Plaintiffs Achieve Another Victory in Litigation Over Executive Compensation Disclosures – This Time in Delaware Federal Court

This is becoming a disturbing trend. On July 2, 2013, the federal district court in Delaware issued a memorandum opinion in Hoch v. Alexander (Qualcomm). The plaintiff had sued Qualcomm and its directors in 2011. In its 2011 proxy statement, Qualcomm sought stockholders' approval of an amendment of it Long Term Incentive Plan, which included an increase in the share reserve by 65,000,000 shares.

As required by SEC rules, the proxy statement included standard, albeit, imperfect language, regarding deductibility under the heading "Federal Income Tax Information." The suit alleged that the representations about the availability of tax deductions were materially false or misleading:

"Because the defendants would still pay performance-based compensation under the 2006 LTIP as unamended, regardless of stockholder approval, no vote of the stockholders would make such payments deductible . . . Therefore, contrary to the representations and omissions in the Proxy Statement, awards under the 2006 LTIP as amended will not be tax-deductible even if the stockholders approve it."

In July 2011 the Court had denied the Company's to dismiss and allowed the suit to continue. (See my July 7, 2011 blog, "A Surprising Lawsuit Over Section 162(m) Disclosure".) As far back as 2011, we were observing a spike in lawsuits over executive compensation).

In July 2013, the Delaware federal court again refused to dismiss the plaintiff's claims and allowed the suit to continue further. To make matters worse, after plaintiffs' lawsuit alleging that Qualcomm's disclosure failed to satisfy Code Section 162(m), the company alerted the IRS regarding the lawsuit and the allegations concerning the nondeductibility. In June 2012, Qualcomm and the IRS entered into an Issue Resolution Agreement ("IRA"), pursuant to which the IRS concurred with Qualcomm that the 2011 LTIP approved by shareholders was compliant with Code Sec. 162(m).

Following review of the Taxpayer's analysis of the facts and law, the Government concurs with the Taxpayer's position that the 2006 Shareholder Approval and 2011 Shareholder Approval are compliant with the requirements of Treas. Reg. Section 1.162-27(e)(4).

Thus, the IRS' concurrence squarely opposed the plaintiff's claims that the 2011 Proxy Statement's representation that the 2006 LTIP would continue if the 2011 LTIP was not approved violated Regulations under 162(m) and precluded deduction of the compensation under Sec. 162(m).

End of the case, right? Wrong again buzzard breath.* The Court determined that the IRA did not "formally bind the IRS." Therefore the IRA did not "definitively rule out nondeductibility and resultant harm to Qualcomm, particularly where [plaintiff] has pled reasons the IRA may be inaccurate."

The case also involved the effectiveness of certain board actions, which may be too technical for this Blog, and this is not a decision on the merits of the case – only that the case may continue. However, the bottom is that even the Delaware courts seem to be growing more sympathetic to lawsuits over executive compensation (SeealsoSimon Properties).

*As Johnny Carson used to say (for those of us old enough to remember Johnny Carson).

This entry has been created for information and planning purposes. It is not intended to be, nor should it be substituted for, legal advice, which turns on specific facts.