Dodd-Frank Act

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Section 951 of the Dodd-Frank Act states that the results of a shareholder say-on-pay advisory vote will not trigger or imply a breach of fiduciary duty. Because Congress went out of its way to be explicitly clear on this point, most legal commentators felt that shareholder derivative suits based on failed say-on-pay votes, without more, would likely never be successful. To further support this position, a number of derivative lawsuits were in fact filed on this very basis in 2011 but none have been successful to date. However, a recent decision by the Federal District Court for the Southern District of Ohio may have breathed new life back into the debate.

In NECA-IBEW Pension Fund v. Cox, the plaintiff shareholders (suing derivatively on behalf of Cincinnati Bell) alleged the company’s board of directors breached its duty by approving and recommending approval of an executive compensation package to the shareholders in its annual proxy statement. The compensation package included significant bonuses and pay increases for executives despite a $61 million decrease in the company’s net income and a drop in earnings per share from $0.39 to $0.07. The plaintiffs alleged that the board-approved executive compensation, which was subsequently rejected by 66% of the shareholders in the say-on-pay vote at the annual meeting, was contrary to the company’s written compensation policy which stated “a significant portion of the total compensation for each of our executives is directly related to the Company’s earnings and revenues and other performance factors” and that at-risk compensation should be “tied to the achievement of specific short-term and long-term performance objectives, principally the Company’s earnings, cash flow, and the performance of the Company’s common shares, thereby linking executive compensation with the returns realized by shareholders.”

The director defendants filed a motion to dismiss the complaint for failure to state a claim for which relief could be granted arguing, among other things, that executive compensation determinations are board decisions protected by the business judgment rule. The business judgment rule generally protects directors that make informed business decisions absent a deliberate
Continue Reading Has New Life Been Given to Derivative Suits Based on Failed Say-On-Pay Votes?

The Dodd-Frank Act mandated the SEC to adopt rules to require reporting companies to make certain “social disclosures.” For example, Section 1502 of Dodd-Frank requires the SEC to adopt disclosure rules that will require reporting companies to make certain disclosures if “conflict minerals” are “necessary to the functionality or production” of its manufactured products. Metals…

On July 26, 2011, the SEC approved amendments to eligibility criteria for use of the short form registration statement on Form S-3.

To use the short form registration statement, a proposed offering must meet both the issuer eligibility requirements and a transaction eligibility requirement.  While there are several available transaction eligibility standards, a frequently relied…

On August 2, 2011, the Securities and Exchange Commission (the “SEC”) released a revised Dodd-Frank rulemaking calendar. The new calendar indicates that rulemaking pertaining to the following sections of the Dodd-Frank Act will be delayed until the first half of 2012:

  • §§953 and 955: Adopt rules regarding disclosure of pay-for-performance, CEO pay ratios, and hedging

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In a resounding victory for public companies Friday, the United States Court of Appeals for the District of Columbia Circuit struck down the Securities and Exchange Commission’s rule on proxy access.  The controversial proxy access rule would have permitted shareholders to more easily and more cheaply nominate a minority slate of director candidates for election…

Section 205(a)(1) of the Investment Advisers Act generally prohibits an investment adviser from collecting performance based compensation that is based on a share of capital gains on, or capital appreciation of, a client’s funds or assets under management. The Securities and Exchange Commission (“SEC”) adopted Rule 205-3 to provide exceptions to this prohibition if the…

Pursuant to Section 417 of the Dodd-Frank Act, the SEC’s Division of Risk, Strategy and Financial Innovation is undertaking two current studies involving short selling. The first study focuses on the state of short selling on national securities exchanges and in the over-the-counter markets. 

The SEC is seeking comments to complete its second study involving…

Last week, the SEC proposed new rules required by Section 952 of Dodd-Frank Act.  Under the proposal, compensation committees may engage a compensation consultant or other advisor, including legal counsel, only after taking into consideration the following factors, and any other factors determined by the national securities exchanges:

1) provision of other services to the…