Protecting Your Company from Proxy Disclosure Litigation David Katz - PDF document

1/9/2013 Protecting Your Company from Proxy Disclosure Litigation David Katz Partner, Wachtell, Lipton, Rosen & Katz John Seethoff VP, Deputy General Counsel – Corporate, Microsoft Corporation Evan Sloves VP, Legal Services and Deputy General Counsel Corporate Affairs and Securities, Cisco Systems, Inc. Robert Varian Partner, Orrick LLP Darla Stuckey Senior VP for Policy & Advocacy, Society Sponsored by Webinar January 9, 2013 Agenda • The Landscape • The Claims • Litigation Dynamics • Defending a Claim • Removal • Steps to Prevent a Claim • Steps to Prepare for a Claim • Should You Settle? • List of Suits 2 1

1/9/2013 The Landscape • At least 15 companies have been sued in 2012-13 • The claims - inadequate disclosure relate to SoP and equity comp plan votes • Preliminary Injunctions sought against such votes at annual meetings; some converted to damage claims • Predominantly filed in California state courts • The primary plaintiff law firm- Faruqi & Faruqi • Their strategy - Applying the M&A disclosure suit approach to regular annual meetings • Settlements – range from $100K-$635K 3 The Claims • Allegations of misleading or inadequate disclosure in proxy statements • Specific challenges to executive compensation plans and Say-on-Pay disclosures • Allegations relating to compensation plans claim that dilution has not been disclosed • Weaker claim where dilution not an issue 4 2

1/9/2013 Litigation Concepts and Dynamics • Irreparable harm • Balancing of hardships • Materiality • Judge/forum • “Atmospherics”  Overall perception of company’s corporate governance practices  Lawyer-driven litigation  Small individual shareholder plaintiff with historical ties to plaintiff’s firm  Counterbalance from large institutional holders 5 Defending a Claim • Establish goals -- short and long term • Assess factual or legal weaknesses • Scope of discovery • Seek removal to Federal District Court? • Evaluate potential challenges to pleadings • Notify insurance carriers • Selecting experts • Sources of supporting declarations • Role of media 6 3

1/9/2013 Removal (Boxer v. Accuray) • Defendants removed case to federal court (N.D. Cal.) • Plaintiff filed motion to remand back to state court • Federal court granted plaintiff’s motion • Defendants argued the comp disclosures were controlled by Dodd-Frank SoP provisions (ie federal law) • Court agreed with plaintiffs that directors could breach fiduciary duties by omitting information material to the vote, without violating Dodd-Frank • Court also held that claim alleging b/f/d relating to disclosures on the incentive comp plan were not governed by Dodd-Frank 7 Steps to Prevent a Claim • Reduce your exposure  Polish disclosure on equity plans • Explain why more shares are needed and dilutive impact of share increase  Consider less proxy disclosure about nature of Compensation Committee deliberations • Remove quantitative data from SOP proposal • Minimize peer group references • Explain basis for exec pay changes  Have outside counsel that has defended similar suits review draft disclosures 8 4

1/9/2013 Steps to Prepare for a Claim • Adopt exclusive forum bylaw • Build a strong record by drafting Compensation Committee and Board minutes expecting they will be reviewed by plaintiffs’ counsel • Advise Board and Compensation Committee of litigation risk during proxy preparation process • Plan to submit equity plans for shareholder approval more than a year in advance • Preparing ahead of time  The cases move fast  Identify possible outside counsel and experts  Understand your defense strategy and appetite for settlement  Determine state law and bylaw/charter constraints on adjourning vote to later date 9 Should You Settle? • Business principles • Cost of defense • Impact of discovery • Effect of additional disclosure that would accompany a settlement • Risk to timely passage of contested annual meeting proposals • Risk of future similar suits 10 10 5

1/9/2013 List of Suits Boxer v. Accuray, Inc., No. 1-12-235266 (Cal. Super. Ct. Santa Clara Cnty. filed Nov. 1, 2012) Bramwell v. LifeVantage, No. 120413468 MI (Utah 3d Jud. Dist. Salt Lake Cnty. filed Oct. 22, 2012) Gordon v. Microsoft Corp., No. 12-2-33448-0 SEA (Wash. Super. Ct. King Cnty. filed Oct. 11, 2012) Morrison v. The Hain Celestial Group, Inc., No. 602074/2012 (N.Y. Sup. Ct. Nassau Cnty. Oct. 11, 2012) Wenz v. Globecomm. Sys., Inc., No. 031747/2012 (N.Y. Sup. Ct. Suffolk Cnty. Oct. 11, 2012) Mancuso v. The Clorox Co., No. RG12651653 (Cal. Super. Ct. Alameda Cnty. filed Oct. 10, 2012) Nazarenko v. Angiodynamics, No. 1500182/2012 (N.Y. Sup. Ct. Albany Cnty. filed Oct. 3, 2012) 11 11 List of Suits (con’t) Noble v. AAR Corp., No. 2012CH004950 (Ill. Ch. Ct. filed Oct. 2, 2012) Gordon v. Cisco Sys., Inc., No. 1-12-cv-233209 (Cal. Super. Ct. Santa Clara Cnty. filed Sept. 28, 2012) Schumacher v. NeoStem, Inc., No. 653285/2012 (N.Y. Sup. Ct. N.Y. Cnty. filed Sept. 20, 2012) Gordon v. Symantec Corp., No. 1-12-cv-231541 (Cal. Super. Ct. Santa Clara Cnty. filed Aug. 31, 2012) Feinstein v. WebMD Health Corp., No. 652147/2012 (N.Y. Sup. Ct. N.Y. Cnty. filed June 20, 2012) Rice v. Ultratech, Inc., No. 1-12-cv-226520 (Cal. Super. Ct. Santa Clara Cnty. filed June 14, 2012) Knee v. Brocade Communications Sys., Inc., No. 1-12-cv-220249 (Cal. Super. Ct. Santa Clara Cnty. filed March 6, 2012) Joyce v. AmDocs Ltd., No. 650114/2012 (N.Y. Sup. Ct. N.Y. Cnty. filed Jan. 13, 2012) 12 12 6

1/9/2013 Questions? • Is any company immune from these suits? Is size or industry a factor? • Have the plaintiffs’ firms tried any new strategies? • Will these suits die on the vine or continue? • How can you get an institutional investor to agree to sign an affidavit? • Will/could these suits extend to disclosure in other areas of the proxy, such as director qualifications? • Should I advise my Board or committee about these suits now even if I don’t expect to receive one? 13 13 7