Defending Section 162(m) Executive Compensation Derivative Suits in the United States

February 11, 2013

Decisions regarding executive compensation fall squarely within the discretion of a public company’s board of directors. Recently, however, plaintiffs’ firms have been trying to invade the board’s purview by bringing shareholder derivative actions challenging such decisions. Many of these claims are based on Section 162(m) of the Internal Revenue Code of 1986, as amended (“IRC”), which limits the deductibility of executive compensation over $1 million. At least thirteen such cases were filed in 2011 and 2012, seven of which were filed in Delaware. We expect the number of these cases to increase in 2013. So far this year, the plaintiffs’ firm at the forefront of this movement has issued at least twelve press releases announcing investigations of companies and their boards in connection with executive compensation. Plaintiffs in the cases already on file are tenaciously pursuing these 162(m) claims even as the nascent body of law develops. We are currently defending a public company in such a case in the Federal District Court of Delaware.

Read “Defending Section 162(m) Executive Compensation Derivative Suits in the United States.”