Lexpert US Guides

EXECUTIVE COMPENSATION RESULTS SUCH AS these cannot be ignored as they have the potential to raise significant implications within the Canadian legal landscape. and After Say on Pay: Say on Pay in Canada 2009‒2011, Clarkson Centre for Board Effectiveness), it appears that say on pay is here to stay in Canada. RECENT SAY ON PAY FAILURES: Barrick Gold Corporation A 2012 SHARE report indicates that shareholder approval levels of executive compensation policies appear to be declining as a whole in Canada. More recently, Canadian companies have started to experience say on pay failures. In the high-profile failure of Barrick Gold Corporation, a whopping 85 percent of shareholders rejected the company's $47-million executive compensation plan. Shareholders took particular issue with the $17-million compensation package awarded to Barrick's newly appointed co-chairman, John Thornton. Included in Thornton's package was an $11.9-million signing bonus. This compensation package occurred in a year where Barrick's share prices fell to a 20-year low. Prior to Barrick's say on pay vote, several institutional shareholders expressed their disapproval of the compensation plan. In an April 2013 press release issued by institutional investor Caisse de dépôt et placement du Québec, and endorsed by seven other large Canadian institutional investors, Thornton's compensation was stated to be "unprecedented" and "inconsistent with the governance principle of pay-for-performance." The press release further stated that the bonus would set a "troubling precedent in Canadian capital markets." Days later, these shareholders put their dissatisfaction into action when they voted against the compensation package. Given that say on pay votes are neither legally required in Canada, nor binding on the issuing corporation, the results of the vote did not impose any legal obligation on Barrick's executives. However, results such as these cannot be ignored as they have the potential to raise significant implications within the Canadian legal landscape. Failed say on pay votes could lead to costly shareholder litigation premised on claims for breach of directors' fiduciary duties and oppression. LITIGATION IN THE UNITED STATES Say on pay lawsuits in the United States have been largely unsuccessful, and the number of lawsuits has waned recently (see: David F. Larker & Brian Tayan, "Shareholder Lawsuits: Where Is the Line Between Legitimate and Frivolous?" (2012) Stanford Closer Look Series). However, the evolving tactics used by plaintiffs have 40 | LEXPERT • December 2013 | www.lexpert.ca made them an interesting study from which Canadian companies can learn. The two classes of cases discussed below provide examples of the approaches taken by plaintiffs in the United States. CHALLENGES TO EXECUTIVE COMPENSATION The first class of cases deals with direct challenges to executive compensation plans based on say on pay votes. As an example, Gordon v. Goodyear 2012 WL 2885695 (N.D.Ill.) concerned Navigant Consulting Inc., a consulting firm that, ironically, provides risk management and financial advice to government agencies. Navigant was experiencing poor and declining financial performance, with its share price falling from more than $21 per share in January 2006 to $9.20 per share in December 2010. In response to the company's financial performance, more than 55 percent of Navigant's voting shareholders rejected the 2010 executive compensation plan. In response to the rejection, Natalie Gordon, a Navigant shareholder, brought a derivative lawsuit (an action in the name of the corporation) against Navigant's board of directors. Gordon alleged that Navigant's board of directors awarded "excessive executive compensation despite the fact that Navigant shareholders [had] seen the value of their investment plummet." She claimed that each individual director owed, and was in breach of, fiduciary obligations requiring board decisions to be made in furtherance of the best interests of Navigant and its shareholders, rather than in furtherance of the directors' personal interests. The plaintiff claimed that the shareholders' rejection of the 2010 compensation package was "direct and probative evidence" that the board's approval of the compensation plan was not in the best interests of Navigant shareholders. The Federal District Court of Illinois, applying Delaware law, rejected Gordon's claims. The court held that the plaintiff had failed to demonstrate "demand futility." Demand futility refers to Delaware law's requirement that, to bring a derivative lawsuit, a shareholder must cast reasonable doubt that the majority of the directors are independent and disinterested, or the transaction was the product of a valid exercise of business judgment. Gordon failed to satisfy either requirement. First, she could not prove that a majority of the directors were not independent or disinterested as seven of the eight board members were not alleged to have received any personal benefit from the executive compensation package. Second, the court held that the plaintiff failed to rebut the presumption of the business judgment rule. The business judgment rule refers to the concept that directors of a corporation are presumed to be motivated by a genuine regard for the interests of the corporation and its shareholders. Accordingly, directors' decisions are presumed to be made in the best interests of the corporation (Gimbel v. Signal Companies Inc., 316 A.2d 599 (1974) at page 8). Under Delaware law, a board's compensation decisions or business judgments are entitled to great deference. In Goodyear, the negative say on pay vote was held to be insufficient to find that the directors had not validly exercised their business judgment. The court also rejected Gordon's claim that section 951 of the Dodd-Frank Act imposed additional fiduciary duties on directors. The Act legislates mandatory say on pay voting in the United States as a means of promoting financial stability through improved accountability and transparency. The language of the Act is clear

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