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EXECUTIVE COMPENSATION — it explicitly states that shareholder votes "shall not be binding on the issuer or the board of directors" and that votes do not "create or imply any change to the [directors'] fiduciary duties." Thus, while the plaintiff alleged that the negative shareholder vote was evidence that compensation decisions were not made in the best interest of Navigant shareholders, and was thus a breach of the directors' fiduciary duties, the court viewed this claim as an attempt to circumvent the statutory protections afforded by the Act. CHALLENGES TO PROCEDURAL ASPECTS OF SAY ON PAY VOTES The second class of cases deals with challenges to the procedural aspects of say on pay votes. An example of this class of cases is Gordon v. Symantec Corp. (Case No. 1-12-CV-231541). The plaintiff, the same Natalie Gordon as above, sought an injunction restraining Symantec Corporation from proceeding with its say on pay vote for failure to disclose essential information. Symantec's proxy circular, which recommended that Symantec shareholders vote to approve Symantec's executive compensation plan, was alleged to be deficient as it did not specify "what exactly the Board considered in making [the] recommendation." Gordon claimed that the circular failed to provide a "fair summary" of the compensation consultant's analysis and was deficient in terms of information relating to both the reasons Symantec changed its compensation consultant and the reasons Symantec chose particular peers as a basis of comparison. Symantec, in turn, filed an expert report from Professor Robert Daines of Stanford Law School, who submitted a declaration that Symantec's disclosures were consistent with industry standards and complied with regulatory requirements. In his declaration in opposition to the plaintiff 's motion for a preliminary injunction, Professor Daines stated that "not a single firm" provided all the disclosures the plaintiff requested and that if such disclosures were required "one would need to enjoin the vote at every single one of Silicon Valley's largest firms." Professor Daines further explained that one method of determining whether additional disclosures are required is to examine whether such disclosures are included in a significant number of circulars filed by similar companies. If such details are not repeatedly provided by other companies, the omission can be viewed as "a collective professional judgment that the details are not considered useful or necessary to shareholder decision-making." The Superior Court of California (County of Santa Clara), citing Professor Daines' declaration, sided with Symantec and denied the plaintiff 's motion. The court held that there was no precedent enjoining a say on pay vote or imposing additional disclosure requirements beyond those contained in the Securities Exchange Act of 1934. IMPLICATIONS FOR CANADIAN COMPANIES Canada has yet to see say on pay lawsuits as in the United States. However, Canadian courts have repeatedly held that management fees or compensation paid without approval, that are larger than industry norms, or that increase while a corporation is encountering financial difficulties, can be oppressive or constitute a breach of fiduciary duties (see: M. Koehnen, Oppression and Related Remedies (Thomson Canada Limited: Toronto, 2004)). Accordingly, companies may be at an increased risk for litigation, with failed say on pay votes used as evidence against the company. An example of the impact dissatisfied shareholders can have on a company's executive compensation was recently seen in the Ontario Superior Court case, Unique Broadband Systems Inc. (Re), 2013 ONSC 2953. This case arose following a proxy battle initiated, and won, by certain shareholders of Unique Broadband Systems Inc. (UBS). The prevailing shareholders, outraged by the amount of management compensation, ousted the UBS board and denied re-appointment to UBS's CEO, Gerald McGoey. McGoey subsequently claimed he was terminated without cause and sued for recovery of $5.8 million allegedly owed to him under his UBS employment contract. UBS counterclaimed for breach of fiduciary duty and further claimed that decisions made by McGoey and the board were oppressive to the interests of UBS's shareholders. Central to UBS's claim was a decision to replace an established Share Appreciation Rights Plan (SARs plan) with a fixed compensation payment to SARs holders. Initially, the SARs plan had been implemented as a type of incentive plan that purported to attract and retain people, such as McGoey, to serve as directors, officers and employees of UBS. Like a stock option plan, upon certain triggering events, SARs plan participants were to receive a cash award equal to the appreciation in the share value over the value of the unit when awarded. When a triggering event was set to occur and share prices were nowhere near anticipated levels, which would have resulted in the value of SARs units being close to 20 cents per unit, the UBS compensation committee replaced the SARs plan with a fixed compensation payment to SARs holders of 40 cents per unit. Five people were to receive the fixed compensation: four members of the board of directors (including the three members who made up the compensation committee) and an IT consultant. The court sided with UBS and held that McGoey and the UBS board were in breach of their fiduciary obligations to UBS's shareholders. The court came to the "inescapable conclusion" that the decision to replace the SARs plan was motivated by the board's own self-interest, rather than the interests of the corporation. In short, "there was nothing in it for UBS shareholders." The court outlined a number of factors that contributed to the UBS board's breach of fiduciary duty. For example, although the board consulted with its corporate counsel, the board's decisions were not consistent with any of the received recommendations. Further, the board did not consult with an independent compensation consultant prior to agreeing to the compensation plan. The court held that "having board members recognize their obligations to act in the best interests of the corporation and its shareholders is not the same as leading evidence to show that their actions were actually in those best interests." Further, the compensation committee was not independent, as it was composed entirely of individuals who would personally benefit from the replacement of the SARs plan. Finally, the SARs cancellation plan was held to negatively impact the value of the UBS shares, as it gave SARs holders a 40 cents guarantee per share while the shares were trading at less than 20 cents per share. The court responded to McGoey's breach of fiduciary duty by setting aside his compensation package. Unique Broadband Systems reflects the increased willingness of shareholders to express their dissatisfaction with executive compensation plans. This is exacerbated by the recent say on pay failures experienced by Canadian companies: in addition to Barrick, discussed above, three other Canadian companies have had say on pay failures thus far: QLT Inc., Equal Energy Ltd. and Golden Star Resources Ltd. These failures suggest that Canadian companies and directors must take measures to protect themselves from the potential adverse consequences of shareholder litigation in the face of failed say on pay votes. www.lexpert.ca | LEXPERT • December 2013 | 41

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