In July, I wrote an article for The Recorder noting that shareholder derivative lawsuits appeared to be the inevitable consequence following negative say-on-pay shareholder votes that are now required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. In summary, Dodd-Frank added a new §14A(a)(1) to the Securities Exchange Act of 1934 that requires most domestic companies at least once every three years to include in their proxies a separate resolution submitting executive officer compensation to a nonbinding SOP vote. Section 14(a)(2) also requires companies at least once every six years to include in their proxies a separate resolution for a nonbinding shareholder vote on whether the SOP should be held every one, two or three years. The article discussed that seven such shareholder derivative lawsuits had been filed — with two settlements of $1.75 million and $525,000 — and that more such actions would be forthcoming.

A recent federal court decision has created shock waves in corporate circles by refusing to dismiss a lawsuit alleging that directors breached their fiduciary duties by refusing to rescind a compensation plan that included bonuses to corporate officers after a negative SOP vote against the plan. NECA-IBEW Pension Fund v. Cox (“Cincinnati Bell”), 1:11-cv-451, (S.D. Ohio Sept. 20, 2011). On the other hand, a Georgia state court simultaneously calmed fears by dismissing a similar lawsuit while reaffirming the traditional prerogative of directors to determine corporate compensation. Teamsters Local 237 Additional Security Benefit Fund v. McCarthy (“Beazer Homes”), 2011-cv-197841, (Superior Court of Fulton County Sept. 16, 2011).

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