence of a presuit demand for board action, because the underlying complaint raised a reasonable doubt that stock awards exceeded a plan’s limits on individual awards, and thereby were not a valid exercise of business judgment.  

 2013.Jul.31  IRS and NYSE Rulings Fail to Prompt Dismissal of Exec Comp Complaints, while Viacom succeeds re "Negative Discretion" (DE)
It is common for public companies to seek informal governmental approval for questions of law relating to their executive compensation plans and practices. Whether from the IRS or the NYSE, those governmental approvals failed to persuade two different Delaware courts to dismiss shareholder derivative claims relating to company stock plans.   

  • In Hoch v. Alexander, a Delaware federal district court rejected Qualcomm's motion to dismiss claims alleging that its proxy statement misled shareholders by representing that plan awards could qualify for an exemption from Code §162(m). Qualcomm's argument rested on an "Issue Resolution Agreement" in which the IRS agreed that Qualcomm's 2011 LTIP satisfied Code§162(m)'s requirements for the making of exempt awards. The non-binding nature of the IRS ruling led the court to conclude that it was relevant but not dispositive. Further discussed at §162(m) Litigation.
  • In a separate ruling involving Simon Property Group, a Delaware Chancery Court considered whether to dismiss claims alleging that directors breached their fiduciary duties by not seeking shareholder approval for a stock plan amendment. The company argued that the NYSE had confirmed by email that the plan amendment did not require shareholder approval. Chancellor Strine ruled against dismissal from the bench for reasons discussed at Harvard Law Blog.
  • In a more routine ruling, a Delaware district court dismissed shareholder derivative litigation claiming that Viacom's compensation committee exercised impermissible subjective discretion when deciding LTIP awards. Viacom argued that the LTIP at issue authorized negative discretion, and that awards were consequently valid products of business judgement. The court agreed, holding that . . .  continued with case link at Excessive Compensation Claims.

2012.Sept.28  Trifecta of Dismissals for Shareholder Complaints re Executive Compensation.  The application of Delaware law principles has led courts in Colorado (re Janus Capital), North Carolina (re Dex One), and California (re HP), to dismiss shareholder challenges based on alleged disconnects between pay and performance, failed say on pay votes, and alleged waste through payment of $53 million of severance. In each case, the underlying complaints failed to excuse a pre-suit demand because none of the allegations created a reasonable doubt that the questioned transaction was entitled to protection under the business judgment rule.  More re Dex One and Janus at Failed Say on Pay Litigation; more re HP at litigation re Litigation re Excessive Severance and Litigation re 14A Disclosures. 

2012.Apr.25  "Occupy Boardroom: Shareholder Revolt" (CNNmoney)  
This article warrants attention because it is not a tale of populist anger, but of pension funds and mutual funds that "are reaching the tipping point" as they "fight back against executive pay packages."  The article cites banking sector activism, but the shareholder litigation risks are sure to run to any public company that does not convincingly explain its executive compensation and severance structures and decisions.

2011.Aug.20 Litigation Risks from the Appearance of Conflicts. The recent $32M settlement of the Tribune's ESOP litigation (LA Times) should serve as a healthy reminder that company owners and executives invite litigation risks not only when they assume fiduciary responsibilities for 401(k), ESOP, and other tax-qualified retirement plans, but also when there are other indicia of a conflict of their interests (see, e.g. this year's shareholder derivative litigation that was dismissed in Berry v. Dillard). One proven defense involves reconsidering the composition of key committees, in order to assure independent decision-making as well as to defuse potential conflicts. For example, with regard to the committees that administer 401(k) and other retirement plans, replacing executive officers with mid-tier officers or other employees may defuse claims based on conflicts between ERISA fiduciary standards and the requirement for securities law disclosures of corporate events.Forum Selection for Shareholder Derivative Litigation.