Sunday, September 15, 2013

Thinking Out Loud: Does requiring board disclosures made in connection with say-on-pay votes to satisfy the duty of candor create “additional fiduciary duties”?

This is a “thinking out loud” post, which means I’m not sure I’ve got the analysis correct, but feel it’s worth floating by readers in draft form in an attempt to generate some discussion (which may include the comment: “you are obviously wrong, and here’s why”).  I realize not all academic bloggers agree this is an appropriate use of the blogosphere, but you now know my current position on that issue.  (By the way, if you do post a comment, please consider also emailing me directly at because I’m not clear on what sort of comment alerts we get when comments are posted and I’d hate to miss one.)  So, with disclaimers firmly in place:

A few weeks ago, The CLS Blue Sky Blog posted a piece by Pepper Hamilton on Round Two of Shareholder Say-on-Pay Litigation. Here is a relevant excerpt:

The third proxy season of the Dodd-Frank Act’s mandatory shareholder “say-on-pay” advisory votes is well underway, and “round two” of shareholder say-on-pay litigation is in full swing. Unlike the first round of say-on-pay lawsuits, which were based on negative advisory votes that had already occurred, this second wave of shareholder litigation, which began in 2012, seeks to enjoin advisory votes on executive compensation based on allegedly deficient proxy disclosures…. The Dodd-Frank Act expressly states that shareholder say-on-pay votes … may not be construed as … (2) creating or implying any change to the fiduciary duties of the company or its board; or (3) creating or implying any additional fiduciary duties for the company or its board…. Generally speaking, the complaints in these lawsuits do not allege that the defendants violated any disclosure statute, rule or regulation. Instead, the complaints aver that the directors breached their state law fiduciary duties (e.g., duty of candor) ….

Further on, the piece quotes from a relatively recent relevant case, Noble v. AAR Corp., 12 C 7973, 2013 WL 1324915 (N.D. Ill. Apr. 3, 2013), wherein the court dismissed one of these cases:

Plaintiff does not dispute that Defendants have complied with the federal disclosure requirements under the Dodd–Frank Act nor does he point to any statutes, regulations, or case law that require corporations to disclose more than the federal disclosure requirements. Indeed, Plaintiff does not identify how the alleged omissions are even arguably covered under Item 402 or Item 407. Instead, Plaintiff attempts to create additional disclosure obligations for “say on pay” votes without citing legal precedent other than case law involving the required disclosures for shareholder actions outside of the context of executive pay.

What strikes me as interesting about this analysis is that it seems to suggest Dodd-Frank’s say-on-pay provision implicitly has preempted state fiduciary duty law on what disclosures satisfy the duty of candor, which seems wrong.  Cf. Robert E. Scully Jr., Executive Compensation, the Business Judgment Rule, and the Dodd-Frank Act: Back to the Future for Private Litigation?,  Fed. Law., January 2011, at 36, 38 (“the act does not pre-empt state fiduciary duty law”). In other words, requiring disclosures made in connection with say-on-pay votes to satisfy the duty of candor should not be deemed to create improper additional disclosure obligations, or change or add to existing fiduciary duties.  Rather, it should merely be understood as applying existing duties to new disclosures, which strikes me as perfectly consistent with the text of say-on-pay.  In light of this, it should be possible to state a claim for a violation of the duty of candor without alleging a violation of the federal disclosure requirements.


| Permalink


I agree that the excerpt from the Nobel case seems overbroad. The federal say-on-pay provisions create no new fiduciary duties, but they also don't eliminate any state fiduciary duties that already exist. There's a possible preemption argument, but the Noble quote doesn't seem to be making that argument.

Posted by: Steve Bradford | Sep 16, 2013 12:54:08 PM

Post a comment