Shareholder Advisory Vote Constitutes Evidence of Board's Breach of Duty of Loyalty
The U.S. District Court for the Southern District of Ohio declined to dismiss a complaint brought by shareholders of Cincinnati Bell, a publicly-traded company, suing the company’s directors for breach of the duty of loyalty. The shareholder derivative suit was based on the directors’ grant of $4 million in bonuses on top of $4.5 million in salary and other compensation to the chief executive officer in the same year that Cincinnati Bell had incurred significant declines in net income, earnings per share, share price and a negative annual shareholder return. Ordinarily, courts will not inquire into board decisions under the business judgment rule, but the court found that the presumption of this rule had been rebutted by the plaintiffs’ allegations of evidentiary facts demonstrating that Cincinnati Bell’s board members did not act in the best interests of the company or its shareholders. Included among these evidentiary facts was the Cincinnati Bell board’s unanimous approval of the executive compensation at issue, notwithstanding an advisory vote, required under the Dodd-Frank Wall Street Reform Act, in which 66% of voting shareholders voted against such compensation.
NECA-IBEW Pension Fund ex rel. Cincinnati Bell, Inc. v. Cox, No. 1:11-cv-451 (S.D. Ohio Sept. 20, 2011).
