TK Kersetter lets loose with both barrels on a phenomenon we've been tracking here at PB.com for a while:
... companies that failed the say-on-pay shareholder vote (that is, they did not garner a majority of shareholder support) that are now being sued have fallen into the black regulatory hole known as: UNINTENDED CONSEQUENCES. I equate this to the modern-day expression: “My Bad!” In other words, it’s the creators of the regulation saying, “Oh, sorry companies… This wasn’t our intention, but now it is what it is.” Who couldn’t see this coming? Even I (fully admitting I’m not the sharpest tool in the shed at times), knew that the plaintiff’s bar would capitalize on this newly formed soft underbelly of American companies. And it sure didn’t take long.
You'll recall from our earlier discussion that aggressive plaintiff lawyers are suing companies with failed say on pay votes, despite the undisputable fact that "Dodd-Frank and the legislative history make clear that while both the say on pay and say when on pay votes must be tabulated and disclosed, neither is binding on the board of directors. The act and its legislative history further make clear that the votes shall not be deemed either to effect or affect the fiduciary duties of directors. S. Rep. No. 111-176, at 134 (2010)."
Anyway, back to Kersetter:
The sad part is, every expert I have been able to talk to believes these cases (eight filed so far) are frivolous and cannot be won if they to go to trial. And that’s OK for the law firms that filed the suits because more often than not they would prefer to settle than fight it in court. Two of the cases, one of which was clearly in the “egregious abuse of comp” category, have been settled. The other targeted companies are going through that frustrating exercise of, “Should we spend the time, energy, and money to fight a frivolous lawsuit that we are pretty sure to win?”… or “Do we settle, pay our blood money for not getting shareholder support, and get our company and board out of the negative limelight?” I wish that decision was as easy as it sounds and that all companies would stand their ground. But the facts are, sometimes settling is the best business decision… no matter how bad it ticks you off.
That's what the plaintiff's bar is counting on. As I've said before, "Sharks got to eat. Until Rule 11 has real teeth and we adopt loser pays with respect to class action legal fees, lawyers are going to bring these sorts of cases."
As I’ve said before, many of these lawsuits aren’t developed based on mass shareholder discontent and unfortunately they don’t have to be. All it takes is one volunteer or malcontent shareholder (or sometimes a recruited shareholder) for the plaintiffs’ bar to file the suit. Then they hope for what all these chasers hope for: a company eager to settle. Well I’m here to support those companies, because what’s right sometimes overrides what’s prudent ,and I hope that some companies will fight the battle and clear up this mess for the rest of us.
Maybe more important, though, is to make sure your congressmen and the SEC see how ridiculous some of these lawsuits are and ensure they understand that nonbinding shareholder votes—even those won but where the percentages of votes were close—are not incidental, and often there is nothing “nonbinding” about them. I promised in my last blog that after this rant I would turn to some positive issues. Honestly, it might take me a while because with all that facing today’s American businesses, this is an unintended consequence that we could have predicted and we shouldn’t be dealing with.
And the Washington idiots that passed Dodd-Frank wonder why the economy is struggling.