As the 2013 proxy season comes into full swing, a review of the fundamental principles governing a company's disclosure obligations is warranted, as is a consideration of how complaints are exposing novel theories of potential exposure for public companies. A relatively new weapon in the arsenal of plaintiffs' counsel is an action to enjoin an annual shareholder meeting on the ground that proxy statements issued by a company inadequately disclose information concerning transactions that require shareholder approval, including the issuance of restricted stock options and descriptions of adjustments to executive compensation (called for by the "say-on-pay" vote).  Such actions have the potential to hold hostage the consummation of meetings and proposals that are often critical to the company's strategic goals, and plaintiffs have won several early victories by obtaining injunctions and/or settlements for perceived inadequacies in proxy disclosures. Nonetheless, companies that have adopted a prophylactic approach to responding to challenges to their proxy disclosures have been able to defeat injunctions and have used their success as leverage in dissuading would-be plaintiffs from filing suit altogether. The key to this success is an aggressive response that relies on the application of well-established principles of law to the unique circumstances of each situation. At a minimum, management should enter this proxy season with a clear understanding of disclosure obligations and an appreciation of how those obligations are being tested in today's landscape.
It is beyond dispute that directors' duty to disclose is "not boundless" but instead limited to information that is "material." In re CheckFree Corp. S'holders Litig., 2007 Del. Ch. LEXIS 148, at *6, 2007 WL 3262188, at *2 (Del. Ch. Nov. 2, 2007). Omitted facts are considered material "if there is a substantial likelihood that a reasonable stockholder would consider them important in deciding how to vote." Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170, 1172 (Del. 2000) (internal quotation marks and brackets omitted). Courts have also emphasized that, to constitute a material omission, the information in question must "significantly alter the total mix of information made available." See, e.g., id. (internal quotation marks omitted); In re Micromet, Inc. S'holders Litig., C.A. No. 7197, 2012 Del Ch. LEXIS 41, at *32, 2012 WL 681785, at *10 (Del. Ch. Feb. 29, 2012).
In a few recent cases, courts have granted preliminary injunctions enjoining proxy votes at annual meetings, based on complaints that proxy materials issued in advance of those meetings were misleading or inadequate. These opinions involve unusual facts and, in some cases, are incorrectly premised on distinguishable legal principles. For example, in one shareholder class action and derivative action, the plaintiffs moved for a preliminary injunction based on the claim that the proxy materials failed to disclose material information about the modification of an equity incentive plan. See St. Louis Police Ret. Sys. v. Severson, No. 12-CV-5086, 2012 U.S. Dist. LEXIS 152392, at *1-2, 2012 WL 5270125, at *1-2 (N.D. Cal. Oct. 23, 2012). The federal district court enjoined the proxy vote until the defendants supplemented the proxy statement, with the court ordering that the revised proxy statement provide additional disclosures about "the reasons for [and] the consequences of failure to approve" an amendment to increase the total number of available shares and the award ceiling. See id. at 2012 U.S. Dist. LEXIS 152392, at *11-16, 18-19, 2012 WL 5270125, at *4-7. However, the case involved a potential violation of NASDAQ listing rules, which formed the basis for the court's decision that the plaintiffs were likely to succeed on a claim pursuant to Section 14(a) of the Securities Exchange Act. See id. at 2012 U.S. Dist. LEXIS 152392, at *3-6, 15-16, 2012 WL 5270125, at *1-2, 5-6.
In Santa Clara County, California, shareholders have launched several recent attacks on the sufficiency of proxy disclosures, seeking to disrupt proxy votes at annual meetings. In Knee v. Brocade Commc'ns Sys., Inc., No. 1-12-CV-220249 (Cal. Super. Ct. Santa Clara Apr. 12, 2012), the Santa Clara County court granted a preliminary injunction enjoining an annual proxy vote on the grounds that information about a plan to increase the stock plan's reserves by 35 million shares was material and should have been disclosed. In coming to this conclusion, the court relied on In re Netsmart Techs., Inc. S'holder Litig., 924 A.2d 171 (Del. Ch. 2007), notwithstanding that In re Netsmart, unlike Knee, involved a cash-out transaction, in which "information regarding the financial attractiveness of the deal is of particular importance," 924 A.2d at 200. See Knee, No. 1-12-CV-220249 (Cal. Super. Ct. Santa Clara Apr. 12, 2012).
Santa Clara decisions issued since Knee have taken a more skeptical approach to shareholder motions for a preliminary injunction. In an order issued on July 16, 2012, the court denied a motion, without written explanation, to enjoin a shareholder vote until Ultratech Inc. provided more complete disclosures about its proposal to increase the number of authorized shares of common stock. See Rice v. Ultratech, Inc., No. 1-12-CV-226520 (Cal. Super. Ct. Santa Clara July 16, 2012).  Moreover, in Gordon v. Symantec Corp, No. 1-12-CV-231541 (Cal. Super. Ct. Santa Clara Feb. 22, 2013), the Santa Clara County Superior Court, which had earlier denied a motion to enjoin an annual say-on-pay vote by Symantec shareholders, sustained Symantec's demurrer in the case, dismissing allegations that the company's directors had breached their fiduciary duties by providing materially misleading and inadequate proxy materials. Although the plaintiff alleged that, with respect to disclosures pertaining to the say-on-pay vote, the proxy was deficient in eight different ways, the court examined each allegation and held that with respect to each one the plaintiff had failed to allege how the omission of the information "would have altered the total mix of information available to the Symantec shareholders through the Proxy." Id. Thus, the court found the plaintiff had failed to adequately plead a sufficient disclosure claim and granted the demurrer, with leave to amend. See id.
Apart from these cases in Santa Clara County, courts in several other jurisdictions have rejected recent attempts by plaintiffs to derail proxy votes. See, e.g., Greenlight Capital, L.P. v. Apple, Inc., No. 13 Civ. 900, 976, 2013 U.S. Dist. LEXIS 24716, at *34-42, 2013 WL 646547, at *10-13 (S.D.N.Y. Feb. 22, 2013) (rejecting assertion that the proxy disclosures pertaining to a say-on-pay vote were inadequate and denying motion to enjoin vote on that particular proposal); Gottlieb v. Willis, No. 12-CV-2637, 2012 U.S. Dist. LEXIS 159343, at *14-20, 2012 WL 5439274, at *4-7 (D. Minn. Nov. 7, 2012) (denying plaintiffs' motion to enjoin a proposed merger and proxy vote until defendant disclosed additional information to shareholders); La. Mun. Police Emps. Ret. Sys. v. Continental Res., Inc., No. CIV-12-667, 2012 U.S. Dist. LEXIS 112088, at *21-26, 2012 WL 3263710, at *7-9 (W.D. Okla. Aug. 9, 2012) (denying a motion for a preliminary injunction based on a claim that proxy materials failed to provide the basis for a fairness opinion); and In re Micromet, Inc. S'holders Litig., 2012 Del. Ch. LEXIS 41, at *1-2, 30-35, 2012 WL 681785, at *1, 9-11 (examining plaintiffs' allegation that a company's board had breached its duty of disclosure by making materially incomplete and misleading statements related to a negotiated tender offer and concluding no additional disclosure was necessary). Some of these cases offer insight into mounting a successful defense against efforts to enjoin proxy votes. For example, in Gottlieb, the court noted the plaintiff had "not submitted so much as a declaration averring that the information she seeks would be material to her vote, much less an expert affidavit stating that a reasonable investor would likely find the omitted information material." 2012 U.S. Dist. LEXIS 159343, at *14-20, 2012 WL 5439274, at *4-7; see also Assad v. LSB Corp., 2010 Mass. Super. LEXIS 303, at *5-6, 10, 2010 WL 5129147, at *2, 4 (Mass. Super. Ct. Suffolk Cty. Oct. 26, 2010) (denying a motion for preliminary injunction to prevent a shareholder vote in which plaintiffs failed to rebut a defense affidavit that "directly addresse[d] each of the alleged omissions, explaining, with respect to each, why the information is not material"). And, in La. Mun. Police Emps. Ret. Sys., the court noted the fact that the proxy materials had been submitted to and approved by the SEC was "of some importance on the issue of injunctive relief." 2012 U.S. Dist. LEXIS 112088, at *24, 2012 WL 3263710, at *8.
In New Jersey, plaintiffs' firms have also lodged efforts to delay or even circumvent annual proxy votes. In a complaint filed in December 2012 in the U.S. District Court, District of New Jersey, public shareholders sought to enjoin a company's annual shareholder meeting, based on allegations that the proxy statement contained materially false and misleading statements and omissions about the board's ability to grant tax-deductible performance-based compensation. See Amended Complaint at 2-3, 10-16, Holland v. N.J. Res. Corp., No. 3:12-cv-07858 (D.N.J. Dec. 31, 2012), ECF No. 6. In response, the company filed supplemental proxy materials, including a proposal to approve its compensation plan, and the plaintiff withdrew its motion for a preliminary injunction. The company held its annual meeting on the originally established date. In other New Jersey cases, shareholders have challenged the adequacy of proxy materials after annual meetings and proxy votes were held. See, e.g., Complaint at 80-81, George Leon Family Trust v. Coleman, No. 3:12-cv-04401 (D.N.J. July 13, 2012), ECF No. 1 (asserting a derivative action based, in part, on claims that 2010-2012 proxy statements had contained materially false and misleading misstatements and omissions related to Johnson & Johnson's compensation practices).  In one such case, Resnik v. Boskin,  the federal court granted a motion to dismiss the claim that the board of directors of Exxon Mobil Corporation had made materially false or misleading proxy solicitations in connection with an annual shareholder vote on an employee compensation plan. See Opinion at 1, Resnik v. Boskin, No. 2:09-cv-05059 (D.N.J. Feb. 17, 2011), ECF No. 40. In particular, the court found there was no connection between the allegedly false or misleading statements in the 2008 and 2009 proxy statements and the 2008 and 2009 shareholder votes. See id. at 5-7.
The series of recent cases challenging the adequacy of proxy materials is illustrative of the potential exposure companies should be mindful of when preparing disclosures this season, especially disclosures concerning the issuance of stock or executive compensation. Management also must stay informed of how court rulings are defining the contours of disclosure obligations in discrete circumstances that may be comparable to those affecting its shareholders. Of course, there is no "one size fits all" approach to defending against the new era of proxy litigation, and companies should expect that plaintiffs' firms will continue to find creative ways to challenge even the most scrupulous of disclosures. Nevertheless, a comprehensive strategy based on an adherence to fundamental principles and an appreciation of how those principles apply in today's environment are critical to any successful outcome.
 The Dodd-Frank Act requires that public companies hold periodic advisory votes on say-on-pay proposals. See 15 U.S.C. § 78n-1(a)-(b).
 The plaintiffs subsequently moved to amend their complaint.
 This litigation is still outstanding.
 Day Pitney served as counsel for defendant in this case.
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