Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, January 22, 2012

Nelson on Say on Pay and Derivative Shareholder Litigation

Ending the Silence: Shareholder Derivative Suits and Amending the Dodd-Frank Act so 'Say on Pay' Votes May Be Heard in the Boardroom, by William Alan Nelson II, George Washington University - Law School, was recently posted on SSRN.  Here is the abstract:

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) has broad and deep implications that will touch every corner of the financial services industry, as well as multiple other industries. This article is the first to fully examine shareholder derivative lawsuits filed after a negative “say on pay” vote on executive compensation under the Dodd-Frank Act. The article begins by providing a history of “say on pay” votes and examining the “say on pay” provisions of the Dodd-Frank Act. The article transitions into a discussion of how the Dodd-Frank “say on pay” provisions are currently being utilized by shareholders in derivative lawsuits. Specifically, the article will analyze in detail the legal theories raised and remedies sought by the litigants in the only two post-Dodd-Frank decisions that have been handed down by courts to date.

Based on this analysis, the article provides recommendations for companies on how to re-write their “pay for performance” executive compensation policies and how to respond positively and actively to a negative “say on pay” vote on executive compensation. The article concludes by proposing an amendment to the Dodd-Frank Act which, if promulgated, would provide that a second successive negative “say on pay” vote (50% or more of shareholder votes cast against the proposed executive compensation package) on executive compensation would prompt a vote on a “spill” resolution and, if that resolution passes, all directors, except for the managing director, must stand for re-election at a special “spill” meeting within 90 days of the annual shareholder meeting where the “spill” resolution passed.

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