It’s proxy season, which means it’s also proxy strike suit season. We’ve recently heard reports from several members that plaintiffs are targeting disclosures surrounding whether brokers will be permitted to vote on particular proposals & the effect of abstentions and non-votes, as well as disclosures relating to compensation plans being submitted for a shareholder vote.
Here’s what we have learned:
– The plaintiffs’ bar has been sending demand letters to companies alleging inadequate or inaccurate disclosure about the vote required to approve proposals included on the company’s proxy materials, and threatening legal action in the event that corrective disclosure is not provided.
– Similar demand letters have been sent to companies with compensation plans on the ballot, alleging inadequate disclosure under Item 10(a) of Schedule 14A, which relates to general disclosures relating to compensation plans being submitted for shareholder approval.
– These demand letters typically arrive shortly before the scheduled date for the annual meeting, and a number of companies have filed DEFA 14As to reflect revised disclosure relating to these matters.
– Resolution of the issues raised in the demand letters is typically accompanied by a demand for legal fees.
These are not new areas of proxy disclosure for plaintiffs to pursue. Compensation plan disclosures have long been an attractive target, and disclosures about the effect of abstentions & non-votes were the subject of at least one high-profile case in 2014 & a number of demand letters over the last few years. It’s also easy to see why plaintiffs might like to single out disclosures in these areas for potential challenges.
When it comes to broker non-vote disclosures, the application of NYSE Rule 452 is sometimes unclear, and the Exchange’s interpretation of what proposals are “routine” does not always align with what one might expect. On top of that, the impact of broker non-votes on the outcome of any given proposal may depend on state law, charter provisions, and the nature of the proposal itself. In other words, this is complicated stuff – and it’s easy to make a mistake.
Item 10(a) of Schedule 14A seems more straightforward – essentially requiring companies to summarize the material features of the plan and information about the number of participants & how they are selected. But these requirements are also very open-ended, and leave plenty of room for second-guessing disclosure decisions. We’ll have more on this in the next issue of The Corporate Counsel newsletter.
-John Jenkins, TheCorporateCounsel.net May 14, 2019
