Another Say on Pay Suit Dismissed: Swanson v. Weil

In Swanson v. Weil, the federal district court in Colorado dismissed another case seeking to establish a breach of fiduciary obligations at least in part based upon a negative say on pay vote.  This case involved the board of directors of Janus Capital, a company that received a negative vote on pay in 2011.  As has been the case for most of these suits, the decision was issued in the context of a motion to dismiss for failure to make demand. 

The court found first that the plaintiffs had not alleged sufficient facts to meet the Aronson test.  The facts were not sufficient to show that the board was interested because of the potential for liability arising out of the litigation.  In doing so, the decision noted the holding in NECA-IBEW Pension Fund ex rel. Cincinnati Bell, Inc. v. Cox, No. 11-cv-451, 2011 WL 4383368 (S.D. Ohio Sept. 20, 2011), but found the decision not to be "persuasive." 

In addressing the negative shareholder vote on executive compensation, the court emphasized that "Dodd-Frank expressly states, however, that such a vote may not be construed 'to create or imply any change' to existing fiduciary duties."  The court also rejected the argument that the "resounding no vote" by shareholders combined with a decline in share prices sufficied to remove the presumption of the business judgment rule. 

[the argument] contradicts the express language of Dodd-Frank and well-established Delaware law. Dodd-Frank states that a shareholder vote does not “overrul[e]” a decision by a board or “create or imply any additional fiduciary duties” to rescind or otherwise respond to a say on pay vote. See 15 U.S.C. § 78n-1(c). . . . I also note that the result of the advisory say on pay vote cannot rebut the business judgment presumption because it occurred after the Board approved the 2010 executive compensation. Delaware law forbids using events subsequent to the challenged action to second guess a board’s business judgment.

The decision, therefore, continues a clear trend with respect to legal challenges involving negative say on pay votes.  With the exception of Cincinnati Bell, courts have not been willing to allow cases involving a negative say on pay allegation to get past the demand excusal stage.  Some have used language that suggests a negative vote is irrelevant to the analysis, mostly relying on the language in the statute stating that the advisory vote does not alter fiduciary obligations.  See 15 U.S.C. § 78n-1(c).  A few cases have noted that a negative vote can be a factor in determining whether the board is entitled to presumption of the business judgement rule but, standing alone, does not suffice to rebut the presumption. 

The short term consequences of these decisions is to remove some of the legal risk associated with negative say on pay votes by shareholders.  Boards in general can be comforted by knowing that the fact alone does not significantly increase the risk of a violation of the board's fiduciary obligations.

In the long term, however, the cases likely will make advisory votes less effective.  Aware that a negative say on pay vote does not significantly increase risk, boards will have greater freedom to ignore them.  To the extent that this occurs, advisory votes will have less impact on the compensation process.  In countries where say on pay has not had the intended effect on compensation practices, countries have sometimes put in place second generation statutes that provide shareholders with some binding authority.  This has occurred, for example, in Britain. 

J Robert Brown Jr.