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Litigation: Not much actual “say on pay” for shareholders

The Dodd-Frank provision requiring shareholder approval of executive compensation often doesn’t hold up in court

Since becoming effective in January 2011, the say-on-pay provision of the Dodd Frank Wall Street Reform and Consumer Protection Act has been a springboard to numerous shareholder derivative actions. The Dodd-Frank say-on-pay provision requires a vote for shareholder approval of senior executive compensation at least once every three years. The vote does not bind the issuer or board of directors; it is merely an advisory vote and creates no fiduciary duty on behalf of the company.

Throughout 2011, say-on-pay votes resulted in shareholder derivative actions in the wake of falling stock prices and companies’ dipping financial performances. These suits generally alleged a breach of companies’ fiduciary duties and attempted to use the failed say-on-pay votes to circumvent traditional obstacles to shareholder derivative suits, such as showing demand futility or the presumption of the business judgment rule.

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Matthew Ingber

Matthew Ingber is a litigation partner at Mayer Brown.

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