ExecutiveLoyalty.org
2012 Alerts
2012.Dec.31 Advancement of Legal Fees Denied - Delaware Decision Provides Healthy Reminder
In Miller v Palladium Industries, the DE Chancery Court decision begins by recognizing that Delaware law both authorizes the mandatory advancement of defense costs, and favors indemnification and advancement in order to attract qualified directors. Unfortunately for the director seeking an advancement from Palladium Industries, its Bylaws did not provide him with an unconditional right to the advancement, but instead ...
2012.Dec.28 Performance Awards Work, per Survey of Fidelity Clients
Here are research highlights quoted from a survey covering 2006-2011 for 89 companies . . .
2012.Dec.20 ISS Releases FAQs re 2013 Proxy Voting Guidelines and Procedures.
The ISS FAQs are organized as follows . ..
2012.Dec.12 Performance-based Trends Shown in Bank Executive Comp Survey
Here are a few highlights from a survey of CEO compensation at 58 publicly-traded banks with asset sizes between $1 billion and $5 billion: (1) salary comprises about 50% of total compensation, (2) more than 80% of compensation committees use some level of discretion to determine incentive awards, (3) performance-based vesting doubled from 17% to 34% from 2009 to 2011, and (4) "formulaic approaches to annual incentives are increasingly using" . . .
2012.Dec.08 Global Convergence of Executive Compensation Shown
A comprehensive study titled "Are U.S. CEOs Paid More? New International Evidence" involved a survey of several thousand E.U., U.K. and U.S. companies. Highlights of the study include findings that "[(1] the US pay premium is modest after controlling for firm, ownership, board, and CEO characteristics; [2] . . . higher [U.S. CEO pay is] associated with a larger fraction of equity-based pay; and [3] CEO pay levels and the use of equity-based compensation are positively related to variables routinely used as proxies for better monitoring and better governance, namely institutional ownership and board independence." For other findings, see of Survey Data.
2012.Dec.06 Shareholder Value and Golden Parachutes
A Harvard empirical study titled "Golden Parachutes and the Wealth of Shareholders" prompted this blog by one of its authors, Lucian Bebchuk: "Our corporate system provides executives with a significant power to impede or facilitate an acquisition. Golden parachutes are offered as a remedy to the concern that executives will deviate from shareholder interests in exercising this power. But this remedy is a highly imperfect one. While it does lead to more acquisitions, it also carries significant countervailing costs with it." For more about the costs of golden parachutes, see Golden Parachutes.
2012.Dec.05 Treasury Delaying Release of 409A Penalty Rules
Treasury's acting deputy benefits tax counsel Robert J. Neis has stated that the Treasury Department and the Internal Revenue Service are likely to delay issuing final penalty regulations under tax code Section 409A from the first quarter of 2013 (when earlier projected) until later in calendar year 2013.
2012.Nov.30 Severance Plan Exclusion Defeats ERISA Claim
A federal district court in Colorado has dismissed a former employee's ERISA retaliation claim on the ground that the severance plan in question limited benefit eligibility to those terminated without cause, and the record established a termination for cause. Bleil v. Williams Production (D. CO).
2012.Nov.27 Arbitration and the Enforcement of Non-competes: Supreme Court Rules
In Nitro-Lift Technologies v. Howard, the U.S. Supreme Court held that a valid arbitration clause precluded an Oklahoma court from determining in the first instance whether a covenant not to compete was enforceable under Oklahoma law. Significantly, Oklahoma law imposed strict limits on the enforceability of non-competes, and the Oklahoma Supreme Court itself held the covenants not to compete invalid under state law. Open questions remain, such as will injunctive relief be available to aid of the arbitration (either to enjoin enforcement, or enjoin employment or specific employee activities).
2012.Nov.25 Proxy Voting Guidelines and their Consequences
The directors of public companies should be sure to receive year-end briefings about the 2013 voting guidelines that Glass Lewis and ISShave recently released. Interestingly, a recent statistical analysis of 8-K announcements indicates that shareholder value decreases when companies announce changes intended to conform with proxy advisory guidelines. Overall, corporate directors should focus on striking the right balance between conforming their executive compensation structures to best practice guidelines, and departing from them for valid business reasons. Further information at Say on Pay Planning.
2012.Nov.20 CEO Employment Agreements and Noncompete Provisions (Academic Study)
This broad-based study of more than 1,000 CEO employment agreements finds that the use of noncompetition agreements is increasing, and "that more profitable firms are more likely to use noncompete provisions in their CEO’s employment contract suggesting that for these firms the risk of harm from a departing CEO may simply be more acute than with other firms."
2012.Nov.16 Failed Say on Pay Votes Reach 61 for 2012
See our Failed 2012 Vote Table for not only the addition of Oracle, DFC Global and PMFG, but a comprehensive list that includes commentary about the reason for vote failures. A pay-for-performance disconnect, omitted executive summary, or an extraordinary departure from past practice tend to explain many of the failed votes, including the latter two noted here. The best CD&As continue to begin with a cogent executive summary that gets the company "out in front" of the executive compensation message.
2012.Nov.13 SEC N0-Fault Clawback Claim Avoids Dismissal (vs. Arthrocare Executives)
A W.D. Texas decision rejects a motion to dismiss in which executives argued that "SOX § 304 either cannot be construed as broadly as the SEC claims; i.e., to impose liability on CEOs and CFOs without any element of scienter, or, alternatively, because § 304 is unconstitutional." SEC v. Baker and Gluk. See generally SOX 304.
2012.Nov.6 "Realized Pay" - New Measure Emerging as Supplement to SEC Tables
A comprehensive report by Fredric W. Cook gets the dialogue moving by explaining that "For these fifteen companies, the most prevalent definition (used by companies such as Allstate Corp., Boeing, and Eaton Corp.) of realized long-term incentive (LTI) compensation was:
Gains upon stock option exercises for the most recently completed fiscal year, irrespective of when the awards were granted
Fair market value of all full-value awards (restricted stock/restricted stock units and performance shares/units) that vested in the most recently completed fiscal year, irrespective of when the awards were granted
Value of actual long-term performance cash paid for the performance cycle ending with the most recently completed fiscal year."
2012.Oct.25 NY Injunction Standard for Preemptive Action by Former Employee: 2nd Circuit Breaks Ground
In Hyde v. KLS Prof. Advisors, the 2nd Circuit decision begins by explaining: "Our Court has not directly addressed when enforcement of a covenant restricting competition may irreparably injure a former employee." The former employee had alleged irreparable injury from having his three-year restrictive covenant inhibit his ability to find a new job and continue his client relationships. Reversing a district court's grant of injunctive relief, the 2nd Circuit found that monetary damages would suffice to protect employee on the facts presented. Further, the court noted that . . .
2012.Oct.24 Viacom Directors Move to Dismiss Code §162(m) Complaint
This one-sentence motion to dismiss relies on a memorandum reciting what have become the usual procedural and substantive arguments against shareholder derivative actions premised on lost tax deductions under Code §162(m), namely: a failure to excuse the shareholders from making a presuit demand on the board, and the absence from Delaware law of a general fiduciary duty on directors to minimize corporate taxes.
2012.Oct.15 ERISA Risk Management 2012: End of Year Action Items
This Bloomberg-BNA article of ours provides a discussion and checklist identifying the most significant ERISA risks to address as year-end approaches (with the main risks involving investment programs for 401(k) and other retirement plans, plus compliance with the Affordable Care Act now that the Supreme Court has upheld ACA’s constitutionality).
2012.Oct.3 Executive Superstars, Peer Groups and Over-Compensation – Cause, Effect and Solution
This article by Charles Elson and Craig Ferrere provides a thoughtful and comprehensive analysis of the external factors that inflate executive compensation, not necessarily in relation to corporate performance ("disconnected systems were bound to emerge"). The authors present detailed advice directed toward implementing their conclusion that . . .
2012.Sept.28 Trifecta of Dismissals for Shareholder Complaints re Executive Compensation
The application of Delaware law principles has led courts in Colorado (re Janus Capital), North Carolina (re Dex One), and California (re HP), to dismiss shareholder challenges based on alleged disconnects between pay and performance, failed say on pay votes, and alleged waste through payment of $53 million of severance. In each case, the underlying complaints failed to excuse a pre-suit demand because none of the allegations created a reasonable doubt that the questioned transaction was entitled to protection under the business judgment rule.
(July 1 to Sept. 30)
2012.Sept.19 Second Circuit's Top Hat Decision Leaves Open Question re Deference
A well-designed plan has the potential to defuse litigation, and that occurred in AIG v. Guterman. The case involved an executive who refused a lesser position, and then contested AIG's denial of severance benefits because they were payable for involuntary terminations, not resignations. As the decision notes, "the Plan expressly precludes departing employees from asserting constructive discharge in support of a severance benefits claim." The Second Circuit dismissed the executive's claim, but expressly declined to address . . .
2012.Sept.17 ERISA Severance and DE Law: Limitations Period Thwarts Claims by Former Martha Stewart GC
Employers should take note of Barton v. Martha Stewart, in which a S.D.N.Y. court dismissed a former General Counsel's severance claim because it was untimely due to a one-year statute of limitations applicable under Delaware law (which the plan designated as controlling, and which NY law enforced because of the employer's incorporation there).
2012.Sept.09 Asset Purchase and Restrictive Covenants (NY and CT Law, from Assignability to Torts)
In the heat of closing a merger or acquisition transaction, buyers need to be attentive to assuring that the seller's key employees have agreed to post-closing restrictive covenants. In Milso Industries v. Nazzaro, a Connecticut District Court recently applied New York and Connecticut law to a dispute involving (1) an asset purchase that involved the seller's assignment of employment agreements that did not expressly allow for that, (2) the buyer's hiring of seller's key employees pursuant to offer letters that they did not sign, and (3) trade secret and non-compete issues arising when the key employees broke away to form a competing company.
2012.Aug.21 Code §162(m) Claims -- One Dismissed (vs. AK Steel); Others Rise (vs. Caterpillar and Viacom)
Applying Delaware corporate law, a federal district court in Delaware dismissed claims that directors of AK Steel breached their fiduciary duties in connection with a proxy statement's proposal for approval of stock plans intended to allow for performance-based awards that could qualify for an exemption from Code §162(m).
>>> One day earlier, Law 360 reported the lawsuit with the headline "$37M Viacom Investor Suit Likely To Flop Despite Novel Tactic". Claims of this kind have been springing from proxy statements when stock plan proposals suggest inadvertently that all awards "will" qualify -- rather than "may" qualify -- for Code §162(m)'s exemption for performance-based compensation. For further information, see Shareholder Claims and Code §162(m) Case Digest.
2012.July.27 Failed Say on Pay Claims: Another Dismissed (vs. Navigant)
An Illinois court has added another dismissal to the escalating wave of decisions finding that a failed say on pay vote does not excuse the Delaware law requirement for a pre-suit demand before shareholder derivative litigation proceeds. More at Failed Say on Pay Litigation and Failed SOP Case Digest.
2012.July.13 Excessive Compensation Claims - Next Wave?
Perhaps because of the growing body of law rejecting "failed say on pay" votes as the lynchpin for shareholder derivative claims, new complaints are taking a different tack, notably:
2012.Aug.24 Bankruptcy-related Executive Compensation in the Spotlight
For employers in Chapter 11, incentive compensation is generally critical to talent retention, yet fraught with potential opposition from creditors and government regulators. Within past weeks, there has been a flurry of action, including publication of "Provision of Management Incentives in Bankrupt Firms". This empirical study focuses on the key employee retention plans (KERPs) that 417 public companies adopted in bankruptcies filed between 1996 and 2007. The authors generally endorse the use of KERPs, explaining that: "Our results do not support the common view that retention bonus plans enrich managers at the expense of creditors. On the contrary . . ."
(1) Rejection of Hawker Beechcraft's proposed key employee incentive plan, due to setting "the minimum bonus bar too low to qualify as anything other than a retention program for insiders";
(2) Residential Capital's challenges in gaining bankruptcy court approval for its executive bonus plan;
(3) a U.S. Justice Department initiative aimed at blocking "bonuses for executives who led their companies into Chapter 11 protection"; and
(4) a Delaware bankruptcy court's approval of Blitz U.S.A.'s EBITDA-based bonus plan. Over objections from a committee of unsecured creditors and the U.S. trustee, the court approved a motion for recognition of an annual bonus plan as being an ordinary course transaction that the debtor company could approve without notice and a hearing.
2012.Aug.07 Government Healthcare Regulators Flex Muscle in Executive Issues
As part of settling Dept. of Justice claims, GlaxoSmithKline has agreed to a Financial Recoupment Program that "puts at risk of forfeiture and recoupment an amount equivalent to up to 3 years of annual performance pay (i.e., annual bonus, plus long term incentives) for an executive who is discovered to have been involved in any significant misconduct." Details appear in Appendix E of GSK's Corporate Integrity Agreement with the Dept. of Health and Human Services.
>>> Meanwhile, the FTC has announced a settlement under which "Renown Health, the largest provider of acute care hospital services in northern Nevada, will release its staff cardiologists from 'non-compete' contract clauses, allowing up to 10 of them to join competing cardiology practices."
2012.Jul.27 Bonuses in Bad Times? More than a Yes/No
The July-August edition of the Harvard Business Review presents a common employer dilemma: in the wake of poor corporate performance, how should an employer recognize extra effort by its employees? An interesting HBR case study involves a supermarket set in Spain, but the issue is arising globally, with similar tough choices regardless of the industry. Two experts provided insights, one suggesting a better-designed formula bonus plan, and the other advising that bonuses be paid in order to reward hard work, and thereby"nurture a richer pool of committed talent." In a world of scarce funds for bonuses, yet a desire to encourage the most committed and best talent, there is more to the mix than an all-or-nothing bonus decision. More thoughts at Incentive Alternatives.
2012.July.05 Executives Prevail in Stock Award Litigation due to Mis-step in Claims Procedures
In disputes between employers and executives, the courts commonly enforce applicable contract or plan provisions according to their terms, but resolve ambiguities against the employers (as drafters of the documents). The 8th Circuit's decision in Schaffart v. ONEOK provides a healthy reminder because the plan was ambiguous about what constituted "retirement" (triggering the right to pro rata benefits), and the employer's decision -- by its authorized representative and fiduciary for its benefits committee -- "is not entitled to deference because . . ." read more at Litigation by Executives.
2012.July.03 Private Company's Sale and Stock Value at Issue in Stock Award Litigation
When private employers sponsor stock award plans, valuation becomes a common source both for tax issues and for disputes with award recipients. In Fried v. Stiefel Labs, a S.D. Florida court examines and and denies the employer's motion to dismiss securities fraud and fiduciary breach claims against controlling shareholders. Those claims trace to valuation issues in the context of both a private equity investment and a later corporate sale. For more info, see Stock Award Claims by Executives.
(April 1 to June 30)
2012.Jun.29 U.S. Tax Laws Being Refined re Executive and Equity Compensation
Over the past few weeks, the Internal Revenue Service has issued three publications that indicate the Service is beginning to focus its attention on executive compensation, including the tax implications of equity-based awards. A summary of these publications and links to them, appears at U.S. Tax Rules. As it appears IRS activity is picking-up with respect to equity-based compensation, employers should ensure that their awards continue to comply with the new rules.
2012.Jun.27 Voluntary Tax Correction Program for U.S. Taxpayers re Stock Awards from Non-U.S. Companies
Certain U.S. individual taxpayers were required to disclose – on Form 8938 to their 1040s for 2011 – their stock options and other equity holdings and awards received from non-U.S. entities. For general information about this new and obscure tax reporting requirement, see FATCA. For correction information for those who failed to file a Form 8938, see IRS correction homepage / IRS FAQs.
2012.June.25 Delaware Dismisses Claims vs H-P alleging Excess Severance and Inadequate CEO Succession Planning
A Delaware chancery court has ventured into new ground in analyzing claims that H-P's directors breached their fiduciary duties with regard to CEO succession planning. The court declined "under the circumstances of this case" to impose such a fiduciary duty by judicial fiat, and found that "Plaintiff has not identified any case law or alleged any facts that suggest that directors have been or are on notice that such a failure is a breach of fiduciary duty." Dismissal of the claim resulted, under a continuing Delaware theme, because ... read more. See also Shareholder Claims re Excessive Severance, and June 18th entry below.
2012.June.24 Updated "Failed" Say on Pay Table for 2012
The count of failed say on pay votes in the U.S. has reached 54, with shareholder discontent reverberating globally (see Reuters re UK "When shareholders topple CEOs" and BusinessDay re Australia "CEO Pay Revolt Threatens Xstrada Merger"). >>> More info at 2012 Say on Pay Planning / Digest - Say on Pay Litigation.
2012.June.21 SEC Final Rules for Comp. Comm. Independence - A Few Twists
The SEC has given the stock exchanges 90 days within which to propose rules, and one year within which to adopt final rules, implementing final SEC regulations relating to the independence of compensation committees and their advisors. Regarding the latter, the SEC expanded the final rules in subtle ways, such as by ....
2012.June.20 UK Binding Say on Pay Moves forward in Parliament -- toward Oct. 2013 Effectiveness
The UK's BIS has announced further steps to pass binding say on pay legislation. See this summary from Manifest proxy advisors; see generally UK binding say on pay.
2012.June.18 Updated "Failed" Say on Pay Table for 2012
The count of failed say on pay votes in the U.S. has reached 49, with shareholder discontent reverberating globally (see Reuters re UK "When shareholders topple CEOs", and BusinessDay re Australia "CEO Pay Revolt Threatens Xstrada Merger").
2012.June.18 Shareholders Lose Two More Derivative Actions Challenging Executive Compensation
Continuing a theme, a California federal court dismissed so-called "failed say on pay" litigation due to the failure by the shareholders to make a pre-suit demand on the board of Monolith Power Systems (as to which 64% of its shareholders cast unfavorable say on pay votes in 2011). Interestingly, associated claims against Monolith's compensation consultant were ... more at Failed Say on Pay Litigation.
>>> Meanwhile, Law360 reports that the absence of a pre-suit demand led a NY court to dismiss, from the bench, litigation claiming excessive compensation at Ralph Lauren. For a summary of the underlying 11/23/2011 complaint, go here. For quotes to the NY court decision, and a link to it, go to boston.com's 6/18 article.
2012.June.17 UK Headlines as Shareholders Vote Down WPP's Executive Remuneration - By 59.5%
The BBC headline reads: "Majority of WPP shareholders oppose executive pay deal" and the Wall St. Journal follows by noting "Shareholder Unrest Grows in England, Now Hits WPP." WPP's CEO Sir Martin Sorrell had tried to defuse the controversy by defending his pay in an Op-ed in Financial Times last week.
2012.June.11 ARTICLE: Shareholder Litigation Challenges to Executive Compensation
What are the general impediments to shareholder derivative litigation regarding executive compensation? For a detailed discussion, the latest edition of Corporate Governance Advisor includes our article titled Staying in Front. It includes a review of cases in which shareholders have avoided dismissal of their claims, and -- most importantly -- actions that Board should consider in order to reduce their litigation risks. See generally, Say on Pay Litigation.
2012.June.5 Dodd-Frank's Triple Threat re Executive Compensation
This week's American Banker included our blog describing litigation risks arising from the say-on-pay requirements that range from disclosure to golden parachutes. For recent litigation derived from a "say on golden parachute" disclosure, see Law360 "Encore Shareholders Blast Exec Perks in $250M Cadence Deal" (4.17.2012). The moral to our story? The increasingly toxic nature of executive compensation has shifted the battle lines, from having Boards be sure to cover the full gamut of SEC demands to assuring that proxy statements convince shareholders that pay appropriately reflects corporate performance. To read our commentary, go to American Banker.
2012.May.24 Non-compete Limited on Post-Merger Basis (Ohio Ruling)
The closing date of a merger triggered a termination of employment with the target company, for purposes of measuring a non-competition agreement's two year post-employment. The merged company was accordingly not entitled to enforce the non-competition agreement beyond that two-year period, because the agreement omitted a "successors and assigns" provision and referred to service with "the Company" alone. That was the Ohio court's conclusion in Accordia of Ohio v. Frankel.
2012.May.17 "Pay Clawbacks Raise Knotty Issues" (Wall St. Journal), includes the following quote from former TARP pay czar Kenneth Feinberg: "It's all well and good to talk about clawbacks, but there are not many instances where they have been used." Mr. Feinberg's comment suggests that, while clawback protections make sense as a protection of last resort against ill-gotten executive gains, a better focus for executive compensation should involve deferring payouts and vesting periods in order to better correlate realized income to the risk horizon to which the incentive relates. See Clawback Articles for further info.
2012.May.14 Former Dresdner Bankers Win Court Battle Over Unpaid Bonuses
“Commerzbank must pay bankers €50m in bonuses dating back to credit crunch” -- quoting from the Guardian, further reporting that Bonuses for 2008 at City subsidiary Dresdner Kleinwort were guaranteed, high court rules, even though parent company lost €6bn that year in the depths of the financial crisis. The dispute with Germany's Commerzbank, which took over Dresdner, involves some former investment bankers seeking more than €1m each. During the three weeks of hearings, the CEO of Commerzbank had argued that there was a difference between a promise and a contractual agreement. Plaintiffs had been verbally promised the bonuses by their employer in 2008, but the UK high court ruled that this verbal promise constituted a binding contract. >>>Contributed by Jeremie Gicquel, Paul Hastings Paris.
2012.May.9 Copycat "Failed" Say on Pay Class Action - Helix Energy Hit
Will Texas provide a friendlier forum than Delaware for the latest complaint that second-guesses executive compensation decisions by reference to a later say on pay vote? The complaint against Helix Energy begins with the usual refrain: "This is a 'failed' say on pay shareholder derivative action, arising from the Board's unwarranted and excessive spending ... on executive compensation." Within the same paragraph, the complaint contorts applicable corporate law by intimating that the business judgment rule is violated where a majority of shareholders disagree with a board decision (see complaint ¶3: "A majority of the Company's stockholders agree; they rejected the Board's business judgement by voting ..."). .
2012.May.7 Social Media - Employers Should Beware of Requesting Employee Passwords
"Mortified" may be the best word to describe the public and legislative reaction to employers who pressure employees for access to their personal social media accounts (e.g. Facebook).
2012.May.4 No Doubt in Delaware - Dismissal Final for Excessive Risk and Compensation Case
In affirming the dismissal of shareholder derivative litigation against officers and directors of Goldman Sachs, Delaware's Supreme Court issued a terse ruling, stating that "To the extent: ... the issues raised on appeal are legal, they are controlled by settled Delaware law, which was properly applied." Overall, Delaware's business judgement rule continues to solidly protect corporate directors with respect to their executive compensation decisions. Unhappy shareholders are likely to continue their trend toward seeking friendlier judges and law in other states.
2012.May.3 Shareholder Discontent Rises, and Crosses the Pond
The daily headlines signal unprecedented shareholder activism in response to executive pay disclosures. From the UK:"Shareholders Reject Aviva's Pay Policy" (Wall St. Journal, reporting that this "humiliating rebuke" is "only the fourth time that has happened to a FTSE 100 company"). From Zurick: "UBS investors protest against pay plan" (Financial Times, 5/3), reporting as follows ...
2012.May.1 Litigation versus Former Executives Shows High Stakes ... and Gloves Off
As if we need reminders about the importance of precision in the drafting of executive-level agreements, this week brought the following object lessons:
Apr.27 Binding Say on Pay? Yea for Transparency, Nay for Shareholder Approval
Today, a UK-USA team of Paul Hastings LLP attorneys filed comments in response to the UK government's binding say on pay proposal. While generally supporting transparency in the disclosure of executive remuneration, the comment letter opposed binding say on pay (BSOP) generally, and proposed two dramatic refinements to the UK governments proposal in the event BSOP moves forward nevertheless; namely (1) the BSOP vote requirement should not be imposed on all UK-quoted companies, but should instead should only apply to those that receive sub-standard shareholder advisory votes in more than one year; and (2) when recruiting new talent, boards should not be constrained by the most-recently approved remuneration policy, as the UK consultation draft suggests. For a copy of the Paul Hastings comment letter, just email Mark.
2012.Apr.25 "Occupy Boardroom: Shareholder Revolt" (CNNmoney)
This article warrants attention because it is not a tale of populist anger, but of pension funds and mutual funds that "are reaching the tipping point . . . [as they] fight back against executive pay packages." The article cites banking sector activism, but the shareholder litigation risks are sure to run to any public company that does not convincingly explain its executive compensation and severance structures and decisions.
2012.Apr.22 Failed Say on Pay Redux? Citi Vote Triggers Shareholder Derivative Lawsuit
About 20% of the failed say on pay votes from 2011 triggered shareholder derivative claims alleging that officers and directors had breached their fiduciary duties. Within a week after Citigroup's favorable say on pay vote plunged from 93% to 46%, its shareholders have followed suit with similar claims "in connection with the award of excessive and unwarranted 2011 compensation" (see Moskal v. Pandit et al, U.S. District Court, Southern District of New York, No. 12-03114).
2012.Apr.21 Say on "Parachute" Disclosure Sparks Bank Shareholders to Sue -- 1st Failed Vote
With bank M&A heating up, the complaint against Encore Bancshares could be symptomatic of what to expect from the new "Say on Parachute" disclosure requirement. Encore filed its special meeting proxy statement on April 12th, and the complaint soon followed with allegations drawn directly from the Say on Parachute disclosure. The complaint basically alleges breaches of fiduciary duties by officers and directors due to the compensation they receive from Encore's sale. This litigation is a healthy reminder that, although the Dodd-Frank Act's Say on Parachute disclosure and vote are not expected to derail transactions, they involve sensitive disclosures that warrant up-front diligence and thoughtful presentations to shareholders. Meanwhile, Advance America became the first selling company to fail to receive majority shareholder support for its say on parachute vote.
2012.Apr.17 UK Binding Say on Pay - a Proposal Worth Critiquing
UK-incorporated public companies have reason to fear that binding say on pay (BSOP) could become a reality for general shareholder meetings held on and after October 1, 2013. That proposal comes from the UK's Department for Business, Innovation and Skills (BIS), and is set forth in a consultation document released on March 14th. From a business perspective, the BIS proposal threatens to result in a regime under which one failed shareholder vote could derail a company's sound operations. Because governance initiatives in one country have been going global at an increasingly rapid rate, companies ought to consider commenting on the BIS proposal before its April 27th deadline. Highlights of the BIS proposal and some preliminary thoughts appear at ...
2012.Apr.16 KB Home Loses Say on Pay Vote -- Beaten by Too Little Change?
After a less than resounding 61-39 favorable vote in 2011, KB Home only garnered a 46% favorable vote in 2012. Its CD&Aacknowledged an "extremely challenging operating environment" and tried to explain successes in the company's business strategy. Further, its executives received no cash bonuses again in 2011, and their total compensation generally declined -- by about 10% for the CEO and CFO. But seven pages into its CD&A, the heading "Consideration of the Results of the 2011 Annual Meeting Advisory Vote" describes little change from 2011. After mentioning consideration of stockholder feedback, the company notes one change: not providing tax gross-ups in new change-in-control agreements. Apparently, that was not responsive enough.
2012.Apr.13 DE Chancery Dismisses Broad Range of 162(m) Claims; Denies Fee Award
In Freedman v. Adams, a shareholder brought derivative claims alleging breaches of fiduciary duty and waste due to the failure of XTO Energy's board to structure over $40 million of executive bonuses in a manner that would be deductible under Code §162(m). The Delaware Court's decision sweepingly rejects all claims, with two of many notable quotations being ...
2012.Apr.10 SEC AGAIN PURSUES NO-FAULT CLAWBACK UNDER SOX 304
The SEC has announced the filing of a complaint against the CEO and CFO of ArthroCare Corp. who "are not charged with personal misconduct, but they are still required under Section 304 of the Sarbanes-Oxley Act to reimburse ArthroCare for bonuses and stock profits that they received after the company filed fraudulent financial statements."
2012.April.7 Headstrong CEO Study -- Balance Innovation with Governance and Compensation
This intriguing study casts doubts on "the usual presumption that overconfidence is undesirable" by finding benefits weighing "especially heavily in industries in which firms have strong internal innovative opportunities. In contrast, in industries that lack good opportunities for internal innovation, overconfident CEOs may be more likely to resort to bad acquisitions." One sentence in the article carries a message for Board members, by warning that "compensation and governance should be designed to severely constrain such CEOs"(page 40). That is easier said than done, but is nonetheless an important heads-up for boards challenged with a headstrong CEO.
(Jan. 1 to March 31)
2012.Mar.28 2012's First Failed SOP Lesson: Explain Extraordinary Increases within Summary Comp. Table
Int'l Game Tech received the first failed say on pay vote for 2012, perhaps because (1) its summary comp. table showed that its CEO and CFO received a 60% increase in year-over-year total compensation, and (2) the executive summary in its CD&A merely explains that "This grant was deemed essential to promote the longer-term retention of critical senior leadership." After an unfavorable ISS voting recommendation, the company issued supplemental proxy materials, which includes the ominously telling sentence: "To better understand the rationale behind the special incentive stock grants, it is important to note the context in which the grants were approved." Issuers are best advised to convincingly address extraordinary compensation items in their CD&A's executive summary. Supplemental explanations, after problems emerge, seem generally less effective.
2012.Mar.23 TAX ALERT FOR NON-U.S. ISSUERS ... AND THEIR U.S. AFFILIATES
A new and obscure tax reporting requirement under FATCA requires that certain U.S. individual taxpayers disclose – on Form 8938 attached to their 1040s due April 15, 2012 – interests in specified foreign financial assets which include their equity holdings and awards received from non-U.S. entities. Interests in non-U.S. defined contribution plans, and distributions from non-U.S. defined benefit plans, are also potentially reportable. While failure to file penalties of up to $10,000 would fall on employees, officers, and directors who are U.S. taxpayers, it is nonetheless wise for employers to act ASAP to consider providing a simple heads-up notice to those who are at risk due to their employer-provided stock awards and employee benefits. More at >>> FATCA 2012 Reporting.
2012.Mar.23 NY Court Dismisses Excessive Compensation Case vs. Morgan Stanley Directors
According to Reuters: “Shareholders [of Morgan Stanley] accused the outside directors of corporate waste and breaching their duties by setting aside 62 percent of net revenue, or $14.3 billion, for compensation in 2009. … They said the amount was excessive given that . . . A New York State appeals court panel in Manhattan said the shareholders should have . . .”
2012.Mar.14 "UK's Cable Proposes Annual Binding Vote on Say on Pay" (BloombergBusinessweek), beginning "U.K. Business Secretary Vince Cable backed allowing shareholders a greater say over executive pay, including annual votes on compensation and binding votes on exit payments.” Coincidentally, Financial Times reports ...
2012.Mar.12 Two More "Failed Say on Pay" Cases Dismissed
Jacobs Engineering:
The directors and officers of Jacobs Engineering, and their compensation consultant, successfully challenged a complaint alleging that the poor financial performance made their authorization of significant pay increases for executives "unreasonable, disloyal, and not in good faith, and violated the Board's pay-for-performance executive compensation philosophy." A Los Angeles Superior Court dismissed the complaint for failure to adequately allege either (1) demand futility or (2) facts sufficient to constitute their claim. Notably, the court observed that "The Dodd-Frank Act did not create any binding obligation on the Board" [through its advisory say-on-pay vote requirement], and that there was "no actionable misrepresentation alleged or culpability" alleged to support claims based on false disclosures in the company's proxy statements.
Biomed Realty:
The absence of a pre-suit demand also proved fatal to this complaint, with Maryland law driving the result in a decision that both reviewed Delaware law, and considered the failed say-on-pay decisions in Cincinnati Bell and Umpqua. Here is one excerpt fromWeinberg v. Gold (D.MD, 3/12/2012): “Although it can be reasonably argued that a “say on pay” vote provided the board an opportunity to reconsider its decision regarding executive compensation, it should not be seen as the equivalent of a pre-suit demand. A shareholder advisory vote is fundamentally different from a demand for litigation.”
2012.Mar.10 ISS Releases Updated Governance Risk Indicators (GRId 2.0)
GRId 2.0 Updates indicate: "On top of this list was the inclusion of aspects of ISS’ pay for performance evaluation – which now comprises multiple new questions within the Compensation category, directly drawing upon ISS’ new quantitative methodology." >>> See GRId 2.0's 26 Compensation Questions.
2012.Mar.9 Spain limits executive pay state-owned companies and rescued banks
“Spain to limit executive pay at state-owned companies” -- quoting from the Guardian (2/17/2012), further reporting that “Rajoy's government estimates salary cuts of up to 35% (…) in the third of a series of measures designed to assuage anger over tax-funded executive pay”. Annual base salaries at state-owned firms would be limited to €105,000 although the government may approve performance bonuses. The Spanish government had already decided to cut salaries of banks (see art. from the Guardian dated 2/10/2012) with upper limit for nationalised or part-nationalised banks set at €300,000 and non-executive directors of such banks capped at €50,000. Former General Manager of the IMF Rodrigo Rato has also recently agreed to have his executive chairman's salary at the Bankia group reduced by 75% down to €600,000 as the government also decided to cut bankers’ pay at rescued banks.
2012.Mar.7 Another Claw-back via Hold-back ... Lloyds Bank
“Lloyds bank claws back £1.5m bonuses from directors” -- quoting from the Guardian (2/20/2012), further reporting that “Lloyds Banking Group is to claw back at least £1.5m from five former and current executives and eight other senior managers, to penalise them for £3.2bn of losses the bailed-out bank incurred after the bonuses were awarded”. It is the first time that a large UK bank has reclaimed executive bonuses, though mostly in the form of hold-backs, as UBS has done (see the 2012.Feb.9 entry below). All of this suggests banks, and other employers, are likely to pursue better governance and risk management through the increased use of multi-year vesting schedules that basically establish performance-based or discretionary forfeiture risks.
2012.Mar.6 Aon Enforces Non-Competition and Non-solicitation Covenants via Multi-Layer Approach
In NY County's Sup. Court, Aon succeeded in enforcing post-employment restrictive covenants against a former SVP and his new employer, as a result of what the court described as "their orchestration and participation in a massive raid on the clients and employees" of an Aon division. Aon prevailed both despite an expired employment agreement (with the court enforcing its "survival of covenants" provision), and because its restrictive covenants were also set forth in three different benefit executive incentive plans in which the executive participated. This multi-layered approach tends to make sense for employers who want to best position to enforce post-employment restrictive covenants.
2012.Feb.28 Say on Pay -- Early Returns Show Reversals Possible, but No Guarantees
Negative say-on-pay votes last year prompted Beazer Homes, Jacobs Engineering, and Hewlett-Packard to respond with positive changes and shareholder outreach. Their 2012 proxy statements tell impressive stories, with the shareholders of Beazer and Jacobs already having more than doubled their favorable say-on-pay voting percentage, in each case from 46% in 2011 to more than 95% in 2012.
>>> On the other hand: Johnson Controls dropped from a 62% favorable vote in 2011 to a 58% in 2012. Its 14A proxy statement discloses total compensation increases averaging 18% for named executive officers (27% for the CEO), with its CD&A beginning without a pay-for-performance explanation (although the CD&A follows with significant detail about performance and improved compensation structures). There was a supplemental filing that made the company's pay-for-performance case, although perhaps belatedly.
2012.Feb.27 ISS Executive Comp. Survey Results from 2008 to 2010
ISS has released an 8-page report titled Post-Crisis Trends in U.S. Executive Pay, which provides detailed support for findings such as the following: "Mindful of the outcry over particular elements of pay packages, companies began scaling back bonus awards as well as payments related to 'golden parachutes' and other forms of exit pay following the crisis. … But that has been more than offset through increases in other pay elements, most notably awards tied to company stock. The result is a 37 percent surge in total annual compensation paid to C-suite officers from fiscal 2008 to 2010 with stock awards now constituting more than half of the total pay pie."
2012.Feb.22 SEC Expert re What is a Perquisite (for Executive Comp Disclosure Purposes)
In litigation against two CFOs re their failure to disclose perquisites that an issuer provided for its CEO, the SEC prevailed in a motion to have its expert testify about a "primary purpose" methodology that is applicable under the Internal Revenue Code for determining whether an item is a business or a personal expense. The federal district court decision in SEC v. Das states that ...
2012.Feb.20 Golden Parachutes and Board Accountability
Board members should beware of warnings within the conclusion to a Governance Metrics International analysis of large golden parachute payments: "Directors who approve such awards for an incoming CEO or allow them to continue in place for existing CEOs may be held accountable when CEOs receive tens of millions after a short or unproductive tenure. They may also be held accountable if CEOs are paid twice for their successes."
2012.Feb.20 Say on Pay Votes and CEO Compensation: Evidence from the UK (Ferri and Maber, Review of Finance, pending).
"Overall, our tests suggest that UK investors perceived say on pay to be a value enhancing monitoring mechanism, and were successful in using say on pay votes to pressure firms to remove controversial pay practices and increase the sensitivity of pay to poor performance."
2012.Feb.19 Social Networks and Restrictive Covenants (Bloomberg Article)
"Over the past 10 years, with the advancements in technology and the rapid spread of online networking among professionals, the effectiveness of traditional restrictive covenants (such as confidentiality, noncompetition, and nonsolicitation agreements) has been called into question." >>> Read more re Why Rapid Change Should Meet Rapid Improvement.
2012.Feb.14 SEC Advises re Say on Pay Proposal Text for Voting Cards and Instructions
The SEC has issued guidance about how proxy cards and voting instructions should describe the say-on-pay vote. The top four bullets provide examples of approved language, and the bullet in the last line illustrates an inadequate description (because of its ambiguity). See CD&I 169.07.
2012.Feb.9 Banks Defer 2012 Bonuses, Claw-back 2011 Share Bonuses, and Fail to Recover on Forgivable Loan
Per Reuters, Deutsche Bank will defer any part of an employee's bonus above 200,000 euros ("the deferred portion will also be half cash and half shares, and will be paid out over a period of three years in equal annual installments, beginning in 2013"). Separately, UBS has notified some of its highest-paid investment bankers that they will forfeit the maximum amount (50%) of share bonuses that were awarded in 2011 and that were scheduled to vest in 2012 (in the first of three vesting installments).
The foregoing is consistent with advice Lucian Bebchuk posted on Harvard Law's blog under the title "Executive Pay and the Financial Crisis" where he advises: "Going forward, these two problems can and should be addressed by improved design of pay arrangements.To address the first problem, pay arrangements should generally tie executives’ payoffs to long-term results (along the lines proposed in Bebchuk and Fried (2010) or otherwise). To address the second problem, executives’ payoffs should be tied not only to long-term results for shareholders but also (as Bebchuk and Spamann (2010) advocate) to long-term results for other contributors of capital to their financial firm."
Unrelated to the above, a financial regulatory panel (FIRA) dismissed an action by which UBS sought recover $1,000,000 from a former broker pursuant to a promissory note relating to his signing bonus. See Reuters (2/6/2012) for further information ("rare win for a broker").
2012.Feb.8 Clawbacks -- Goldman and JPM Announce Changes that Appease NYC Pension Investor. Articles in Law 360 and the WSJ describe an improved clawback standard (from the investor perspective), reporting that the main clawback changes that Goldman and Morgan Stanley have agreed to implement involve the following: (1) permit recovery of compensation for failure to appropriately supervise or manage an employee; (2) cover actions or omissions; and (3) remove the term “material” re losses as a trigger for recovery. The utter absence of a clawback policy is a say-on-pay red flag for public companies, with most seeming to tread carefully by either freezing past policies or adopting minimalist ones due to uncertainties surrounding Dodd-Frank.
2012.Feb.8 California Law Rules ... in Choice-of-Law Dispute involving Employee Classification (9th Circuit). For employers outside California, the 9th Circuit's decision in this worker classification case provides a heads-up for the governing law to expect in choice of law disputes involving California-based employees. >>> See relevant quotes from Ruiz v. Affinity Logistics.
2012.Feb.7 Italy's Supreme Court Denies Worker Guarantees to Bank Executive who Breached Fiduciary Duties. Here is interesting info from LinkedIn's international employment group re an Italian Sup. Ct. decision to the effect that, if an employer follows proper dismissal procedures, an employee may be denied -- quoting from R. Ferrario's blog post -- "guarantees under the Workers' Statute" if the employee "seriously breaches his employment contract in a way that permanently jeopardises the fiduciary relationship with the employer."
2012.Feb.3 ISS FAQs re Pay-for-Performance Issues. ISS has released 20 FAQs that provide some detail about its pay-for-performance testing, such as its total shareholder return (TSR) factor, peer group selection, issuer commitments to make future changes ("not as relevant"), and ISS recommendations for shareholder voting on proposals relating to (i) new or amended stock-based compensation plans, and (ii) the election of directors, especially those on compensation committee.
2012.Jan.26 Merger-related Disclosures Prompt Shareholder Action -- Dismissed by 7th Cir.
The 7th Circuit's recent decision in Dixon v. ATI Ladish, while focused on Wisconsin law, serves as a reminder that the Dodd-Frank Act's new Say-on-Parachute vote is likely to generate close scrutiny from shareholders with respect to the completeness of the required disclosures. >>> For general reference, see Say on Parachutes.
2012.Jan.23 Credit Suisse Again Bundles Risk and Reward
"Credit Suisse plans to pay a portion of senior employees' bonuses in bonds backed by derivatives, reviving a maneuver from 2008 that helped the firm dispose of risky assets while preserving value for staff" so starts the following Bloomberg article.
2012.Jan.15 Stock Claims by Executives Fall to Straightforward Contract Terms; Survive Ambiguity
The 4th Circuit has issued two recent decisions illustrating the power of unambiguous plans and award agreements.
The first upheld dismissal of a former executive's claim contesting expiration of his stock options three months after his employment terminated (Porkert v. Chevron, stating that "Porkert unequivocally accepted each stock option grant on an annual basis from 1999 until 2004, and did so knowing that each grant was expressly governed by the LTIP terms and rules").
The second decision involved dismissal of a former employee’s claim seeking recovery of unvested equity awards (Kunda v C.R. Bard, Inc.), with the court rejecting Kunda's arguments that Maryland law applied despite the stock plan's designation of New Jersey law as controlling. On the other hand, an executive's claims relating to his stock options avoided dismissal in Rawat v. Navistar, because "the Release does not unambiguously demonstrate Rawat's intent to release the claims alleged" with respect to his inability to exercise stock options due to a blackout period in effect after execution of the claims release.
2012.Jan.12 Say on Pay Claims Receive Adverse Rulings in CA and OR
When it comes to shareholder derivative actions inflamed by failed say-on-pay votes, the court decisions are lining up behind the convincing Beazer dismissal, with a CA district court being the latest to dismiss a shareholder's claim, this one for a declaratory judgment, on the ground that "The Dodd-Frank Wall Street Reform Act did not change state law regarding fiduciary duty or the business judgment presumption." That litigation in Dennis v. Hart (S.D. CA) has not ended, however, because the case was remanded to California state court for consideration of the shareholder's breach of fiduciary duty claims, including whether or not the plaintiff may "use the negative say on pay vote as evidence that the business judgment presumption was rebutted."
Meanwhile, an Oregon federal magistrate judge has recommended dismissal of a federal court action involving a shareholders' complaint that traces to a 62% unfavorable say on pay vote re Umpqua Holdings (news). The Oregon magistrate's recommendation rejects the analysis inCincinnati Bell, and applies Oregon and Delaware law principles in finding that the complaint's allegations were insufficient to overcome the business judgement rule's presumption in favor of the board's executive pay decisions.
2012.Jan.11 Outside Director's Breach of Loyalty? Shareholders Alone Can Ratify under Bermuda Law - Second Circuit
Tyco has succeeded in reversing dismissal of its claim that a former director breached his fiduciary duty by secretly receiving a $20 million payment from Tyco in connection with its acquisition by CIT Group. The Second Circuit's decision concludes that "under Bermuda law, [the director's] breach could be ratified only by Tyco's shareholders, not its board of directors." See Tyco v. Walsh (2nd Cir.).
2012.Jan.8 "Cameron promises powers to limit executives' pay" (BBC News)
The BBC reports that "David Cameron has promised shareholders a binding vote on executive pay, in an effort to deal with excessive salaries," and that he "also pledged to tackle large payouts for executives dismissed because of poor performance." More at Executive Comp - UK.
2012.Jan.6 Code Section 162(m) Heads Up for Annual Meetings.
For public companies, higher-than-usual stakes attach this year to proposals for shareholder approval of new (or amended) cash incentive plans and/or equity award plans. This is mainly because of the two Delaware District Court decisions described here, which essentially highlight a litigation risk if a proposal for shareholder approval states or implies that awards "will qualify" -- rather than "are intended to qualify" -- either for exemption from Code §162(m) or as performance-based compensation for Code §162(m) purposes. While Code §162(m) has your attention, two further caveats are worth mentioning.
(1) Five-year Rule. Although the normal life of a stock plan is 10 years, an exemption from Code §162(m) requires shareholder approval every 5 years if the plan follows the common practice of merely identifying a maximum per person limit and a menu of possible performance-based measures (as opposed to locking-in a formula for awards).
(2) Vesting on Involuntary Termination or Retirement. The Treasury Department has issued a ruling to the effect that a performance-based award will lose its §162(m) exemption to the extent that the award will be paid-out, regardless of performance outcomes after 2008, in connection with the award holder's termination of employment for a reason other than death or disability.
As a general precaution, public companies should be sure to carefully vet any proxy statement that proposes a compensation-related plan for shareholder approval (whether the plan involves cash or equity awards, or both).
2012.Jan.2 Delphi Shareholder Targets Premium Sale Payable for Founder's Shares.
The Pontiac General Employees Retirement System has filed a complaint in Delaware's Chancery Court alleging breaches of fiduciary duty by the Founder and CEO of Delphi Financial Group, as well as by its board of directors, due to a merger agreement under which common shareholders will receive $9 per share less than the founder and CEO (who has super-voting shares.
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