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

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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

Webinar January 9, 2013

Sponsored by 2

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

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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

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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

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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

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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

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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

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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

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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

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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

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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)

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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)

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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?