Executive Compensation: Negative Say-on-Pay Vote Does Not Trump Board Authority

In an important battle in the ongoing executive compensation wars, last week a federal court in Oregon affirmed that directors of Oregon corporations are indeed protected by the business judgment rule in making executive compensation decisions. In ruling that the claim in Plumbers Local No. 137 Pension Fund v. Davis should be dismissed, the specifically declined to follow a recent controversial decision by an Ohio court allowing a say-on-pay lawsuit to proceed under similar circumstances.

In the Oregon case, two union pension funds filed a shareholder derivative action in May 2011 claiming that Umpqua Holdings Corporation’s directors violated their fiduciary duties to shareholders by approving increases in the company’s 2010 compensation plan despite recent negative shareholder return. In a say-on-pay vote at the company’s annual meeting in April 2011, the shareholders rejected the compensation plan roughly 62% to 35%. The plaintiffs argued that a negative say-on-pay vote and a simple comparison revealing a level of compensation inconsistent with general corporate performance are sufficient to overcome the presumption that directors acted in the best interests of the corporation.

The court, citing Delaware law, rejected the plaintiffs’ positions and ruled that the suit should be dismissed, in what we believe is an affirmation that directors have the authority to set executive compensation, and that their good faith decisions will be afforded the protection of the business judgment rule. To see the court’s ruling, click here: Plumbers Local No. 137 Pension Fund v. Davis.