By Reynolds Holding
NEW YORK, Jan 4 (Reuters Breakingviews) - Shareholder votes
could offer up a feast for legal eagles in 2013. Restrained from
suing over securities fraud, lawyers are starting to prey on
dodgy disclosure in corporate elections. Say-on-pay votes are
popular, but anything needing investor approval is fair game.
Starved of other business, attorneys' hunger for these suits can
only grow.
The plaintiffs' bar's resilience should surprise no one. Its
bread and butter was federal class-actions blaming stock losses
on fraud until Congress began limiting the suits in 1995.
Challenges to M&A deals that allegedly cheat investors then
became the flavor of the day, though companies' rising
determination to fight - and win - the cases may bode ill for
their survival.
The latest litigation recipe derives from a requirement in
the Dodd-Frank Act that shareholders vote on executive
pay. Lawsuits against companies that failed to get enough
investor support generally went nowhere, because the results
weren't binding. So investors are suing over pre-vote disclosure
that omits supposedly crucial information like the data reviewed
in calculating compensation.
The suits, which seek a court order to delay balloting, are
pouring in. Microsoft, Clorox and some 18 other listed companies
have been hit in the past year, according to Reuters. At least
six companies settled, agreeing to provide beefed-up disclosure
and shelling out legal fees of up to $625,000. One lawsuit
persuaded a judge to block temporarily a shareholder vote. It
was eventually settled, too.
The tide may be turning, though. Five courts have ruled
against shareholders and other suits have been dropped,
according to law firm Pillsbury Winthrop. But the tactic might
have a future in other contexts.
A scheduled board election, for instance, could draw a
lawsuit claiming a proxy statement excluded important
information about proposed directors. A planned change in
auditors could also attract a challenge if shareholders weren't
told about, say, the new auditor's past run-ins with regulators.
The defense bar, however, is already cooking up its own
creative arguments. One asserts that shareholders shouldn't win
a say-on-pay case because Dodd-Frank doesn't give them the right
to sue. No court has bought the argument yet, but the lawyers
can afford to be patient. Litigation, after all, can be good
business for both sides.
CONTEXT NEWS
- U.S. shareholder lawsuits seeking to block votes on
executive compensation are on the rise, with Microsoft, H&R
Block and Clorox among the 20 or so companies that faced
lawsuits in 2012 over allegedly faulty disclosure in proxy
statements. At least six of the so-called say-on-pay suits
prompted agreements to provide additional disclosure and pay
legal fees, according to Reuters. The cases could be a model for
similar challenges to shareholder votes on directors, auditors
and other matters.
(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
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