The other decision on say on pay came out of the federal distrcit court of Oregon. In Plumbers Local No. 137 v. Davis, 2012 U.S. Dist. LEXIS 5174 (D. Or. Jan. 11, 2012), the federal magistrate considered a derivative action brought against the board of Umpqua holdings.
The case arose out of a challenge to a board approved a compensation package in 2010. The package, according to the court, resulted in an increase for each executive officer of "60 up to 160%." During the same year, return to shareholders in 2010 "was a negative 7.7 percent." Submitted to shareholders for an advisory vote, shareholders expressed disapproval in fairly emphatic terms.
Umpqua shareholders rejected the 2010 executive compensation program by approximately sixty-two to thirty-five percent (with three percent abstaining). Those voting against the proposed executive compensation package included thirteen of Umpqua's twenty largest shareholders.
Defendants sought dismissal for failure of shareholders to make demand and for failing to state a claim. The magistrate agreed to dismiss only on the basis of the demand issue, without reaching the substantive claim. Id. ("The court expresses no opinion regarding the merits of the Plaintiffs' allegations or the Defendants' defenses.").
The first question was to resolve the applicable law. Umpqua is an Oregon corporation but, as the court noted, the law in the state was "undeveloped." As a result, the parties and the court opted to rely on Delaware law.
That meant an application of the much litigated two prong standard set out in Aronson. The first permitted demand excusal where the board lacked a majority of independent and disinterested directors. Plaintiff sought to meet this standard by asserting that independence was lost as a result of the threat of liability arising out of action. In addition, the CEO, as an interested director, was “in a leadership position or otherwise wield[ed] significant influence.”
The argument that directors ceased to be disinterested because of concern over liability was described by the magistrate as a “novel theory”.
Under Plaintiffs' reasoning, the fact that presuit demand is itself suggestive of impending liability is sufficient to create the type of self-interest that triggers the demand futility exception. This would permit every derivative action plaintiff to argue that demand is futile and need not be made because no board would be able to act objectively in evaluating a presuit demand. Such a result would effectively erase the demand requirement and negate its purpose.
As for the argument that the CEO exercised excessive influence, the magistrate concluded that the assertion had not been pled with sufficient particularity.
The second prong of Aronson required a showing that there was “reasonable doubt that the challenged action was the result of reasonable business judgment.” Plaintiffs asserted that the negative vote coupled with the company’s poor performance deprived the board of the presumption of the business judgment rule. The magistrate found this insufficient.
Plaintiffs' essential position is that if a simple comparison reveals a level of compensation inconsistent with general corporate performance, the business judgment presumption is necessarily overcome, a position that is unsupported by the applicable standards.
In reaching its decision, the magistrate disregarded the analysis in Cincinnati Bell, the one case that has allowed a say on pay based case to go forward noting that “it is unlikely that the case remains viable legal authority." Instead, the magistrate pointed to Teamster Local 237 v. McCarthy, Civ. No. 2011-cv-197841 (Superior Court of Fulton County, Ga., September 16, 2011), the decision that dismissed a say on pay based claim. In that case, the court reasoned:
Given that Delaware law, which the Dodd-Frank Act explicitly declined to alter, places authority to set executive compensation with corporate directors, not shareholders, this Court will not conclude that an adverse say on pay vote alone suffices to rebut the presumption of business judgment protection applicable to directors' compensation decisions.
Plaintiff filed objections to the magistrate's decision. As the Objections describe:
Plaintiffs respectfully submit that Magistrate Judge Acosta’s Recommendation applied the wrong legal standard, improperly accepted defendants’ explanations rather than the allegations of the Complaint, and effectively created a pleading standard that requires plaintiffs to prove their case before bringing it. Plaintiffs respectfully object.
The case, therefore, continues.
For the most part, this case is a difficult one for shareholders. It is premised mostly upon facts that arise from the negative say on pay vote by shareholders. Standing along, courts will probably not, for the most part, allow a negative say on pay vote (in the context of poor earnings) be sufficient to allow for demand excusal. On the other hand, a negative say on pay vote in the context of a broader challenge to board behavior with respect to compensation (perhaps challenging the process used by the board or demonstrating poor performance over a more protracted) will likely have a better chance of overcoming a motion to dismiss for failure to make demand.
Primary materials in this case are located at the DU Corporate Governance web site.