When Diplomacy Fails: Litigation Developments

Travis E. Downs IIIBruce GambleJuly 10-12, 2013

San Diego

San Francisco

Atlanta

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Washington, D.C.

Largest Plaintiffs’ Securities Litigation Firm

New York (2)

PhiladelphiaChicago

• 180180 Lawyers in 9 offices, including former Federal & State prosecutors and SEC Lawyers Lawyers in 9 offices, including former Federal & State prosecutors and SEC Lawyers • 250250 Professionals, including Forensic Accountants and Investigators Professionals, including Forensic Accountants and Investigators

TOTAL RECOVERY – $7.3 billion

$925 Million Recovery

• 18 times greater than average

• 4 times greater than the next largest backdating settlement

• $30 million in cash paid from CEO’s own pocket

Corporate Governance Reforms

• Shareowner Nominated Director

• Lead Independent Director

• Executive Compensation Linked to Performance

• Minimum Holding Period for Shares Obtained via Option Exercise

Lead Plaintiff: CalPERSLead Counsel: Robbins Geller

“[Backdating options] isn’t a question about ‘Whoops, I may have (accidentally) crossed a line here’ . . . It’s a question of knowingly betting on a race that’s already been run.”

Former SEC Chairman Christopher Cox

“Backdating "represents the ultimate in greed,… It is stealing, in effect. It is ripping off shareholders in an unconscionable way.”“

Former SEC Chairman Arthur Levitt

 

• CEO, COO, CTO and CFO paid $9.6 million in cash and $22 million in options and shares -- 57% of total damages

• 5 officers and directors paid $9.2 million in cash and $9.4 million in options and shares -- 43% of damages recovered

• CEO and Chairman and SVP paid $9.5 million in cash -- 31% of damages recovered

• CEO and EVP paid $30 million in options -- 100% of damages recovered

• 7 officers and directors paid $22 million in cash and options -- 89% of damages recovered

• CEO paid $3.9 million in options -- 23% of damages recovered

• 4 officers and directors paid $22.6 million in options -- 100% of damages recovered

Thanks to a “say on pay” clause in last year’s Dodd-Frank financial-reform law, the pay of every senior executive of an American public company is now subject to a shareholder vote.

 

Negative Say-On-Pay Votes

2011: Approximately 2,300 reported votes45 failed votes

2012: Approximately 2,215 reported votes52 failed votes

2013: Approximately 2,634 reported votes55 failed votes

Reasons for Failed Say-On-Pay Votes

• Poor stock price performance vs. high CEO and top executive pay

• Magnitude of CEO and top executive pay

• Poor executive compensation pay practices

• Use of an inappropriate peer group

Judicial Review of Executive Compensation

“The directors of a Delaware corporation have the authority and broad discretion to make executive decisions. . . . . [H]owever, the discretion of directors in setting executive compensation is not unlimited. Indeed, the Delaware Supreme Court was clear when it stated that “there is an outer limit” to the board’s discretion to set executive compensation, ….”

In re Citigroup Inc. Shareholder Derivative Litigation, No. 3338-CC, Delaware Chancery Court.

“Executive compensation, however, is not a realm in which less than forthright disclosure somehow provides a company with an advantage with respect to competitors…. When directors speak out about their own compensation, or that of company managers, shareholders have a right to the full, unvarnished truth.”

In re Tyson Foods, Inc. Consolidated Shareholder Litigation, No. 1106-CC, Delaware Chancery Court.

“. . . Dodd-Frank explicitly states that say-on-pay votes “shall not be binding” on a company or its board of directors. . . . Plaintiff’s allegations and arguments in this litigation fail to recognize these realities of Dodd-Frank.”

Raul v. Rynd, et al., No. 11-560-LPS, U.S.D.C., Delaware

“Although a ‘say on pay’ vote may be reasonably considered as a factor in the demand futility analysis, it is not conclusive in this case.”

Weinberg v. Gold, et al., No. JKB-11-3116, U.S.D.C. Maryland

“Looking to precedent from other courts that have interpreted the shareholder vote provision of the Dodd-Frank Act, as well as the purpose of the Dodd-Frank Act, this court concludes that a shareholder vote on executive compensation under the Act has substantial evidentiary weight and may be used as evidence by a court in determining whether the second prong of the Aronson test has been met….”

Laborers’ Local v. Intersil, et al., No. 5:11-CV-04093 EJD, U.S.D.C., N.D. Cal.

Travis E. Downs IIIBruce Gamble

Robbins Geller Rudman & Dowd LLP

www.rgrdlaw.com

800/449-4900