Appeals Court Tosses Jacobs Engineering 'Say on Pay' Suit
Scott Graham writes for The Recorder, an American Lawyer affiliate.
A divided California Court of Appeal has rejected an attempt to punish a public company for ignoring a shareholder vote on executive compensation, in the latest test of Dodd-Frank "Say on Pay" legislation.
The Dodd-Frank Wall Street Reform and Consumer Protection Act requires executive compensation to be approved by shareholders, but the vote is non-binding. Robbins Geller Rudman & Dowd and two other firms brought a shareholder derivative action against the leaders of Jacobs Engineering Group after the construction services company increased five executives' compensation from $13.5 million to $17 million in 2010. Some 55 percent of shareholders had voted against the plan.
The plaintiffs alleged that board members, executives and a compensation consultant lied about the company's financial performance to influence the vote.
Second District Justice Sandy Kriegler, following a Delaware federal court decision from earlier this year, wrote that plaintiffs failed to show that bringing a demand to the board before filing suit would have been futile.
Doing so requires specific allegations of wrongdoing by individual directors, Kriegler wrote in Charter Township of Clinton Police and Fire Retirement System v. Martin. Instead, the plaintiffs relied on "vague, conclusory and non-specific" claims.
Moreover, Kriegler added, "the goal of retaining key executives during poor economic circumstances is entirely reasonable in order to attempt to minimize the effects of a major economic downturn on a company."
In dissent, Justice Richard Mosk acknowledged that courts so far have mostly rejected cases based on "say on pay" votes. But, he argued, plaintiffs in Charter Township had alleged more than shareholder disapproval. Their suit had accused board members of portraying financial results in a false light, deceptively comparing them with peer companies, and ignoring an Institutional Shareholder Services report recommending a no vote.
Though he lost the vote, Mosk vowed that the issue isn't going away. "In connection with the increasing number of shareholder derivative actions concerning executive compensation," he wrote, quoting from a law review article, "'the issue of shareholders being able to control executive compensation will be part of the legal discussion for the foreseeable future.'"
The Weiser Law Firm and Robbins Umeda joined Robbins Geller on the appeal for plaintiffs. Paul Hastings and Wachtell Lipton Rosen & Katz represented the individual board members, executives and consultants. Gibson, Dunn & Crutcher represented Jacobs Engineering Group.