2011 Alerts

2011.Dec.21  Clawback Policies should Reach Supervisors, says NYC Comptroller.
From Bloomberg Business Week: "New York City Comptroller John C. Liu, who oversees $108 billion in pension funds, said Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley should target senior executives’ pay to prevent improper or risky practices. ... Liu filed shareholder requests with the three New York- based banks to toughen their so-called clawbacks, which allow the firms to reclaim pay awarded to employees who acted improperly. The lenders, which now limit clawbacks to individual wrongdoers, should target supervisors as well, Liu said in a statement today."

2011.Dec.20  Proposed Settlement in One of Two Say on Pay Lawsuits re Cincinnati Bell. 
Quoting from the proposed settlement order filed in Hamilton Co. (Ohio), regarding an action different from the S.D.Ohio action that survived a motion to dismiss this past summer: "Generally, the settlement terms fall into four general categories: (1) empowering and/or improving the policies of the Board's Compensation Committee; (2) improving communications by the Board and the Company to Cincinnati Bell's stockholders, including, but not limited to, any negative compensation votes by stockholders; (3) enhancing the independence of the Board and rotating membership on the Compensation Committee; and (4) providing for the retention of an additional executive compensation consultant if a majority of the shareholders vote against the executive compensation proposed by the Compensation Committee."

2011.Dec.16  "Good Reason" Severance Denial Violated ERISA Procedures Applicable to "Top Hat" Plans.
In a comprehensive decision, a Massachusetts District Court orders "that the case be remanded to the plan administrator because of significant procedural flaws that rendered the decision to deny Plaintiff benefits under the top-hat plan unreasonable." 

2011.Dec.11  Executive Compensation 2012: Getting Ready ... starting with ISS Policy Updates. 
On November 17, 2011, Institutional Shareholder Services (“ISS”) released its 2012 policy updates to its proxy voting guidelines. In the aftermath of the Dodd-Frank Act’s say-on-pay requirement for advisory shareholder votes on executive compensation, ISS has emerged as the leading proxy advisory firm for public companies. Especially for executive compensation, its policy updates have come to establish best and worst practices by which shareholders and stock analysts hold boards accountable.   

2011.Dec.01  Illinois Supreme Court Refines Non-Compete Standard 
Modifying 36 years of precedent, the Reliant Energy decision holds that the "the legitimate business interest test is still a viable test to be employed as part of the three-prong rule of reason to determine the enforceability of a restrictive covenant not to compete," but then articulates a new determinative test: "whether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case".

2011.Nov.27  Virginia Supreme Court Refines Non-Compete Standard 
Reviewing a non-competition "provision that prohibits former employees from working for competitors in any capacity," Virginia's Home Paramount decision reverses prior precedent by concluding that "Although we weigh the function element of a provision that restricts competition together with its geographic scope and duration elements, the clear overbreadth of the function here cannot be saved by narrow tailoring of geographic scope and duration."  >>> See Virginia Law.
2011.Nov.21  Shareholder Not Allowed to Inspect Board Records of Internal Investigation 
Delaware's Supreme Court denied a shareholder's action to inspect an internal report prepared for Hewlett-Packard's board in connection with its investigation into sexual harassment allegations against its former chief executive officer, because the shareholder "has not shown that the [report] is essential to his stated purpose, which is to investigate possible corporate wrongdoing" (Espinoza v. Hewlett-Packard Co., Del., 11/21/2011).

2011.Nov.14  Inviting Trouble: The Continuing Risks of Executive Perks 
Conventional wisdom should drive the compensation committees of  public companies to be judicious, if not hard-fisted, in providing executives with perquisites.  These special forms of indirect compensation invite scrutiny from shareholders, proxy advisors, and government regulators. Case in point: the SEC investigation relating to Nabors Industries. >>> More at Enforcement re 14A Disclosure Obligations.

2011.Nov.10  Cash Bonus Deduction Allowed Despite No Specific Awards
Under its "all events" test, the IRS has approved an employer's deduction for a cash bonus pool liability that becomes fixed in one year, even though awards to eligible employees do not occur until the first 2-1/2 months of the following year. Revenue Ruling 2011-29 describes key requirements, such as that "any bonus amount allocable to an employee who is not employed on the date on which [the employer] pays bonuses is reallocated among other eligible employees."
2011.Nov.09  Candor for Compensation Committees 
The latest edition of Board Member magazine includes an article that concludes "Whatever the shareholder derivative claim relating to executive compensation, directors are the main targets. They cannot afford to be passive, last minute, or reactive. Just the opposite: Directors need to take ownership over executive compensation, from articulating a well-considered philosophy to selecting insightful advisers, to making sound executive compensation decisions and convincing public disclosures."  The complete article appears at Candor for Compensation Committees.

2011.Nov.08  Another Failed Say-on-Pay ... 29% Favorable is Lowest Yet 
In an 11/8/2011 blog entry, Ted Allen of ISS reports that "The investor dissent over pay at Regis appears to be a reaction to the significant payments to executives that were not tied to strict performance conditions. According to the ISS report on the company, the named executives, including the CEO, all received cash incentive payouts at a time of sustained operational and stock price underperformance pursuant to an annual incentive program that appears to be more discretionary in nature than performance-based when the adjustments to metrics are considered." 

2011.Nov.05  Hot Exec Comp Buttons of Fund Investors and Proxy Advisors 
There were consistent messages from fund investors and proxy advisors at last week's NASPP conference.   >>> More at Exec Comp Governance.

2011.Nov.03  Excessive Compensation Suit Settled -- CEO Returns Part of 2008 Bonus 
The CEO of Chesapeake Energy has agreed to return $12 million of his $100 million total compensation reported for 2008 (essentially undoing his sale of an antique map collection to the company), according to today's Law360.  This action and certain corporate governance improvements are reported to settle an Oklahoma shareholder derivative claim alleging directors breached their fiduciary duty in part through authorizing purchase of the antique map collection.  Reuters reports that "influential proxy advisory service ISS this year opposed McClendon's reelection to the company's board, citing unresponsiveness to investors and compensation issues" and that "At this year's annual meeting in June, more than 40 percent of the company's shareholders rejected Chesapeake's executive pay plan, and McClendon was reelected with 78 percent of the vote."

2011.Oct.25 Bank Incentive Compensation: Comprehensive Checklist for Compensation Committees.
In the wake of the 2008 financial crisis, the Federal Reserve and other U.S. banking regulators have been forewarning bank boards to rapidly reconsider and improve their incentive compensation structures, mainly in order (i) to customize awards based on the risk-taking activities of the award recipient, (ii) to reduce the sensivity of awards to short-term results, though deferred payouts, and (iii) to deveop "a systematic approach ... supported by formalized and well-developed policies, procedures, and systems to ensure ... safety and soundness." The latter quote come from the Federal Reserve's October 2011 report re its horizontal review of incentive compensation practices at large banking organizations. 

2011.Oct.13 2011.Oct.13  Excessive Compensation Complaint Dismissed vs. Goldman Directors
In its Goldman Sachs decision, Delaware's Court of Chancery dismisses a shareholder derivative action claiming that "...the Director Defendants violated fiduciary duties in setting compensation levels and failing to oversee the risks created thereby. The facts pled in support of these allegations, however, if true, support only a conclusion that the directors made poor business decisions."    >>> More at Shareholder Claims vs Board.

2011.Oct.12 "Good Progress" toward Sounder Bank Compensation
The Financial Stability Board has released a report presenting its recent assessment of how well major financial institutions around the world have revised their executive compensation practices.  The FSB cites "good progress," echoing the Federal Reserve's conclusion in its October 2011 report. Notably, the Fed found that "senior executives now have more than 60 percent of their incentive compensation deferred on average."  >>> More at Banking.

2011.Oct.1  IRS Worker Classification Correction Program
It is easy to underestimate or to ignore the tax, labor, and ERISA risks that arise from classification of workers as independent contractors. This often latent liability is worth attention now because IRS Announcement 2011-64 provides tax amnesty relief for employers. Interested employers need to apply, enter into a closing agreement with the IRS, and pay a fee that is a mere fraction (10%) of the payroll taxes that would othewise have been payable over the prior year for the re-classified group. Employers should consider their corrective alternatives carefully because the IRS corrective program may not be the best alternative and carries the risk of serious unintended consequences (such as claims from the very employees who are re-classified). 

2011.Sept.25  Change-in-Control Severance and Non-Compete Insights
Recent 1st and 5th Circuit decisions provide healthy reminders about two often underappreciated M&A issues, namely:

  • (1)  For Buyers: Be Careful re Carrying-forward Non-competition Protections. Given judicial skepticism of non-competes, buyers should be careful to take two steps in order to secure non-competition protections that are desired for a seller's key employees. The first involves being sure to identify those key employees of the seller for whom enforcible non-competition agreements are desired. The second involves making pre-closing changes that maximize the buyer's potential to enforce those provisions. The First Circuit's OfficeMax v. Levesque decision provides a classic lesson in buyer actions that left a loose-end which ultimately doomed enforcement of its noncompetition protections. 
    • In a nutshell, the buyer in the OfficeMax case sought to protect itself by having key employees of the seller execute non-competition agreements with the seller on the eve of the closing. Those non-compete agreements went further, by committing the employees to execute a post-closing non-compete with the buyer. When that did not occur due to a post-closing refusal by the seller's key employees, the court took that as evidence that the non-compete was not intended to bind the buyer, and consequently declined to enforce it.
  •  (2)   For Sellers: Document when a Change-in-Control Occurs. In Young v. Merrill Lynch, the 5th Circuit deferred to an LTIP administrator's determination that an executive's resignation for good reason needed to occur after the merger closing date, rather than after signing of the definitive agreement, in order to trigger the LTIP's change in control protections. The court's decision is not surprising, but it highlights the need for sellers to seek express terms in a merger or sale agreement with respect to CIC protections such as confirmation that the transaction constitutes a CIC for purposes of accelerated vesting and severance under all seller benefit plans and agreements.​

2011.Sept.22  Say-on-Pay Litigation has Legs ... vs Cinci Bell
The fiduciary breach complaint against Cincinnati Bell's officers and directors has survived a motion to dismiss. In its decision, the S.D. Ohio District Court holds, in sharp words but on a questionable legal basis, that "These factual allegations raise a plausible claim that the multi-million dollar bonuses approved by the directors in a time of the company's declining financial performance violated Cincinnati Bell's pay-for-performance compensation policy and were not in the best interests of Cincinnati Bell's shareholders and therefore constituted an abuse of discretion and/or bad faith."  More information at Shareholder Derivative Actions re Executive Compensation.

  • Compare: By order dated 9/16/2011, a Fulton County (GA) court dismissed Teamsters Local 237 v McCarthy. The underlying complaint alleged that executives of Beazer Homes had received excessive compensation, with an unfavorable say-on-pay vote cited as support for loss of business judgment rule protections. Just email Mark for the court's opinion.
  • But see FDIC v Saphir (9/1/2011), in which the N.D.Ill refused a motion to dismiss on the ground the business judgment rule is a mere defense against the FDIC's negligence and breach of fiduciary duty claims versus directors of the failed Heritage Community Bank (in part for allegedly "generous incentive compensation payments"). 2011.Sept.15  M&A Non-compete Challenge - 1st Circuit Rejects Injunctive Relief for OfficeMax
  • Despite efforts to establish enduring post-closing protections against non-competition, a buyer failed in its effort to establish that the underlying agreements were assignable (and with any other outcome being "nonsensical and absurd."  The First Circuit disagreed in its decision.

2011.Sept.14  Failed Say-on-Pay ... Former RH Donnelly Targeted
"This is a failed 'say on pay' shareholder derivative action, arising from the Board's  unwarranted and excessive spending ... on executive compensation."  So begins the complaint against Dex One Corp.  

2011.Sept.12  Failed Say-on-Pay ... Reminder of Preventative Steps 
There may be lessons in the latest failed say-on-pay vote, which traces back to a proxy statement which (i) treats abstentions as "no" votes, (ii) omits an executive summary addressing pay-for-performance, (iii) includes a red flag item in its summary comp. table, in that the CEO's pay more than doubled, and (iv) notes that the Compensation Committee acted without an independent advisor, because it had recently obtained survey data from a consultant. There could be other causes for the failed vote, but these four items generally warrant attention by those responsible for executive compensation decisions and disclosures.

2011.Sept.1  Another Shareholder Challenges on Pay-for-Performance Grounds (vs. Johnson & Johnson).
Shareholder derivative actions continue to proliferate, this one in New Jersey District Court, alleging that J&J's directors violated their duties of loyalty and candor by "grossly overcompensating" J&J's CEO in contravention of a pay-for-performance credo set forth in J&J's proxy statements. 

2011.Aug.29  Souter on Non-Compete Drafting.
In a  First Circuit decision denying equitable relief because the employer's protection period had expired, former Sup. Ct. Justice Souter notes that the employer could have drafted the underlying agreement to provide for "tolling during the term of litigation, or for a period of restriction to commence upon a preliminary finding of breach." 

2011.Aug.24  The Basics of Garden Leave.
When it comes to employee terminations, employers have several alternatives by which to structure any severance-related pay that they desire to provide.  A “terminal leave” approach may appeal to employers who want to delay an employee’s termination date, perhaps to allow for further vesting of stock awards or retirement benefits – or to extend the period when COBRA health insurance coverage will begin.  Terminal leaves come with some baggage, however, because ... continue reading from BNA article.

2011.Aug.24  Nevada Restrictive Covenant and Trade Secret Decision.
A thorough Nevada district court decision (i) denies injunctive relief premised on an alleged misappropriation of trade secrets due to movant's failure to show a likelihood of success on the merits, and (ii) grants injunctive relief enforcing restrictive covenants, in part finding that a one-year duration was reasonable under Nevada law, and a national scope was reasonable to protect valid business interests in that "Should ACP’s confidential information (known by employees such as Roumen and Pannell) be used in competition against it, ACP’s business could be affected anywhere. ... Hence, in this instance, the scope of the non-competition clause is reasonable and roughly consistent with the scope of Roumen and Pannell’s duties while employees of ACP." 

2011.Aug.20  Litigation Risks from the Appearance of Conflicts.
The recent $32M settlement of the Tribune's ESOP litigation (LA Times) should serve as a healthy reminder that company owners and executives invite litigation risks not only when they assume fiduciary responsibilities for 401(k), ESOP, and other tax-qualified retirement plans,but also when there are other indicia of a conflict of their interests (see, e.g. this year's shareholder derivative litigation that was dismissed in Berry v. Dillard). One proven defense involves reconsidering the composition of key committees, in order to assure independent decision-making as well as to defuse potential conflicts. For example, with regard to the committees that administer 401(k) and other retirement plans, replacing executive officers with mid-tier officers or other employees may defuse claims based on conflicts between ERISA fiduciary standards and the requirement for securities law disclosures of corporate events.

2011.Aug.4  Copy-cat Shareholder Litigation ... Stock Plan Approval Challenged due to Code §162(m) Description. 
ConocoPhillips has become the latest target of vexatious shareholder derivative litigation that seeks to invalidate shareholder approval of a new (or amended) stock award plan. Each of these actions argues, unpersuasively, that the underlying proxy statement mis-stated how Code §162(m)'s tax deduction rules would apply to plan awards. 

2011.July.1  Qualcomm faced the first of these actions, with its motion to dismiss being denied in Hoch v. Alexander (D.De, 7/1/2011), holding that "The parties dispute, among other things, whether certain treasury regulations apply as well as the meaning of the Proxy Statement. But at this stage, Hoch has properly pled that a material misstatement interfered with the voting rights of shareholders and that the false proxy statement breached Defendants' duties of loyalty and good faith and constituted waste. See Resnik, 2011 WL 1184739, at *12-13."2011.Aug.02  French Tax Withholding Change re Equity Compensation.
For profits of French origin that are realized on and after April 1, 2011 from the exercise of stock options and the vesting of restricted stock 

2011.July.29   SEC Delays Dodd-Frank Rulemaking re Executive Clawbacks, Certain Disclosures. 
The SEC has delayed, until January to June of 2012, the expected time for its rule-making relating to claw-backs and disclosures re pay-for-performance, pay ratios, and hedging policies.  See SEC Calendar for Dodd-Frank §§953 to 955. This almost certainly delays the effective date of these rules until after the 2012 proxy season. Public companies are expected to continue to stay the course -- (1) by implementing clawbacks only to the extent required by law, and (2) by refining their executive compensation disclosures mainly with an eye toward demonstrating pay-for-performance, but doing so in a format that suits the company (without necessarily tracking Dodd-Frank changes). 

2011.July.19  Comp. Comm. Member Avoids Liability in SEC Civil Suit relating to Backdated Stock Options (11th Cir.). 
Observing that the backdating at issue occurred before the practice "took on the universal look of inherent evil" (around 2002), the 11th Circuit dismissed the SEC's claims based on "unlawful undisclosed backdating of options."  Read more of the 11th Cir. Opinion.

2011.July.15  Former Employees Lose Bonus Claims (TARP Involved).
Employees who resigned rather than consent to the Treasury Department's TARP requirements did not establish an involuntary or constructive termination, nor a breach of their employer's covenant of good faith and fair dealing when "Hartford acted in compliance with the terms of the Plan in denying ... further compensation or payments after they resigned." Twin City vs. Arch Insurance (PDF available on request), NY Sup. Ct, NY County, 7/12/2011. 

2011.July.14  Forfeitures of Restricted Stock - Upheld Again.
As the U.S. First Circuit's decision notes, "the plaintiffs' claims rehash unsuccessful claims brought by the plaintiffs in In re Citigroup, Inc. Capital Accumulation Plan Litigation, 535 F.3d 45 (2008). The notable difference between the two cases—namely, the applicable state law in the 2008 case was that of Florida and Georgia, while in this case it is the law of Colorado and Louisiana—does not change our view of the merits of those claims."  See In re: Citigroup and, generally, Exec Comp Litigation by Executives.

2011.July.6   Another Nay-on-Pay Lawsuit. 
Cincinnati Bell's board of directors faces a shareholder derivative lawsuit alleging that the board's executive compensation decisions breached applicable fiduciary standards.  The lawsuit, filed in the Southern District of Ohio, stems from a say-on-pay vote that garnered favorable support from only 38% of shareholders. 

2011.June.30   Texas Supreme Court Upholds Non-compete Tied to Stock Options.  There is now Texas law articulating the circumstances under which employers may use stock options as consideration for the enforcement of non-competes. Careful construction of the stock option program (and its documents) is critical. In this case, Marsh USA prevailed in part due to establishing that the executive's "exercise of the stock options to purchase MMC stock at a discounted price provided a reasonable nexus between the noncompete and the company s interest in protecting its goodwill." 

2011.June.25   Forfeiture-for-Competition Agreement Lacks ERISA Indicia; Employer Loses Preemption.  A Colorado District Court has remanded an executive's claim for severance benefits to state court in a case demonstrating the litigation risks to an employer who uses individual agreements, rather than an ERISA plan, as the vehicle for promising supplemental retirement benefits.

2011.June.24   Tax Gross-ups "Time to Go"? ... & The Power of ISS.  An article in today's Marketwatch concludes with one quotation condemning golden parachute tax gross-ups for executives as a "skeleton in the closet" (Paul Hodgson of GovernanceMetrics International), and another one saying "It's time for these to go" (Charles Elson, a University of Delaware professor specializing in corporate governance).  What really should go are tax gross-ups that are poorly considered or poorly structured. 

2011.June.23   Code §162(m) Rule Changes Proposed.  The Treasury Department has proposed minor clarifications to its 1.162-27 regulations to clarify two provisions, namely (i) the per-person award limit that is required to qualify income from stock options and SARs for an exemption from the 162(m) limit, and (ii) application of the transition rule for that are becoming publicly-traded. See Links - 162(m).

2011.June.22   ERISA Preempts and Forecloses Relief for Former Executives re SERP Benefits.  An Eastern District of Michigan decision analyses the claims of former executives for supplemental retirement benefits, and holds that (i) the breach of fiduciary duty claims are completely preempted by ERISA but outside its civil enforcement provisions, and (ii) the other state law claims involve alternative state law enforcement mechanisms that must be dismissed as being preempted by ERISA.

2011.June.11   Minor Changes - Major Protections (Sequel to June 5th blog entry below).  Does it matter if an ERISA plan or policy merely refers to approval of a participant's benefit claim upon receipt of proof "satisfactory to us"? You bet it matters, as evidenced by Viera v. Life Insur. Co. of U.S. (3rd Cir., 6/10/2011), in which the Third Circuit applied de novo review to a claim denial under an ERISA life insurance plan, because the underlying policy did not expressly state that the plan administrator had "discretionary authority" to make claim determinations.

2011.June.1   No Constructive Trust for Top Hat Benefits (in Bankruptcy) -- In a claim by participants for top hat plan benefits, the Delaware Chancery Court decision (In re Washington Mutual) finds that although a constructive trust is an allowable form of relief under both ERISA and Federal bankruptcy law, that remedy is not available to plan participants because "it is an essential requirement that the top hat plans be unfunded, [and accordingly] there is no nexus or property identifiably belonging to the Plan Participants on which a constructive trust can be placed to remedy the refusal of the Debtors to pay their benefits."

2011.June.1   Litigation Risk Management - Time to Amend Benefit Plans?  Described below are a series of U.S. law developments that should be prompting employers to consider amending the claims-related provisions of their benefit plans, as well as the non-competition provisions of any benefit plans or agreements that are subject to the laws of Delaware, Georgia, or New York.  Action now will better position employers for future litigation.

  • ERISA Plans (All).  The Supreme Court's decision in CIGNA v. Amara seems likely, when coupled with the Court's LaRue v. DeWolff decision, to encourage plan participants to pursue wide-ranging alternatives for equitable, individualized, and class action remedies.  In anticipation of that, employers should consider material changes to the often boilerplate claims-oriented provisions within their ERISA plans.
    • Silver Lining for Employers:  The CIGNA decision has the potential to benefit employers because they too may seek and obtain equitable relief under ERISA.  Consider, for example, Young v. Verizon where the 7th Circuit allowed reformation of a mistaken plan amendment, which saved Verizon $1.67 billion (see related Reuters story from 2010, with the Supreme Court denying review on 5/23/2011 - a day after issuing its CIGNA decision).  
  • ERISA Plans (Non-qualified). The 7th Circuit's decision in Comrie v IPSCO Inc. holds that the Supreme Court's Firestone decision supports honoring such discretion-conferring clauses, through judicial review under an arbitrary and capricious standards.  The convincing rationale set forth in the Comrie decision should remind employers to assure that their non-qualified ERISA plans contain terms that expressly provide for the highest level of judicial deference to interpretive decisions made by plan administrators. Note that some U.S. circuits have disagreed with the 7th Circuit's conclusion in Comrie (notably, the 3rd Circuit, in Goldstein).  As a result, employers should consider how their plans address the designations of governing law and forum selection.
  • Non-compete Provisions. It is a familiar warning from employment attorneys: beware of overly-broad non-competition provisions. Part of the challenge involves being sure to consider updating plans and agreements in order to keep pace with changes in applicable law. Here are a few recent developments that may warrant amendments to plans and agreements that set forth non-competition restrictions:
    • Delaware. A recent Delaware Chancery Court decision signals tougher scrutiny for non-competition provisions, by warning that "a court should not save a facially invalid provision by rewriting it and enforcing only what the court deems reasonable. Doing so puts the employer in a no-lose position" (Delaware Elevator, Inc. v. John Williams).  
    • Georgia.  The governor of Georgia has signed legislation (House Bill 30, aka H.B. 30) in order to clarify the validity and effective date of Georgia’s new statute addressing the enforceability of restrictive covenants in employment agreements and other circumstances. Employers should be careful to consider steps by which to maximize their ability to establish that their noncompetition agreements qualify for enforcement under the new law. 
    • New York. A recent SDNY decision dissects the issues relating to a former employer's application for injunctive relief, and provides insights into smart moves for the on-boarding of executives subject to non-competition constraints.