Litigating Challenges to Executive Pay: An Exercise in Futility?

Abstract

This paper is an empirical analysis of plaintiffs' success rates in executive compensation litigation. Using data from publicly available files, this study examines a sample of 124 cases where shareholders have challenged executive compensation levels and practices at public and closely held corporations. This data set shows that shareholders are successful in at least some stage of this litigation in a significant percentage of these cases. Our most robust result is that plaintiffs win a greater percentage of the time in compensation cases against closely held companies than against publicly held companies. This result is consistent for every stage of these cases - motions to dismiss, motions for summary judgment, trial and appeal. We also find that, on average, plaintiffs fare better in compensation cases in courtrooms outside of Delaware than in Delaware. However, once we control for the different composition of the Delaware Courts' caseload, these differences disappear and the overall success rates in executive compensation litigation are surprisingly similar. When we look at the procedural and substantive claims being made in the cases, we find some other interesting results. Demand futility is a significant barrier to getting such suits off the ground. Plaintiffs lose on a motion to dismiss for failure to make demand about half the time. In Delaware, motions to dismiss for failure to make demand are much more frequently raised since the Delaware Supreme Court's decisions in Aronson v. Lewis, although plaintiffs today seem to succeed in overcoming them a greater percentage of the time. The picture is more complicated with respect to the substantive claims made in these cases. Plaintiffs average about 30% success in maintaining duty of care claims at the various stages of these suits with slightly higher success rates in non-Delaware cases. However, since the Delaware Supreme Court's decision in Smith v. Van Gorkom, the number of these claims has increased and their likelihood of success at least at some stage of the litigation appears to have increased. With waste claims, plaintiffs succeed about 40% of the time, while for duty of loyalty claims, they win about 35% of the time. Plaintiffs are consistently more successful at close corporations than at public corporations for both types of claims.