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Shareholders Challenging Annual Proxy Disclosures
Robert M. Daines, Stanford Law School and Olga Koumrian, Cornerstone Research
In 2012, plaintiff attorneys filed a wave of lawsuits challenging annual shareholder proxy votes and disclosures of executive compensation. This litigation may increase during the 2013 proxy season. It does not challenge the actual compensation, but only requests more detailed disclosures. Initially, these cases focused on say-on-pay disclosures and increases in the number of shares authorized for equity compensation plans. The say-on-pay disclosure claims were largely unsuccessful, but plaintiffs had more success with the argument that an increase in the number of shares available to stock compensation plans dilute share value for existing shareholders.
The authors argue that, although any additional information can be valuable to shareholders, the benefits can be offset by the costs incurred to supply the data, and a too-expansive requirement that companies provide additional compensation data may reduce, rather than expand, the opportunity for shareholders to vote on executive compensation. If the Dodd-Frank Act were interpreted to encourage costly disclosure lawsuits and challenges, without otherwise changing outcomes, firms would rationally seek to avoid these costs by limiting such votes to the statutory required once in three years, instead of the annual vote that many firms hold today.
The authors note that while all the 2012 litigation was filed by a single plaintiff law firm, two more firms have announced similar investigations in 2013. These three firms announced a combined total of 16 investigations of public companies in December of 2012 and an additional 17 companies in January of 2013.