Last month, a Georgia state court and an Ohio federal court issued the first two decisions addressing motions to dismiss shareholder derivative complaints based on negative say-on-pay votes, and the courts reached different conclusions. This column assesses the validity of these suits in light of Dodd-Frank, and recommends steps to mitigate the litigation and reputational risks of a negative say-on-pay vote.
Shareholder Advisory Votes
SEC Rule 14a-21(a) implements Dodd-Frank section 951′s requirement that SEC-registered issuers provide shareholders at least once every three calendar years with a separate non-binding say-on-pay vote regarding the compensation of the company’s named executive officers, as defined in Item 402(a)(3) of Regulation S-K—the CEO, CFO and the company’s three other most highly compensated officers. Rule 14a-21(a) specifies that the advisory vote is required only when proxies are solicited at an annual or other meeting of shareholders for which the SEC’s proxy solicitation rules require compensation disclosure. The company thereafter must include a statement in the Compensation Discussion and Analysis (CD&A) of the proxy statement whether and, if so, how its compensation policies and decisions have taken into account the results of the most recent shareholder say-on-pay vote.
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