The NASPP Blog

I’m a San Diegoan at heart, and, as I write today, I’m thinking about a picture taken last year on a beautiful beach day. The water was sparkly, reflecting the bright sun. The beaches were filled with sunbathers. Someone snapped a photo of this perfect day, and accidentally captured something amazing – the image of a shark swimming through a wave, virtually unnoticed. People were smiling, nobody seemed to have a care in the world. That day ended well – it seems no one was bitten by the shark, and people probably didn’t even understand the potential danger until they saw that image later that evening on the news. So why on earth am I talking about sharks in this equity compensation blog? Well, as you’ve probably garnered by now, I’m drawing a parallel to an issue I feel is looming, somewhat under the radar, for many companies.

Stock Plan Sharks

You’ve probably heard the buzz over the past year or so about a wave of litigation surrounding say-on-pay and proxy proposals. The litigation, in short, has been brought as a series of class action suits by shareholders who want to see more information disclosed in the proxy around various proposals that are being submitted to shareholders for a vote. Many of these proposals involve stock plans (approval of a stock plan, increasing shares in an existing plan, and so on). The theory behind the lawsuits is that that shareholders have a right to be fully informed before they vote. The claim is that proxy statements lack a complete and full disclosure of material information that would aid in the shareholder’s ability to make an informed decision. In the past year there have been 21 of these cases filed. Of those, 10 cases were “successfully resolved” according to the plaintiff’s lawyer (successful meaning they resulted in a preliminary injunction or restraining order, which paved the way to an acceptable outcome). While 21 may seem to be a small number, keep in mind that this is the actual number of cases “filed” with a court. There have been many more instances where companies have received a letter from plaintiff’s attorneys, which ultimately opens a door that most companies would prefer remain closed.

Although many companies seem to have cognizance of these lawsuits, it seems that most still think “it can’t happen to us”. There have even been rumors that the litigation is dead. If you’re thinking those thoughts, think again. These lawsuits appear to be far from dead. In fact, in a unique set of circumstances at this year’s annual conference, we had both the plaintiff’s attorney and defending attorneys at front and center in these lawsuits come together to share their perspective on these suits.

The session was interesting, and I can’t do it full justice in this blog (the materials are available online for conference attendees, and the audio is available for purchase). However, I wanted to raise awareness of this concern and share some of the “red flags” that the plaintiff’s attorney shared during this session.

An Invitation to a Plaintiff’s Attorney?

• Share Increases: Increasing the number of shares in an equity plan? Plaintiffs attorneys are scouring proxies to see if companies have disclosed information such as any projections that helped determined the number of shares to request.
• Consultants: If the company or board hires a consultant who uses things like analysis of “share value transfer” in their assessment, and the board evaluates or relies on that information in making compensation decisions, then that information should be disclosed in the proxy.
• Peer Groups: If the board determines that executive compensation should be based on peer group data points, then plaintiff’s attorneys are looking for information on the companies in the peer group, the metrics evaluated (e.g. number of employees, enterprise value), and any performance metrics, such as TSR.

Now, before you shoot the messenger – I’m not taking a stance advocating these disclosures. I’m relaying what I heard the plaintiff’s attorney identify as “red flags” when they are looking at proposals and evaluating proxy statements. If you have items going before shareholders in a vote this upcoming proxy season (yes, the proxy is months away for calendar year-end companies, but proposals are likely to be discussed in the near-term), then you absolutely want to be aware that plaintiff’s attorneys are going to look at your proxy through this lens.

Advance Mitigation

You know the sharks are out there – now what? Before I answer that, I just have to disclose that the term “shark” was borrowed from the panel’s own chosen title – so I’m not labeling anyone a shark, and I certainly appreciated the entire panel’s contribution to our conference. Now, back to the sharks and how to avoid them – there are a few suggestions that I gleaned from the presentation:

• Consider including more disclosure (if it won’t hurt, it might make you appear to be a less easy target)
• Advise your board of directors that a proxy proposal could result in litigation
• Consider getting 3rd party advice on how to size your equity pool

Additional details, such as insight about what to do if your company is contacted by a plaintiff’s attorney can be found in the materials and audio for the conference session titled “Stock Plan Proposal and Say-on-Pay Litigation: How to Avoid the Sharks”. This is definitely an area where companies should focus some attention as they prepare for the 2014 proxy season.

Thanks to panelists Douglas Clark and David Thomas of Wilson Sonsini Goodrich & Rosati, Juan Monteverde of Faruqi & Faruqi, and John Grossbauer of Potter Anderson & Corroon for the content that I used in writing this blog.

-Jennifer