Loser Pay Provisions
The loser pay provision shifts attorneys’ fees and costs to unsuccessful plaintiffs in intra-corporate litigation (e.g., claims filed on behalf of stockholders against the board of directors for breach of its duties). This type of provision garnered attention as a result of the May 2014 Delaware Supreme Court decision in ATP Tour, Inc. v. DeutscherTennis Bund, in which the court upheld the facial validity of such a provision in the bylaws of a non-stock corporation. Although ATP involved a non-stock corporation, the court’s holding appeared to apply equally to stock corporations, thereby providing all corporations a way to deter the filing of frivolous lawsuits.
Despite the apparent blessing of loser pay provisions by the ATP decision, many commentators cautioned against their adoption because of the competing interests between deterring litigation and the danger of self-interested director action, and the likelihood that shareholder groups, governance advocates and proxy advisors would strongly oppose such provisions.
The discussion surrounding whether or not to adopt loser pay provisions was quickly rendered moot when two weeks after the ATP decision, the Delaware Corporate Law Council proposed an amendment to the Delaware Corporate General Law that, if adopted, would have limited the applicability of ATP decision to non-stock corporations, and would have clarified that a loser pays provision would not be permitted in the charter or bylaws of stock corporations. Many involved in the Delaware legislature process thought that the proposed amendment, which would have been effective August 1, 2014, was going to pass.
However, in response to some lobbying from the other side of the table, the proposed amendment was withdrawn on June 18, 2014. It is expected that some form of the proposed amendment will be reintroduced in 2015 following a study of the effect of loser pay provisions by the Delaware State Bar Association, its Corporation Law Section, and the Council of that section.
Raul v Astoria
Those defending loser pay provisions will be shaking their head at the facts that unfolded in Raul v Astoria.
Astoria Financial Corporation, a publicly-traded company, held its 2011 annual stockholder meeting at which it submitted the say-on-pay and the frequency of the say-on-pay votes to its stockholders. Approximately 65% of stockholders approved the say-on-pay and approximately 74% voted for an annual say-on-pay vote, which is what the board had recommended.
As required by SEC rules, Astoria filed a Form 8-K to announce the results of the 2011 annual stockholder meeting and reported: “The non-binding vote to determine the frequency of future shareholder advisory votes to approve the compensation of the Company’s named executive officers is based on the highest number of votes cast by shareholders represented in person or by proxy and entitled to vote. Based on the vote indicated below, the results of the future advisory shareholder votes to approve the compensation of the Company’s named executives is every year.”
Fast-forward to 2012. Astoria mails out its proxy statement for the 2012 annual stockholder meeting. In line with what the board recommended and with what was approved by the stockholders, one of the items on the agenda was the say-on-pay vote.
After receiving the proxy statement, the plaintiff sent a demand letter to the board alleging that the board had violated SEC disclosure rules and its duty of candor by failing to disclose whether, and if so, how, the board considered the result of the 2011 annual meeting say-on-pay vote and the frequency of the say-on-pay vote. The letter demanded that the board (1) issue corrective disclosures, (2) adopt stronger protocols regarding disclosures, and (3) amend the company’s compensation committee charter to require that committee to consider the results of future say-on-pay votes when making executive compensation decisions.
These seem to be the type of letters that should be quickly tossed aside, but as every good board does, the board took the demand seriously and, among other things, Astoria filed an amendment to its Form 8-K that reported the results of the 2011 annual meeting. The amendment to the Form 8-K added that “in light of the shareholder advisory vote at the 2011 Annual Meeting on the frequency of shareholder votes on approval of [executive compensation]…the Company intends to hold a say-on-pay vote every year.”
After the Form 8-K amendment was filed and after receiving a response letter from Astoria that it would assess its disclosure controls and that the compensation committee would evaluate its charter, the plaintiff requested that Astoria pay for its attorneys' fees. Astoria denied the request, and the plaintiff filed a complaint. In short, the plaintiff (or, more likely, its attorneys) claimed that it is entitled to attorneys' fees because its efforts to remedy the disclosure violations identified in its demand letter conferred upon Astoria a benefit justifying an award of fees. Astoria moved to dismiss the complaint.
Let's summarize the chain of events: (1) the board recommended in the 2011 proxy statement that stockholders vote to hold annual say-on-pay votes; (2) the company disclosed in a Form 8-K that “[b]ased on the vote indicated below, the results of the future advisory shareholder votes to approve the compensation of the company’s named executives is every year; and (3) the company disclosed in the 2012 proxy statement its intent to hold a second say-on-pay vote. According to the plaintiff, somewhere in this chain is the omission of material information.
The Chancery Court denied plaintiff’s request for attorney fees and failed to find that Astoria’s board breached its duty of candor. In the court’s words: "I find that the board did not omit material information in its initial 8-K by failing to explicitly inform the stockholders that the results of the 2011 Frequency Vote showed that the stockholders had voted to hold future Say-On-Pay Votes annually, as the board had recommended, and that the board had accepted those results. Similarly, whether and how the board considered the results of the 2011 Say-On-Pay Vote cannot be material as a matter of Delaware law. The Plaintiff can point to no authority indicating that, as a matter of Delaware law, every consideration underlying a board’s approval of executive compensation must be disclosed. The supplemental disclosure made after the Demand—which the Plaintiff points to as a corporate benefit—itself provided only the boilerplate information that the board “was aware of a variety of factors, including the outcome of the advisory vote, when it authorized the changes, but no single factor was determinative.” Known to the stockholders, before the Plaintiff sent his Demand and the board supplemented the 2012 Proxy Statement, was that (1) the board recommended certain compensation packages in 2011; (2) the board planned to “take into account the outcome of the vote when considering future executive compensation;” (3) a majority of the stockholders voted in favor of the board’s recommendation; and (4) the board implemented those compensation decisions it had recommended and the stockholders had blessed. The proxy supplement, though in compliance with Dodd-Frank, is devoid of further content, and the failure to include the additional disclosures in the Company’s 2012 Proxy Statement does not, in my view, constitute a material omission sufficient to demonstrate a breach of the duty of candor.”