The NASPP Blog

This week I caught up on a new lawsuit filed by the shareholders of Cheniere Energy. Shareholder litigation is nothing new, and I get lots of Google Alerts on the topic. What got my attention about this particular matter are the nuances of the issues at hand – and the takeaways that may benefit other companies.

Background

Described in a blog by energy site Fuel Fix, last week Cheniere shareholders filed a lawsuit claiming that the company’s Compensation Committee approved large stock awards to the CEO and other high ranking executives that they considered “excessive, improper”. The total value of the shares in question is about $1.7 billion, so we aren’t talking chump change (my guess is if we were, there wouldn’t be a lawsuit involved). The gist of the back story is that in February 2013, the company proposed (via its proxy) a compensation plan for shareholder approval that tripled the compensation approved under the prior plan back in 2011. Shareholders voted, the company said the proposal passed, and subsequent awards were made. Okay, sounds benign so far, right?

The Numbers Don’t Add Up

The core of the issue, and the one that caught my attention, is that the shareholders in this case allege that the company miscounted shareholder votes when the compensation plan that included these awards was presented to shareholders for approval. Shareholders claim the proposal did not obtain the required votes for approval, and that the subsequent awards were not approved. How did that happen? According to the lawsuit, the company failed to count shareholder abstentions as “no” votes. The final reported tally of votes was 77 million in favor of tripling the compensation plan, 57.9 million against the proposal, and 36 million abstentions. A side note crash course on abstentions: an “abstention” basically means that the shareholder refrained from voting. It’s not a “vote” per se, but rather a lack of vote. Where a certain percentage or majority of all shareholders is needed to approve something, abstentions are usually counted in the “no” pile of votes.

Shareholders in this case are not arguing that the compensation is not reflective of performance – those types of complaints are fairly common. Rather, the shareholders are arguing a key technicality – that the awards should never have been issued in the first place because (when you count abstentions) the shareholders did not approve the increase to the plan reserve that would have been needed to make the awards.

The Fallout

So what’s the fallout from this pending litigation, aside from headaches having to deal with the matter? For starters, the company chose to delay its annual meeting (originally scheduled for next week, now scheduled for September 11). This seems to be, based on sources cited in the Fuel Fix blog, rather unprecedented. Many companies facing shareholder litigation still continue on with annual meetings without a delay. In Cheniere’s case, shareholders are asking for the company to void the 2013 vote, and for affected executives to “disgorge all compensation distributed as a result of this improper share increase.”

If the company did fail to properly count abstention votes, then the shareholders (in my non legal, purely speculative opinion) seem to have a valid claim – at least based on the surface issues. We all know that increases to plan reserves need to comply with requirements around shareholder approvals. I don’t like to make examples of companies who fall into challenges like these, but I do think there are things that we can all learn. First and foremost, yes, this can happen to you. A simple oversight or mistake is often behind these matters. Cheniere has not commented yet on this case, so it’s important to note that the public hasn’t heard their side of the story, and we can only speculate at this point. As many companies are emerging from proxy season (and others preparing to enter it), this serves as a good reminder to check your shareholder votes carefully – work with your internal and external involved parties to ensure the tally from shareholder votes has been properly counted. I thought the term “recount” only applied to presidential elections (my attempt at humor), but turns out that a simple audit or double (or re) check could go miles in ensuring that a similar situation doesn’t occur on your turf.

-Jennifer