As the 2013 proxy season comes into full swing, a review of the
fundamental principles governing a company's disclosure
obligations is warranted, as is a consideration of how complaints
are exposing novel theories of potential exposure for public
companies. A relatively new weapon in the arsenal of
plaintiffs' counsel is an action to enjoin an annual
shareholder meeting on the ground that proxy statements issued by a
company inadequately disclose information concerning transactions
that require shareholder approval, including the issuance of
restricted stock options and descriptions of adjustments to
executive compensation (called for by the "say-on-pay"
vote). 1 Such actions have the potential to hold hostage
the consummation of meetings and proposals that are often critical
to the company's strategic goals, and plaintiffs have won
several early victories by obtaining injunctions and/or settlements
for perceived inadequacies in proxy disclosures. Nonetheless,
companies that have adopted a prophylactic approach to responding
to challenges to their proxy disclosures have been able to defeat
injunctions and have used their success as leverage in dissuading
would-be plaintiffs from filing suit altogether. The key to this
success is an aggressive response that relies on the application of
well-established principles of law to the unique circumstances of
each situation. At a minimum, management should enter this proxy
season with a clear understanding of disclosure obligations and an
appreciation of how those obligations are being tested in
today's landscape.
It is beyond dispute that directors' duty to disclose is
"not boundless" but instead limited to information that
is "material." In re CheckFree Corp. S'holders
Litig., 2007 Del. Ch. LEXIS 148, at *6, 2007 WL 3262188, at *2
(Del. Ch. Nov. 2, 2007). Omitted facts are considered material
"if there is a substantial likelihood that a reasonable
stockholder would consider them important in deciding how to
vote." Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170,
1172 (Del. 2000) (internal quotation marks and brackets omitted).
Courts have also emphasized that, to constitute a material
omission, the information in question must "significantly
alter the total mix of information made available." See,
e.g., id. (internal quotation marks omitted); In re
Micromet, Inc. S'holders Litig., C.A. No. 7197, 2012 Del
Ch. LEXIS 41, at *32, 2012 WL 681785, at *10 (Del. Ch. Feb. 29,
2012).
In a few recent cases, courts have granted preliminary injunctions
enjoining proxy votes at annual meetings, based on complaints that
proxy materials issued in advance of those meetings were misleading
or inadequate. These opinions involve unusual facts and, in some
cases, are incorrectly premised on distinguishable legal
principles. For example, in one shareholder class action and
derivative action, the plaintiffs moved for a preliminary
injunction based on the claim that the proxy materials failed to
disclose material information about the modification of an equity
incentive plan. See St. Louis Police Ret. Sys. v.
Severson, No. 12-CV-5086, 2012 U.S. Dist. LEXIS 152392, at
*1-2, 2012 WL 5270125, at *1-2 (N.D. Cal. Oct. 23, 2012). The
federal district court enjoined the proxy vote until the defendants
supplemented the proxy statement, with the court ordering that the
revised proxy statement provide additional disclosures about
"the reasons for [and] the consequences of failure to
approve" an amendment to increase the total number of
available shares and the award ceiling. See id. at 2012
U.S. Dist. LEXIS 152392, at *11-16, 18-19, 2012 WL 5270125, at
*4-7. However, the case involved a potential violation of NASDAQ
listing rules, which formed the basis for the court's decision
that the plaintiffs were likely to succeed on a claim pursuant to
Section 14(a) of the Securities Exchange Act. See id. at
2012 U.S. Dist. LEXIS 152392, at *3-6, 15-16, 2012 WL 5270125, at
*1-2, 5-6.
In Santa Clara County, California, shareholders have launched
several recent attacks on the sufficiency of proxy disclosures,
seeking to disrupt proxy votes at annual meetings. In Knee v.
Brocade Commc'ns Sys., Inc., No. 1-12-CV-220249 (Cal.
Super. Ct. Santa Clara Apr. 12, 2012), the Santa Clara County court
granted a preliminary injunction enjoining an annual proxy vote on
the grounds that information about a plan to increase the stock
plan's reserves by 35 million shares was material and should
have been disclosed. In coming to this conclusion, the court relied
on In re Netsmart Techs., Inc. S'holder Litig., 924
A.2d 171 (Del. Ch. 2007), notwithstanding that In re
Netsmart, unlike Knee, involved a cash-out
transaction, in which "information regarding the financial
attractiveness of the deal is of particular importance," 924
A.2d at 200. See Knee, No. 1-12-CV-220249 (Cal. Super. Ct.
Santa Clara Apr. 12, 2012).
Santa Clara decisions issued since Knee have taken a more
skeptical approach to shareholder motions for a preliminary
injunction. In an order issued on July 16, 2012, the court denied a
motion, without written explanation, to enjoin a shareholder vote
until Ultratech Inc. provided more complete disclosures about its
proposal to increase the number of authorized shares of common
stock. See Rice v. Ultratech, Inc., No. 1-12-CV-226520
(Cal. Super. Ct. Santa Clara July 16, 2012).
2 Moreover, in Gordon v. Symantec Corp,
No. 1-12-CV-231541 (Cal. Super. Ct. Santa Clara Feb. 22, 2013), the
Santa Clara County Superior Court, which had earlier denied a
motion to enjoin an annual say-on-pay vote by Symantec
shareholders, sustained Symantec's demurrer in the case,
dismissing allegations that the company's directors had
breached their fiduciary duties by providing materially misleading
and inadequate proxy materials. Although the plaintiff alleged
that, with respect to disclosures pertaining to the say-on-pay
vote, the proxy was deficient in eight different ways, the court
examined each allegation and held that with respect to each one the
plaintiff had failed to allege how the omission of the information
"would have altered the total mix of information available to
the Symantec shareholders through the Proxy." Id.
Thus, the court found the plaintiff had failed to adequately plead
a sufficient disclosure claim and granted the demurrer, with leave
to amend. See id.
Apart from these cases in Santa Clara County, courts in several
other jurisdictions have rejected recent attempts by plaintiffs to
derail proxy votes. See, e.g., Greenlight Capital, L.P. v.
Apple, Inc., No. 13 Civ. 900, 976, 2013 U.S. Dist. LEXIS
24716, at *34-42, 2013 WL 646547, at *10-13 (S.D.N.Y. Feb. 22,
2013) (rejecting assertion that the proxy disclosures pertaining to
a say-on-pay vote were inadequate and denying motion to enjoin vote
on that particular proposal); Gottlieb v. Willis, No.
12-CV-2637, 2012 U.S. Dist. LEXIS 159343, at *14-20, 2012 WL
5439274, at *4-7 (D. Minn. Nov. 7, 2012) (denying plaintiffs'
motion to enjoin a proposed merger and proxy vote until defendant
disclosed additional information to shareholders); La. Mun.
Police Emps. Ret. Sys. v. Continental Res., Inc., No.
CIV-12-667, 2012 U.S. Dist. LEXIS 112088, at *21-26, 2012 WL
3263710, at *7-9 (W.D. Okla. Aug. 9, 2012) (denying a motion for a
preliminary injunction based on a claim that proxy materials failed
to provide the basis for a fairness opinion); and In re
Micromet, Inc. S'holders Litig., 2012 Del. Ch. LEXIS 41,
at *1-2, 30-35, 2012 WL 681785, at *1, 9-11 (examining
plaintiffs' allegation that a company's board had breached
its duty of disclosure by making materially incomplete and
misleading statements related to a negotiated tender offer and
concluding no additional disclosure was necessary). Some of these
cases offer insight into mounting a successful defense against
efforts to enjoin proxy votes. For example, in Gottlieb,
the court noted the plaintiff had "not submitted so much as a
declaration averring that the information she seeks would be
material to her vote, much less an expert affidavit stating that a
reasonable investor would likely find the omitted information
material." 2012 U.S. Dist. LEXIS 159343, at *14-20, 2012 WL
5439274, at *4-7; see also Assad v. LSB Corp., 2010 Mass.
Super. LEXIS 303, at *5-6, 10, 2010 WL 5129147, at *2, 4 (Mass.
Super. Ct. Suffolk Cty. Oct. 26, 2010) (denying a motion for
preliminary injunction to prevent a shareholder vote in which
plaintiffs failed to rebut a defense affidavit that "directly
addresse[d] each of the alleged omissions, explaining, with respect
to each, why the information is not material"). And, in
La. Mun. Police Emps. Ret. Sys., the court noted the fact
that the proxy materials had been submitted to and approved by the
SEC was "of some importance on the issue of injunctive
relief." 2012 U.S. Dist. LEXIS 112088, at *24, 2012 WL
3263710, at *8.
In New Jersey, plaintiffs' firms have also lodged efforts to
delay or even circumvent annual proxy votes. In a complaint filed
in December 2012 in the U.S. District Court, District of New
Jersey, public shareholders sought to enjoin a company's annual
shareholder meeting, based on allegations that the proxy statement
contained materially false and misleading statements and omissions
about the board's ability to grant tax-deductible
performance-based compensation. See Amended Complaint at
2-3, 10-16, Holland v. N.J. Res. Corp., No. 3:12-cv-07858
(D.N.J. Dec. 31, 2012), ECF No. 6. In response, the company filed
supplemental proxy materials, including a proposal to approve its
compensation plan, and the plaintiff withdrew its motion for a
preliminary injunction. The company held its annual meeting on the
originally established date. In other New Jersey cases,
shareholders have challenged the adequacy of proxy materials after
annual meetings and proxy votes were held. See, e.g.,
Complaint at 80-81, George Leon Family Trust v. Coleman,
No. 3:12-cv-04401 (D.N.J. July 13, 2012), ECF No. 1 (asserting a
derivative action based, in part, on claims that 2010-2012 proxy
statements had contained materially false and misleading
misstatements and omissions related to Johnson & Johnson's
compensation practices). 3 In one such case,
Resnik v. Boskin, 4 the federal court
granted a motion to dismiss the claim that the board of directors
of Exxon Mobil Corporation had made materially false or misleading
proxy solicitations in connection with an annual shareholder vote
on an employee compensation plan. See Opinion at 1,
Resnik v. Boskin, No. 2:09-cv-05059 (D.N.J. Feb. 17,
2011), ECF No. 40. In particular, the court found there was no
connection between the allegedly false or misleading statements in
the 2008 and 2009 proxy statements and the 2008 and 2009
shareholder votes. See id. at 5-7.
The series of recent cases challenging the adequacy of proxy
materials is illustrative of the potential exposure companies
should be mindful of when preparing disclosures this season,
especially disclosures concerning the issuance of stock or
executive compensation. Management also must stay informed of how
court rulings are defining the contours of disclosure obligations
in discrete circumstances that may be comparable to those affecting
its shareholders. Of course, there is no "one size fits
all" approach to defending against the new era of proxy
litigation, and companies should expect that plaintiffs' firms
will continue to find creative ways to challenge even the most
scrupulous of disclosures. Nevertheless, a comprehensive strategy
based on an adherence to fundamental principles and an appreciation
of how those principles apply in today's environment are
critical to any successful outcome.
Footnotes
1 The Dodd-Frank Act requires that public companies hold periodic advisory votes on say-on-pay proposals. See 15 U.S.C. § 78n-1(a)-(b).
2 The plaintiffs subsequently moved to amend their complaint.
3 This litigation is still outstanding.
4 Day Pitney served as counsel for defendant in this case.
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