Shareholder Lawsuits: Where is the Line between Legitimate and Frivolous?

Abstract

Shareholders of public companies are not responsible for designing executive compensation packages. Still, a shareholder vote on compensation is required in two circumstances: when a company wants to establish an equity-based compensation plan, and annually as part of the Dodd Frank requirement shareholders have an advisory “say on pay.” In deciding how to vote, shareholders rely on information provided in the annual proxy.Recently, shareholder groups have sued companies for inadequate disclosure. They allege that the companies provide insufficient disclosure to determine how they should vote on these matters.We explore this issue in closer detail and ask: How much disclosure is too much disclosure? If a company follows SEC guidelines, why is this not sufficient? When do lawsuits cross the line from legitimate to frivolous? If disclosure litigation is successful, what other board decisions would be subject to potential lawsuits?Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.