District of Delaware Federal Court Rejects Say-on-Pay Suit

In Raul v. Rynd, C.A. No. 11-560-LPS (D. Del. Mar. 14, 2013), the U.S. District Court for the District of Delaware dismissed a derivative lawsuit brought on behalf of a Delaware corporation alleging that its board of directors, assisted by the board’s compensation consultant, breached fiduciary duties and securities laws by approving compensation to the company’s top executives despite the failure of a "say-on-pay" shareholder vote on that compensation. The suit was dismissed for failure to satisfy the pre-suit demand requirement for derivative actions and to state a claim upon which relief may be granted. The court’s opinion underscores the strong policy of the Dodd-Frank Act making say-on-pay votes nonbinding.

The plaintiff brought the suit on behalf of Hercules Offshore Inc., a Delaware corporation that provides shallow-water offshore drilling and marine services to the oil and natural gas exploration and production industry. The company planned to hold its first Dodd-Frank-mandated say-on-pay vote at its 2011 annual meeting. The proxy statement issued in connection with the meeting contained a detailed description of the company’s executive compensation practices and policy. Some of the articulated objectives of the policy were to attract, retain, motivate and reward executive officers who are capable of leading the company in a complex, competitive and changing industry; to align the interests of the company’s executive officers with those of its shareholders; to pay for performance; and to ensure that performance-based compensation does not encourage excessive risk-taking. The executive compensation plan, approved by the company’s board, raised compensation between 40 percent and 190 percent at a time when the company was not performing well. In 2010, the company had a net operating loss of $1.17 per share, an 11 percent decline in total revenue compared to the prior year, according to the opinion. The company also experienced a $300 million decrease in total assets, a $100 million decrease in net cash from operations, an almost 13 percent decrease in stockholder equity and a drop in stock price to $3.48 per share, a decline of more than $1 per share.