The Advisors' Blog

A U.S. district court recently ruled in favor of Apple to dismiss a case that alleged ’34 Act and fiduciary duty violations relating to proxy statement disclosures about executive compensation, say-on-pay, and director elections. Bloomberg reported on the case when it was filed last year and this win.

Specifically, the plaintiff (a pension fund affiliated with the International Brotherhood of Teamsters) alleged that the company’s proxy misled investors by understating the value of equity awards in the CD&A. The plaintiff took issue with the fact that the number of RSUs granted to executives was calculated with the very common approach of dividing the target grant value by the closing stock price on the date of grant. So, the CD&A disclosed a “target value” of awards based on those figures.

The plaintiff said that the compensation committee should have used a Monte Carlo simulation to value the awards, which would have shown a higher value of compensation in the proxy disclosure, and which allegedly impacted the voting outcome. Here’s more detail from the opinion:

At the core of the Complaint is Plaintiff’s assertion that the amount of executive compensation disclosed in the compensation-narrative section of the 2023 Proxy Statement understates the actual compensation as disclosed in the compensation-tables section of the 2023 Proxy Statement. According to Plaintiff, “to accurately determine the grant date fair value of performance-based compensation that are based on [relative shareholder return], one needs to employ a somewhat complicated analytical derivative pricing model such as a Monte Carlo simulation. Here Apple did so for purposes of reporting the NEOs[‘] compensation in 2022 and 2023, but it failed to use such a model when awarding the performance-based RSUs.”

As a result, Plaintiff contends, “the 2021-2022 compensation actually cost Apple $31,707,610 more than the amounts disclosed in the 2023 Proxy Statement, and . . . Apple’s representations were materially false because they grossly understated the known costs of this compensation.

The court said that the plaintiff’s Section 14(a) complaint came up short in a couple of ways. First, the plaintiff didn’t adequately plead “loss causation” – because the advisory nature of the say-on-pay vote meant that the proxy statement hadn’t caused any injury, and the compensation information was not an essential link to director election decisions. On the substantive disclosure, the opinion says:

As another court noted in a previous executive-compensation-related suit against Apple brought under Section 14(a), there is no SEC rule requiring that a specific method for determining executive compensation be used, so long as the chosen method is disclosed. That principle applies here.

The Complaint effectively admits (by pasting excerpts of Apple’s disclosures in support of its claims) that Apple did precisely what Section 14a) and SEC rules require – presented its compensation process and methods through detailed compensation tables. [The Complaint says] “the proper way to determine the Grant Date Fair Values of performance-based equity compensation . . . is to use a sophisticated model such as a Monte Carlo simulation. Apple used such a model when accounting for these performance-based shares as demonstrated by the Grants of Plan-Based Awards Tables in its 2022 and 2023 Proxy Statements.”

Plaintiff does not allege that Apple was required to disclose anything more. That the compensation tables are in gray type and not graphically designed in color like the narrative section is inconsequential.

Overall, the dismissal of this complaint (with prejudice) is good news for companies. But as always, there are procedural nuances and specific facts that could have affected the outcome, particularly with respect to the fiduciary duty claims.

That means that this ruling may not entirely deter plaintiffs from bringing claims against other companies on similar grounds, if they find a good target. It’s another reminder that your executive compensation disclosures are being closely scrutinized and can be fodder for litigation – even if you did everything correctly. Stay safe out there!

– Liz Dunshee