Shareholders Suing PICO Can Do So in State Court

     (CN) – PICO Holdings cannot assert federal jurisdiction over twin shareholder actions against its executive compensation policies, the 9th Circuit ruled.
     The California company reported net negative income and free cash flow in 2010, yet increased executive compensation that same year, its shareholders claimed.
     In May 2011, the corporation held a “say-on-pay vote,” a periodic advisory vote on executive compensation mandated by the federal Dodd-Frank Wall Street Reform and Consumer Protection Act. The vote results showed that 61 percent of shareholders were against the 2010 compensation package, yet PICO’s Board took no action.
     Ronald Dennis and George Assad then filed separate shareholder derivative suits in California state courts. Among other things, Dennis sued for breach of fiduciary duty, gross mismanagement and unjust enrichment, and requested a declaration “that the adverse May 13, 2011 advisory shareholder vote on the PICO Board’s executive compensation rebutted the business judgment surrounding the PICO Board’s decisions to increase executive compensation in 2010.”
     Assad sued for unjust enrichment and breach of fiduciary duty with regard to the board’s misleading statements, compensation practices and failure to respond to the vote.
     PICO removed both actions to the Southern District of California, arguing that federal jurisdiction applied since the plaintiffs’ suits stemmed from the say-on-pay vote and their complaints contain numerous references to the vote.
     The 9th Circuit remanded the case back to state court Wednesday, finding that the lawsuits allege only state causes of action and PICO’s arguments for federal jurisdiction were not persuasive.
     “Nothing in either complaint alleges any implicit or explicit violation of the say-on-pay provision or any other provision of the [Securities] Exchange Act,” Judge Raymond Fisher wrote for a three-person panel. “On the contrary, the parties agree that PICO did what the Act requires: it held a vote. The suits allege violations of state law and seek to enforce liabilities created by state law.”
     PICO also failed to show that the actions present a significant federal issue that requires federal jurisdiction because Congress enacted the Dodd-Frank Act to ensure that say-on-pay votes were merely advisory and a negative vote could not incur adverse consequences, according to the ruling.
     “If the defendants are correct – both that the plaintiffs are seeking to impose liability based on the vote and that such liability has been barred by Congress – then the defendants might have a very strong federal defense,” Fisher wrote. “A federal defense, however, is ‘inadequate to confer federal jurisdiction.'”
     PICO likewise failed to claim that the doctrine of complete pre-emption confers federal jurisdiction. Complete pre-emption applies only where a federal statutory scheme entirely replaces state-law claims, according to the ruling.
     The Pasadena-based appellate panel found that that the Exchange Act does not fully displace state law, and that the lawsuits in this case do not include any federal causes of action, placing them outside the real of complete pre-emption.
     “Accordingly, removal to federal court was improper and the district court lacked jurisdiction to do anything other than remand these cases to state court,” Fisher wrote.

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