(Corrects 14th paragraph to show Cisco lawsuit has not been
By Nate Raymond
NEW YORK Nov 30 Since the Dodd-Frank law gave
shareholders a say in executive pay in 2010, c ourts have
routinely rebuffed efforts by shareholders to force companies to
heed their voice.
Now, lawyers have found a new way to bring lawsuits over
executive pay, resulting in a handful of legal settlements. But
the settlements to date have produced no changes in executive
compensation and no money for investors. In fact, the main
financial beneficiary so far has been a small New York law firm
that brought the bulk of the cases.
The law firm, Faruqi & Faruqi, said the settlements benefit
shareholders by giving them the information they need to make
investment decisions, but it declined to comment on monetary
The Dodd-Frank Wall Street Reform and Consumer Protection
Act requires companies listed in the United States to hold
shareholder votes at least every three years on the compensation
of top executives. These "say-on-pay" votes are advisory and
While most of them pass, a few fail, sometimes resulting in
shareholder lawsuits against company directors. Of the 12 such
cases that have been decided by courts, 11 have been dismissed,
according to a report by the law firm Pillsbury Winthrop Shaw
The lawsuits filed by Faruqi & Faruqi, however, are brought
before votes are even taken and do not challenge compensation
packages directly. Instead, the lawsuits accuse companies of
failing to give shareholders enough information on compensation
plans to make informed votes.
This can either be executive compensation, which is subject
to the advisory votes, or employee share plans, which require
shareholder approval. In both cases, the lawsuits seek to
prevent votes from going forward at annual shareholder meetings.
Some 20 public companies including Microsoft Corp,
H&R Block Inc and Clorox Co have been hit with
these lawsuits in the past year, according the report by
Pillsbury and court records. Pillsbury usually represents
companies that are defending themselves against shareholder
lawsuits. It is not representing any defendants in the current
wave of cases.
At least six of the new cases have resulted in settlements
in which the companies have agreed to give shareholders more
information on the pay of their executives or on the employee
share plans. The settlements have also resulted in fees of up to
$625,000 for the lawyers who brought the cases.
Juan Monteverde, the partner at Faruqi who is leading these
lawsuits, said his firm was providing shareholders with
information to protect their investments, even if there was no
monetary award. "The settlements confer a benefit to
shareholders by providing adequate disclosure necessary to make
decisions on important issues," Monteverde said.
The extra information sought has included such things as the
data the company reviewed in determining executive compensation
and analyses showing the effect on shareholders of increasing
the number of shares in a stock plan.
Lawyers from defense firms, however, have taken note that
while settlements have provided additional disclosures and legal
fees for Faruqi, they have netted no cash for shareholders.
"It's a shakedown for a quick buck," said Boris Feldman, a
lawyer at Wilson Sonsini Goodrich & Rosati who is defending a
case against cancer radiation company Accuray Inc.
Mark Chandler, the general counsel of Cisco Systems Inc
, w hich is facing one of the lawsuits, s aid the practice
is a "new cottage industry for plaintiffs' lawyers." Cisco makes
sure its proxy disclosures are thorough, he said.
Monteverde, the partner at Faruqi, declined to comment on
The new strategy mirrors lawsuits in which shareholders have
been able to delay mergers and acquisitions by bringing lawsuits
accusing company directors of trying to sell companies at an
unfair price. Settlements quickly follow and, as in the new
say-on-pay lawsuits, the accords usually involve more
disclosures from the company, no cash for the class and fees for
Many of the M&A lawsuits are brought in Delaware, a major
venue for business litigation, where judges have become
increasingly critical of settlements in which attorneys get paid
but plaintiffs receive more information but no cash.
The compensation lawsuits, however, were filed not in
Delaware but in the states where target companies are
headquartered. Judges have given the cases a mixed reaction.
In an early victory for Faruqi, Superior Court Judge James
Kleinberg in Santa Clara, California, on April 10 blocked a vote
at networking equipment manufacturer Brocade Communications
Systems Inc scheduled for two days later.
Brocade was seeking to increase the number of shares
available under its stock plan. The plaintiff alleged the
company failed to disclose details and misrepresented how the
increase would dilute investors' holdings.
Kleinberg said the plaintiff had shown a "substantial
likelihood" of success in establishing the company did not
disclose material information about a proposed increase in
shares granted under the incentive plan.
"Denial of the proposed injunction would forever preclude
the Brocade shareholders from casting a fully-informed vote on a
proposal that could have dilutive effects on their shares, and
after-the-fact damages calculations would be speculative and
ineffective," he wrote.
Instead of delaying the annual vote, Brocade reached a
settlement on April 11 in which it disclosed more details about
its stock incentive plan while paying $625,000 in fees to the
plaintiffs' lawyers, which were led by Faruqi. John Noh, a
spokesman for Brocade, declined to comment.
The plaintiffs in all of Faruqi's cases were individual
investors. One plaintiff, Natalie Gordon, is named in three of
the lawsuits. The lawsuits gave no details about Gordon or the
other plaintiffs, except to say that they are investors in the
companies. Gordon could not be located for comment.
The one case that was not brought by Faruqi was filed on
behalf of an institutional investor, the St. Louis Police
Retirement System, against blood analytics company Abaxis Inc
. In that case, U.S. District Judge Yvonne Gonzalez
Rogers on Oct. 23 determined the plaintiff would likely succeed
in establishing that the company failed to reference material
information on its equity incentive plan in its proxy statement
and blocked a shareholder meeting from going ahead.
"The law requires that when a board of directors seeks a
shareholder vote, the board must fully and fairly disclose all
material information regarding the matters on which votes are
sought," said Eric Zagar, a lawyer at Kessler Topaz Meltzer &
Check who represented the plaintiff.
A spokesman for Abaxis did not respond to a request for
comment. The lawsuit is ongoing.
At least five companies have reached settlements rather than
fight an injunction demand, according to Pillsbury's report.
Most recently, WebMD Health Corp agreed on Nov. 15 to a
disclosure-only settlement that would pay investors nothing but
award Faruqi at least $250,000.
As part of the settlement, WebMD provided supplemental
disclosures to investors that detailed the "guiding philosophy"
of the board's compensation committee and more details on why it
had approved an increase in the number of shares available under
a stock plan.
Representatives of WebMD and the other companies that
settled - Martha Stewart Living Omnimedia Inc, NeoStem
Inc and Applied Minerals Inc - did not respond
to requests for comment.
Other companies, though, have fought on and recently some
judges have sided with them. At least five times, judges have
denied injunction requests, the Pillsbury report said.
In a case involving Clorox, Superior Court Judge Wynne
Carvill in Alameda County, California, rejected an injunction
request on Nov. 13.
While noting the "public controversy surrounding executive
compensation," Carvill said there was "no risk of any interim,
much less irreparable harm" if a say-on-pay vote went forward.
"This is not a merger or takeover case that would require
the court after a trial on the merits to 'unscramble the eggs'
if plaintiff were to prevail," Carvill wrote.
Kathryn Caulfield, a spokeswoman for Clorox, said the
company was "pleased with the ruling."
A day later, New York state Supreme Court Justice Thomas
Whelan in Suffolk County rejected a similar injunction request
in a case involving Globecomm Systems Inc.
Jonathan Wagner, a lawyer at Kramer Levin Naftalis & Frankel
who represents Globecomm, said courts recognize that the
information the plaintiffs are seeking is not material. The
plaintiffs are trying to turn the rules for disclosure in
compensation proposals "upside down," he said.
Elsewhere in New York, state Supreme Court Justice Vito
DeStefano in Nassau County on Nov. 16 rejected an attempt to get
an injunction in an investor lawsuit against Hain Celestial
The chance of shareholders being irreparably harmed by
letting the say-on-pay v ote go forward was "purely speculative
given the advisory nature of the vote," DeStefano wrote.
A spokesman for Hain Celestial did not respond to a request
Not all of the cases make it to a decision or settlement. In
some cases, Faruqi dropped lawsuits before a judge could rule on
the injunction request and without a settlement.
Last week, Faruqi withdrew a lawsuit against Microsoft. The
company said in a statement that the lawsuit was "meritless" and
that it was "confident that courts will continue to recognize
these cases don't serve the best interests of shareholders."
Despite the recent defense wins, few lawyers believe they've
seen the last of this kind of lawsuit.
Faruqi last week issued a news release saying it was
investigating the directors of Greenbrier Companies Inc
over their conduct in seeking shareholders' approval of an
amendment to its stock incentive plan. Jack Isselmann, a
spokesman for Greenbrier, said the company believed the
investigation "is without merit."
Sarah Good, who co-authored Pillsbury's report, said there
was little companies could do to avoid being hit with these
"Where the plaintiffs securities bar sees that they will get
a return on their investment, they're going to keep filing
them," she said.
(Reporting by Nate Raymond; Additional reporting by Tom Hals;
Editing by Eddie Evans, Martin Howell and Steve Orlofsky)