Insight: Lawyers gain from "say-on-pay" suits targeting U.S. firms

Fri Nov 30, 2012 1:12am EST
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By Nate Raymond

NEW YORK (Reuters) - Since the Dodd-Frank law gave shareholders a say in executive pay in 2010, courts have routinely rebuffed efforts by shareholders to force companies to heed their voice.

Now, lawyers have found a new way to bring lawsuits over executive pay, resulting in a handful of legal settlements. But the settlements to date have produced no changes in executive compensation and no money for investors. In fact, the main financial beneficiary so far has been a small New York law firm that brought the bulk of the cases.

The law firm, Faruqi & Faruqi, said the settlements benefit shareholders by giving them the information they need to make investment decisions, but it declined to comment on monetary details.

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires companies listed in the United States to hold shareholder votes at least every three years on the compensation of top executives. These "say-on-pay" votes are advisory and nonbinding.

While most of them pass, a few fail, sometimes resulting in shareholder lawsuits against company directors. Of the 12 such cases that have been decided by courts, 11 have been dismissed, according to a report by the law firm Pillsbury Winthrop Shaw Pittman.

The lawsuits filed by Faruqi & Faruqi, however, are brought before votes are even taken and do not challenge compensation packages directly. Instead, the lawsuits accuse companies of failing to give shareholders enough information on compensation plans to make informed votes.

This can either be executive compensation, which is subject to the advisory votes, or employee share plans, which require shareholder approval. In both cases, the lawsuits seek to prevent votes from going forward at annual shareholder meetings.

Some 20 public companies including Microsoft Corp, H&R Block Inc and Clorox Co have been hit with these lawsuits in the past year, according the report by Pillsbury and court records. Pillsbury usually represents companies that are defending themselves against shareholder lawsuits. It is not representing any defendants in the current wave of cases.   Continued...