United States: The Troubled Track Record Of The Proxy Strike Suit

Last Updated: July 8 2014
Article by Jonathan A. Shapiro and Joshua T. Foust

The recent wave of proxy strike litigation, once thought to be on the rise in 2012 and 2013, has now gone two years without a significant court victory. After one notable early success, decision after decision has gone against plaintiffs in courts across the country. The question is: what now?

As reported here in March, a new breed of proxy disclosure litigation has been on the rise the last few years. These proxy "strike suits" have typically been brought as class actions, seeking to enjoin annual shareholder meetings until the defendant companies cure the supposed shortcomings in their proxy disclosures—following which the largely self-selected plaintiffs' attorneys receive a legal fee for their effort. Early cases focused on proxy disclosures in advance of the advisory "say-on-pay" votes mandated by Dodd-Frank. But plaintiffs have since broadened their focus to target other types of disclosures and votes, such as those on proposals to increase the number of shares under stock compensation and incentive plans.

The high watermark of this wave remains the 2012 decision in Knee v. Brocade Communications Systems, Inc., in which plaintiffs succeeded in persuading a California state court to enjoin a shareholder meeting under Delaware law. Emboldened by this early success, a handful of plaintiff-side firms created a cottage industry for proxy strike suits. The economic model was built on pragmatism: companies have been willing to make additional disclosures—however unnecessary, duplicative, or, in some instances, trivial they may be—and pay a legal fee simply to put the matter to bed. Doing so mitigated any risk that annual meetings would be postponed and spared companies the annoyance of having to explain why the original appropriate disclosures were, in fact, appropriate. This is why most cases have ended in settlement, and precious few litigated cases after Brocade have made it to the decision stage.

Now that the 2014 proxy season is nearing its end, it makes sense to revisit our March post to better understand how these cases have played out and to evaluate what companies need to know about this type of litigation. Since Brocade, defendants have been largely successful in the cases they have litigated. What is now clear is that no wave of plaintiff victories has materialized in the two years following the Brocade decision, which is more one-hit wonder than trendsetter. In fact, courts from New York to Illinois and even California have consistently declined to follow in Brocade's footsteps.

So what are the key factors driving the decisions in these cases? And what are the take-away lessons for companies faced with these suits going forward?

  • Analysis of Irreparable Harm: In Brocade, the court found it necessary to enjoin the shareholder meeting to protect the plaintiffs from what was potentially "irreparable harm"—that is, being forced to cast a less than "fully informed" vote at the meeting. Later decisions, though, have moved away from this view. In the recent case of Masters v. Avanir Pharmaceuticals, Inc. (February 2014), for example, the Southern District of California found that an injunction was unnecessary because a shareholder vote on a stock plan amendment–unlike, say, a complicated merger—could easily be unwound after the fact, no harm done. A California state court followed similar reasoning in denying a request for an injunction against Clorox (November 2012). And in Noble v. AAR Corp. (October 2012), the Northern District of Illinois denied a request for a TRO to prevent a say-on-pay vote because, under Dodd-Frank itself, such votes were only advisory, not binding. In short, post-Brocade, courts take into account the particular effects of the proposals up for a vote in deciding whether injunctions are genuinely necessary to prevent harm.
  • Materiality of "Omissions": Later decisions have also taken a stricter view of whether the information supposedly "omitted" from proxy disclosures is actually material. The prevailing approach is to insist that companies comply fully with the disclosure requirements imposed by the Dodd-Frank Act, Section 162(m) of the Internal Revenue Code, and other federal laws. Once companies satisfy these standards, though, courts are less likely to require that they include the above-and-beyond metrics and information that plaintiffs seek. For example, in Morrison v. Hain Celestial Group, Inc. (June 2013), a New York state court relied on the fact that the defendant had complied with its disclosure requirements under Dodd-Frank in denying the plaintiffs' request for a TRO and dismissing their complaint.
  • Expert Analysis of Disclosures: A recurring theme in these decisions is that a defendant can bolster its chances for success by using expert witnesses to show that its disclosures are sufficient and on par with those of its peers. In the recent Masters decision, for example, the court relied on the defendant's expert analysis showing that not one of the 25 companies in its peer group had disclosed all the information that the plaintiff claimed was "material." And in Gordon v. Symantec, the same California state court judge who decided Brocade relied on similar expert testimony in concluding that the alleged deficiencies in Symantec's disclosures were not material.

Plaintiffs' losing record in the courts so far is no guarantee that this wave of strike suits will slacken any time soon. Again, proxy strike suits are deliberately designed to make settlement cheaper and easier than litigation, and many plaintiffs will continue taking their chances in the hopes of a quick settlement. Companies amending their stock plans or holding say-on-pay votes should still take care to ensure their disclosures meet the standards set by the SEC, proxy advisory firms like ISS, and the courts. As explained above and in our prior post, there are several concrete strategies that companies can deploy to prevent and manage such suits. And when the next round of proxy litigation inevitably arrives, the developing case law should give targeted companies a solid basis for fighting back.

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.

Authors
Jonathan A. Shapiro
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions