The US Court of Appeals for the Ninth Circuit affirmed the lower court’s decision to remand to state court two “say-on-pay” cases, finding no questions of federal law had been raised. In the shareholder derivative actions, which were initially filed in California state court, plaintiffs asserted a host of state law claims, including breach of fiduciary duty and gross mismanagement, alleging that defendants, PICO Holdings and its board of directors, acted wrongly when they increased executive compensation despite poor financial results and the disapproval of 61 percent of shareholders. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires a public company to hold a shareholder vote on executive compensation at least once every three years. These votes, however, are not binding and the provision of Dodd-Frank explicitly provides that the votes do not “create or imply” additional fiduciary duties.

The Ninth Circuit affirmed the district court’s determination that there was no federal jurisdiction over plaintiffs’ claims, rejecting each of defendants’ theories. First, the court found Section 27 of the Securities Exchange Act of 1934 (Exchange Act) insufficient to provide federal jurisdiction because plaintiffs’ claims are rooted in state law and not based on violations of the Exchange Act. As the court observed, the defendants held the “say-on-pay” vote, as required. Second, the court concluded that federal question jurisdiction was lacking because only defendants’ potential defense—that Dodd-Frank does not require companies to act consistently with a say-on-pay vote—relates to federal law, but not plaintiffs’ claims themselves. Third, the court determined that the “say-on-pay” provision of Dodd-Frank did not “completely preempt” state law on fiduciary duties. In fact, the court noted that it “created no new fiduciary duties and explicitly preserved existing state laws.” Accordingly, plaintiffs’ claims were remanded to state court, where they are entitled to pursue their claims against the board. 

Dennis v. Hart, No. 12-55241 (9th Cir. July 31, 2013).