United States: Lawsuits In The Wake Of Say-On-Pay

Last Updated: July 18 2011
Article by Bradley J. Andreozzi and Douglas C. Murray

In January 2011, the SEC adopted Final Rules on "say-on-pay" under Section 951 of the Dodd Frank Act. These rules provide, among other things, that public companies must provide shareholders with advisory votes on the compensation of named executive officers (NEOs).

A troubling development is that lawsuits are following in the wake of shareholder "no" votes on say-on-pay. In the past year, there have been at least six notable shareholder derivative lawsuits in which plaintiffs have argued that shareholders' "disapproval" of a company's executive compensation plan supports claims that the directors breached their fiduciary duties when they approved the plans, and that the directors are therefore personally liable for damages to the company resulting from allegedly excessive compensation payments to NEOs. Compensation consulting firms that provided advice to the directors have also been named as defendants in these lawsuits.

The Lawsuits

The companies sued in these cases include Occidental Petroleum Corporation (Gusinsky v. Irani, BC442658 (Cal. Super., filed July 29, 2010)); Keycorp (King v. Meyer, CV 10 730994 (Ohio Com. Pleas, filed July 6, 2010)); Beazer Homes USA (Teamsters Local 237 v. McCarthy, 2011CV 197841 (Ga. Super., filed March 15, 2011); Umpqua Holdings Corporation (Plumbers Local No. 137 Pension Fund v. Davis, CV 11 633 AC (D. Or., filed May 25, 2011); Jacobs Engineering Group (Witmer v. Martin, BC454543 (Cal. Super., filed February 4, 2011); and Hercules Offshore, Inc. (Matthews v. Rynd, 2011 34508 (Tex. Dist., filed June 8, 2011)).

Blueprint of the Complaints

With minor variations, all of these complaints follow the same "blueprint."

Fact Pattern and Allegations. The basic "fact pattern" targeted in these complaints is as follows: (1) the company advises shareholders that it maintains a "pay for performance" compensation philosophy; (2) the board relies in part on the advice of a compensation consultant to (3) approve an executive compensation plan pursuant to which NEOs receive an increase in compensation, despite (4) the company's arguably poor financial results; (5) directors who are also NEOs receive the compensation increases; (6) a majority of the shareholders vote "no" in the say-on-pay vote; and (7) the board fails to rescind the pay increases following the shareholder vote. Based on this combination of factors, the plaintiffs allege that the directors' approval of (and refusal to rescind) the compensation plan was irrational, unjustified, a profligate waste of corporate assets, and could not have been the product of a valid business judgment.

Causes of Action. The plaintiffs bring several causes of action against the defendants, including the following:

  • Breach of fiduciary duty claims against the directors based on the theory that the directors' approval of the executive compensation plan violated their duties of care and loyalty to the shareholders.
  • Misrepresentation claims against the directors based on the theory that the approval of the NEO pay hikes despite the company's poor financial performance contravenes the board's representation in SEC filings that the company has a "pay for performance" executive compensation philosophy.
  • Corporate waste claims against the directors based on the theory that the executive compensation plans caused the company to squander corporate assets.
  • Unjust enrichment claims against the directors who are also NEOs based on the theory that they have been unjustly enriched by the pay hikes. Notably, one complaint (involving Hercules Offshore) also sues the NEOs who were not directors on an unjust enrichment theory.
  • Aiding and abetting claims against the company's compensation consulting firm based on the theory that the consultant, in giving its recommendations to the board, joined together with and aided the directors in their breaches of fiduciary duty.
  • Breach of contract claims against the compensation consulting firm based on the theory that the consultant, in providing its recommendations, breached its consulting agreement with the company.

Relief Sought. The plaintiffs seek, among other things, unspecified damages resulting from the executive compensation plans, as well as costs and attorneys' fees. The plaintiffs also demand the implementation of internal controls to prohibit and prevent the payment of excessive executive compensation in the future.

Dodd Frank Act and the Business Judgment Rule

The plaintiffs in these complaints argue generally that the mere fact that the shareholders declined to endorse the executive compensation plans in their say-on-pay votes proves that the directors breached their fiduciary duties when they approved the compensation plans or when they failed to rescind them following the shareholder vote. Certain of the complaints also allege that the shareholders' "no" vote, characterized by the plaintiffs as an exercise of the shareholders' own "independent business judgment," rebuts the presumption that the board's approval of the executive pay hikes was a valid exercise of the board's business judgment. By arguing that the shareholders' negative vote rebuts the business judgment presumption, the plaintiffs seek to shift the burden to the directors to prove that they acted properly in approving the compensation packages.

Section 951 of the Dodd Frank Act, however, clearly establishes that the shareholder votes are advisory, and "shall not be binding" on a company's board. Further, the statute clearly provides that a shareholder vote "may not be construed" as "overruling" directors' executive compensation decisions, or as "creat[ing] or imply[ing]" "any changes" or "addition[s]" to directors' "fiduciary duties." Thus, in arguing that a negative shareholder vote requires the court to find that the directors breached their fiduciary duties by approving the executive compensation plan (or at least shifts the burden of proof to the directors to justify their decision), the plaintiffs are attempting to circumvent the statute by effectively converting an advisory vote into a binding vote, or at least a vote that "creates or implies" a change or addition to the directors' fiduciary duties.

In addition, under the business judgment rule, courts give great deference to directors' business decisions. Although the exact contours of the business judgment rule may vary from state to state, as a general matter, courts will not hold directors personally liable for errors in judgment regarding business matters, absent a clear showing that the directors acted in bad faith, with a conflict of interest, or in a fraudulent or grossly negligent manner when making the challenged decision. In analyzing whether the business judgment rule applies, the focus is on the manner in which the directors performed their duties and not the outcome of their performance. Recognizing that most lawsuits against directors are brought by shareholders, the business judgment rule was developed – and exists – precisely to protect directors from liability when shareholders disagree with the directors' decisions. Thus, the notion that directors, in a lawsuit brought by shareholders, are not entitled to the protections of the business judgment rule merely because the shareholders disagree with a director approved executive compensation plan is at odds with the policies behind the business judgment rule.

Impact of the Lawsuits

The impact of these lawsuits is yet to be determined. The dispositions of all six cases have not yet been publicly disclosed, and it appears that some are still pending. However, based on disclosures in SEC filings, it appears that at least two of the cases – Keycorp and Occidental Petroleum – have been settled. Under the Keycorp settlement, the company agreed to certain corporate governance enhancements with respect to executive compensation, the payment of $1.75 million in legal fees, and payment of $2,500 to each plaintiff ($5,000 in total). The terms of the Occidental Petroleum settlement have not been disclosed.

One of three law firms is named as plaintiffs' counsel in each of the six complaints, and, as discussed above, the lawsuits have been brought with respect to a fairly specific fact pattern. Thus, it is not clear whether these cases represent the beginning of a trend, or whether they reflect an effort by a small group of plaintiffs' law firms to capitalize on the new say-on-pay requirements under the Dodd Frank Act by targeting a specific plaintiff profile.

Because the risk of a negative shareholder vote may be higher in the current economic environment in which executive compensation is a hot topic (especially among institutional shareholders), there could be an increased risk of litigation in the wake of the "first round" of say-on-pay votes after the passage of the say-on-pay Final Rules in January. Indeed, as of late May 2011, approximately two dozen larger reporting companies have received "no" votes on say-on-pay proposals.

Even if lawsuits following negative say-on-pay votes lack merit, they are nonetheless expensive for companies to defend, and some may settle the cases merely to control or limit expenses, exposure and negative publicity.

If shareholder lawsuits following "no" votes on say-on-pay gain traction, it is unclear how insurance companies that provide director and officer (D&O) insurance to public companies will react with respect to the coverages they provide.

It is also unclear how these types of lawsuits will affect boards' decision processes with respect to executive compensation plans and/or governance policies and procedures concerning executive compensation.

Limiting Litigation Risk

As discussed above, in general, the Dodd Frank Act and the business judgment rule should protect directors from personal liability for their decisions concerning executive compensation, as long as the directors acted in good faith and without gross negligence, conflicts of interest or fraud.

To buttress the position that they are entitled to rely on these protections, particularly in the current environment where lawsuits may follow negative shareholder say-on-pay votes, directors should consider building the following items into their decision making process with respect to executive compensation plans:

  • Engage in healthy discussions with compensation consultants and others involved in presenting the proposed compensation package. Ask detailed questions and probe the basis for the recommendations.
  • Ensure that the board or committee meeting minutes document that there was a robust discussion in which questions were asked.
  • Ensure that the supporting materials presented to the board provide solid empirical support for the recommendations, and not merely subjective assessments of the employees' value to the company (although such subjective assessments are also important and appropriate).
  • Continue to vote for the compensation the directors believe in good faith will be needed to attract, retain and incentivize executives based on solid advice and recommendations (e.g., from compensation consulting firms, executives, HR department, etc.), but be prepared to explain the basis for that good faith belief if it is challenged in a lawsuit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.