In January 2011, the SEC adopted Final Rules on “say-on-pay” under Section 951 of the Dodd Frank Act. These rules provide, among other things, that public companies must provide shareholders with advisory votes on the compensation of named executive officers (NEOs).
A troubling development is that lawsuits are following in the wake of shareholder “no” votes on say-on-pay. In the past year, there have been at least six notable shareholder derivative lawsuits in which plaintiffs have argued that shareholders’ “disapproval” of a company’s executive compensation plan supports claims that the directors breached their fiduciary duties when they approved the plans, and that the directors are therefore personally liable for damages to the company resulting from allegedly excessive compensation payments to NEOs. Compensation consulting firms that provided advice to the directors have also been named as defendants in these lawsuits.
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