ExecutiveLoyalty.org
2013 Alerts
2013.Dec.27 Hospitals and Physician Bonus Pools: Improper Designs Prompt Penalties Over $100 Million
Recent court decisions have resulted in multi-million dollar judgments against two hospitals for improperly structured compensation plans with its referral-source physicians. Notably, both hospitals sought advice from outside counsel who advised that . . .
2013.Dec.19 Insider Trading + Cover-up = $31 Million Forfeiture
Clawback claims have generally been few under SOX, but state law can certainly provide robust recourse against misbehaving employees. New York's Faithless Servant Doctrine provided the vehicle in . . .
2013.Dec.8 Stock Award Litigation - Warning List for Employers
From adoption of a stock plan, through the making of awards and their settlement, employers face litigation risks - from shareholders as well as from award recipients. See this case digest, organized according to the life of a plan and awards, for risks employers should consider. The last item reflects a recent 6th Circuit case, and describes two traps to avoid when handling employment terminations . . .
2013.Dec.7 Bank Officers and Personal Liability - Not Saved by Business Judgement Rule
When banks fail, the FDIC insures deposits and looks to recover its losses from those who were responsible. Bank officers face front-line risks, to a greater degree than board members based on two recent cases in which the FDIC succeeded in arguing that the business judgment rule . . .
2013.December Director Compensation - Best Time for Precautions
Despite surveys showing flat growth (see FWCook 2013 Report), director compensation is fraught with the potential to prompt negative shareholder attention and litigation (see, for example, the next para). Given Delaware's Seinfeld v. Slager decision, smart boards should consider acting soon, in order to . . . .
2013.Oct.11 "Spring-loading" of Director Compensation? The appearance of grant-making based on inside information has fueled past shareholder derivative lawsuits, and that litigation generally led public companies to adopt corporate guidelines for the timing of stock option and other awards (with SEC rules requiring their disclosure). Boards should not let their guard down. Law360 reports that shareholders of Peregrine Pharma have sued its directors for allegedly awarding themselves . . .continued at Director Compensation Litigation.2013.Dec.2 Pay Ratio Disclosure: Comments Made on the SEC's Proposed Rules
December 2nd was the deadline for comments on the SEC's proposed rules for disclosing the ratio of CEO pay to the median pay of all other employees. Comments for and against the rules have rolled in, with key comments being . . .
2013.Oct.14 Pay Ratio Volatility? The Economic Policy Institute has published a chart showing that the worker-to-CEO pay ratio has dropped slightly over the past 15 years. During that period, there was nevertheless significant volatility in the pay ratio, indicating that CEO pay has fluctuated . . . further discussed in the Oct.14 entry at Pay Ratio.2013.Nov.25 Hospital Faces over $130 Million in Damages for Doctor's Bonus Pool
According to a federal district court in Florida, a federal law violation (of the Stark Act) occurred through an incentive compensation plan under which six oncologists shared a bonus pool that increased based on revenues from . . ..
2013.Nov.23 "Legally binding Rights" Tax Ruling for Bonus Deductions . . . 409A Relevance
In Field Attorney Advice dated 10/25/13, the IRS cites extensive authority for its position that legally rights do not exist when an employer has the unilateral right to reduce or eliminate bonus awards prior to making payments. While directed to when tax deductions are allowable, the memo has interesting implications under Code §409A in that . . .
2013.11.20 Survey: Annual Incentive Plans for Top Executives. The survey results that Pearl Meyer & Partners has made available provide some interesting insights into the different approaches taken by private vs. public employers. For example, the annual incentive plans for public employers generally take a target-based approach, by a 3-to-1 multiple over formula-based pools and discretionary bonuses. By contrast, private employers use the latter approaches twice as often – indicating more heavy reliance on discretion (whether to divide a bonus pool or to make individualized awards). Interestingly, companies with revenues over $1 billion set maximum bonuses at 200% of target, while smaller companies imposed a 125% or 150% limit. 2013.Nov.13 Mere Eligibility for Future Stock Awards does not Make Directors "Interested"
An amended complaint in a shareholder derivative action was dismissed with prejudice after revised allegations failed to excuse demand on the board.
2013.11. Equity Plan Rejections (Survey 2007-2012). Six years, 4800 shareholder votes, and only 54 failures to approve proposed stock plans. Those numbers open a recent survey from Exequity/Alliance Advisors, with its 18-page report providing insights such as these: (1) an unfavorable ISS recommendation led to a failed shareholder vote in less than about 5% of votes; and (2) “if the dilution caused by the proposal exceeds 20 percent, it is much more likely to fail,” with 45 of the 54 failed proposals involving dilution of 15% or more. Significant but less determinative were survey results relating to the “cost” ISS attributed to a proposed plan, and the burn rate for making past awards. 2013.Oct.26 CEO Pay - Do the Markets Explain Controversial Pay Packages? The headline above refers to an interesting academic study (by Cornell and Notre Dame profs) focused on benchmarking, pay for luck, and outsized CEO compensation packages.
2013.Oct.15 Delaying the Financial Expense for Stock Awards - It is Possible
Twitter's recent Form S-1 provides an example of how to postpone discloses all financial expense for stock awards, based on a common device . . .2013.Oct.2 Brazil's Court Decision re Stock Options and Social Security. In contrast to administrative rulings, the court decision reported in this PwC alert reasons that stock option grants and the associated income are . . .
(July-Sept 2013)
2013.Sept. Healthcare CEO Severance Survey. Here are a few highlights of this well presented study by Mercer et al, drawn from 186 health care organizations . . .
2013.Sept.13 Executive Comp 14A Disclosure: Clorox Wins Dismissal of Second-guessing
A California court has examined seven categories of allegedly inadequate executive compensation disclosure, with the conclusion being that Clorox's proxy statement "contained a wealth of information".
2013.Sept.10 Say on Pay: Year-to-date Failures and Turn-around Analysis from 2012 Failures
For the 60+ failed say-on-pay votes, Steven Hall & Partners has tracked information well - see this link. About the same number of companies failed their say on pay votes last year, with Georgeson having just published this analysis of how most of those companies received passing votes this year.
2013.Aug.16 Stock Plan Limits and §162(m) Disclosure Give Legs to Shareholder Derivative Litigation
A shareholder derivative action has avoided dismissal, despite the absence of a presuit demand for board action, because the underlying complaint raised a reasonable doubt that stock awards exceeded a plan’s limits on individual awards, and therefore were not a valid exercise of business judgment. The case highlights key risks and precautions from a 162(m) perspective . . . continued with case link at Excessive Comp Litigation.
2013.Aug.14 Non-compete Litigation Rising (WSJ Article)
This Wall Street Journal article begins by noting a 60% rise over the past decade in litigation by which employers seek to enforce non-competition clauses. The article then discusses the business reasons for these employer protections, and contrasting views about their value.
2013.Jul.31 IRS and NYSE Rulings Fail to Derail Exec Comp Complaints, while Viacom succeeds re "Negative Discretion" (DE)
It is common for public companies to seek informal governmental approval for questions of law relating to their executive compensation plans and practices. Whether from the IRS or the NYSE, those governmental approvals failed to persuade two different Delaware courts to dismiss shareholder derivative claims relating to company stock plans.
2013.Jul.29 Former CFO Violated Securities Laws through Reimbursements to CEO. The 8th Circuit’s decision begins ominously for the former CFO who was appealing the $50,000 penalty and 3-year bar on public-company service that resulted from his responsibility for reimbursing his company’s then CEO for lavish personal expenses.
Blog-2013_Q2
2013.Jun.20 Failed Say on Pay and Inadequate Plan Disclosure Litigation - Dismissed in NY
In Morrison v. Hain Celestial, a New York court for Nassau County applied Delaware law and concluded . . .
2013.Jun.21 Brazil Rules on Stock Option Taxation
In a ruling that brought a $22 million tax assessment to two employers (ALL Logistica and Cosan), an administrative court in Brazil sided with its tax department in concluding that stock option gains are subject to social security taxes because they are remuneration. The tax saber rattled over two years ago in Brazil - per this Bloomberg blurb from 3/16/2011.
2013.Jun.15 FATCA Update for Employers re Benefit Plans
During an informal call this week, the Treasury Department’s FATCA specialists provided welcome news for employers: compensatory plans are generally exempt from FATCA because their benefits are exempt from being treated as “withholdable payments” for FATCA purposes.
2013.June.14 Grant Date for 409A and Accounting Purposes
From a Code §409A exemption to accounting expense to tax-favored ISO treatment, identifying the exact grant date for a stock option has critical importance to the employer granting the stock option and to those who receive grants. A compendium of general tax and accounting principles appears at Stock Options - Grant Date, but note this is a mere overview with professional advice needed before any reliance.
2013.May.28 Massachusetts Court Denies to Enforce Non-compete
Equitable relief denied -- due to the executive's material change in duties (due to promotion) and his non-compete agreement being made with a smaller company rather than the larger one that bought it. Details at Massachusetts.
2013.May.13 Another Failed Say on Pay Case Dismissed (re First Merit)
This Reuters article reports dismissal of the shareholder derivative action against First Merit, with the ND Ohio court writing that "The fact that plaintiffs' interpretation and application of the 'pay for performance' policy differs from that of the Board does not equate to . . ."
2012.May.4 Shareholders Reject Only 1% of Proposed Stock Plans
A survey covering 4800 shareholder votes from 2007-2012 finds a 99% approval rate (Exequity and Aliance Advisors). Of 54 rejections, 45 involved dilution of 15% or more, and all but one involved an ISS "against" recommendation based commonly on failure of its shareholder value transfer test. For a copy of the publicly-available study, email Mark.
2013.May.2 How Private Equity Investors affect CEO Contracts (academic study)
Two economics professors are about to publish the attached study about how CEO employment agreements change when their employers convert from public to private ownership. They focused on 20 companies that sold to the largest private equity firms, e.g. Blackstone, Carlyle, and Kohlberg. The general finding - that most CEO employment agreements underwent a major redesign – is not surprising. More interesting are the findings about particular changes that resulted, notably:
Regarding the sampled companies, the authors explained that large PE firms are generally in the best position to make value-maximizing decisions. The study is titled “CEO Contract Design: How Do Strong Principals Do It?” (forthcoming in Journal of Financial Economics).
2013.May.1 Discretionary Clawbacks at Work (in contrast to Dodd-Frank §954)
A recent Wall Street Journal article (“Blind Spot Covered Ex-Trader’s Trail,” 4/8/2013), describes Morgan Stanley’s plan to claw back $100,000 to $200,000 of deferred compensation as a result of a trader’s guilty plea to charges arising from his work for a prior employer. This proposed clawback suggests a desirable business dynamic, in the sense that employers should have the discretion to decide what circumstances should trigger the forfeiture or repayment of executive compensation. By contrast, Section 954 of the Dodd-Frank Act requires that employers pursue mandatory clawbacks regardless of business judgment or cost-benefit analysis. The vast majority of employers have clawback policies and rights, and there is a healthy move toward deepening them (as evidenced by the recoupment policy that the major pharmas recently approved in conjunction with an investor coalition.) Section 954's misguided mandate is merely getting in the way of healthy governance. Before there is further waste of SEC or business resources, it would be smart to convert Section 954 into a discretionary right for employers. The fix would be simple, and would remove a drag that current law creates.
2013.Apr.17 Compensation Committee Charters - from Updates to Smoking Guns
With Nasdaq and NYSE independence rules requiring significant charter revisions in 2013, compensation committees should take the opportunity to make thoughtful refinements. Loose language has the potential to create fiduciary duties, and breaches, where none would otherwise exist. See this checklist for revisions and precautions to consider.
2013.Apr.24 Major Pharma Companies Approve Recoupment Policies
In conjunction with a coalition of 13 institutional investor groups, six major pharma companies have approved compensation recoupment policies that apply when significant company harm arises from misconduct that violates company policies relating to the manufacturing, sales, or marketing of products.
2013.Apr.16 E.U. Parliament Caps Banker Bonuses Starting in 2014, the EU's efforts to curb excessive risk-taking will impose limits on banker bonuses. Governmental activism of this kind is worth tracking, even if you are not an EU banker, because the regulation of executive compensation seems to involve a rising tide that exports with increasing speed across borders and industries. Here are a few highlights reported for the EU measure:
2012.Apr.15 Stillwater Rescinds CEO Awards after Shareholder Derivative Suits
Mainly to secure exemptions from Code §162(m)'s $1M deduction limit, it is common for stock award plans to establish maximum limits on the awards that any individual may receive. The recent experience of Stillwater Mining reminds that these limits need monitoring, because awards in excess of shareholder-approved plan limits are vulnerable to challenge.
Blog-2013_Q
2013.Mar.31 Stock Award Litigation and Risk Management Insights
Just published internationally: "Executive Compensation Litigation: Cannons to the Right, and to the Left" - recapping recent U.S. litigation by executives against their employers, as well as fiduciary breach claims by shareholders against corporate directors. For a related PowerPoint, or info about scheduling a CLE presentation, just send an email to Mark.
2013.Mar.22 Shareholder Activism Intensifies Abroad Against Executive Pay
Here are just a few of the many headlines indicating that shareholder empowerment over executive compensation continues to surge:
Overall, what the journalists are calling a "shareholder spring" shows signs of cascading across Europe, and potentially across the Atlantic, as popular discontent with executive compensation continues to escalate.
2013.Mar.20 Shareholder Voting Disparities Shown in Pearl Meyer's Survey
When the test is achieving 90% or more shareholder support, that occurred for 86% of corporate merger votes, but for only 45% of say on golden parachute votes - per the following Pearl Meyer's report of 192 say on parachute votes since 2011. The implications of adverse votes remain an open question, although the smartest directors will take measures to position for a favorable shareholder vote.
2013.Mar.18 Severance Benefits Denied – ERISA Controls Employment Agreement Dispute. In Yarber v. Capital Bank, a North Carolina federal district court applied the Supreme Court’s Fort Halifax ERISA standards to an employment agreement's change-in-control severance provision, and dismissed the complaint because . . .
2013.Mar.14 Failed Say on Pay Litigation vs Hercules - Dismissed in Delaware
Another shareholder derivative complaint has failed due to heavy reliance on a failed say on pay vote. In Raul v Rynd, a Delaware district court dismissed both due to the absence of a pre-suit demand on the board (rejecting the aberrational Ohio decision in Cincinnati Bell), and due to finding no viable claim based on alleged misrepresentations regarding the board's pay-for-performance philosophy. The court also dismissed claims against the board's compensation consultant, in a decision that generally adds to the weighty authority against litigation of this kind.
2013.Mar.13 "Banks Bow to New York on Clawbacks" - Wall Street Journal
Citigroup, CapitalOne, and Wells Fargo have separately agreed to expand their use of clawbacks, in response to pressure from NYC's Comptroller's Office. In addition to applying clawbacks to more key employees, the banks have agreed to expand the triggers to include failures to supervise, and damages due to material reputational or financial harm. Last year, Goldman Sachs, JP Morgan, and Morgan Stanley made similar commitments.
2013.Mar.06 Over $5 Million of Option Gain subject to 409A Penalties due to Below-Market Option Price.
In Sutardja v U.S., the Court of Federal Claims refused a taxpayer's summary judgment motion seeking a refund of 409A penalties paid with respect to more than $5 million of income arising from the taxpayer's exercise of stock options in 2006. The court rejected arguments to the effect that 409A cannot apply to stock options, and in the process held that Notice 2005-1 provided a reasonable basis for the imposition of 409A taxes if the exercise price for the stock options is ultimately found to have been below the fair market value of the underlying shares on the grant date.
2013.Mar.02 Say on Pay Voting Expectations for 2013, and Results YTD
Early returns indicate that 2013 say on pay votes will pit improved CD&A disclosures against deepening shareholder scrutiny. Compensation committees should expect volatility, especially from shareholder reactions to pay-for-performance disconnects, and "irritant" practices (including conspicuous awards that are not convincingly justified). Boards should beware of the trend lines in their say on pay voting results, and should . . .
2013.Mar.01 E.U. Moves Toward Banker Bonus Cap in 2014
"As of Jan. 1, 2014, bankers' bonuses will be capped at 100 percent of their annual pay, or 200 percent with shareholder approval." That is the word from the German press in an article explaining that "The regulation will apply to all bankers working within the EU, as well as employees of European bank subsidiaries abroad." London's mayor echoes widespread criticism in calling the measure "deluded" and warning that . . ..
Feb.28 Director Compensation - From Surveys to Shareholder Approval
2013.Feb.27 Citi Executives Oppose $6M Claim for Attorneys' Fees for Dismissed Say on Pay Lawsuit
The opposition memorandum details arguments in support of the premise that "Having taken no steps to prosecute their claims beyond filing their meritless copycat [failed say on pay] complaints, Plaintiffs now ask the Court to order Citigroup and its shareholders to bear the costs – to the tune of $6 million – of Plaintiffs’ self-proclaimed . . . "
2013.Feb.26 Excessive Compensation Complaint Dismissed vs. Houston American Energy
According to this SD Texas decision, the complaint in King v. Terwillegar "presents precisely the type of decision that courts should not second-guess." The court decision applied Delaware law . . .
2013.Feb.22 Claims Alleging Apple and Symantec Made Inadequate Say on Pay Disclosures - Dismissed
In its Greenlight Capital v. Apple decision, the SDNY addressed -- and dismissed -- a litany of shareholder complaints alleging that Apple's executive compensation disclosure omitted material information. Likewise, a California Superior Court examined the adequacy of Symantec's 2012 proxy statement in eight particulars relating to its executive compensation disclosures. One-by-one, the court decision considers complaints about disclosures relating to items such as Mercer's consulting income, Symantec's selection of its peer group, its consideration of award overhang and burn rates for awards, the items of compensation that were surveyed, the rationale for changes to target pay levels for salaries and performance-based pay, and increased stock ownership guidelines. The court generally found . . .
2013.Feb.16 Add Switzerland for More Shareholder Say over Exec Pay
A recent Bloomberg article begins as follows: "Swiss company chief executive officers . . . earn some of the world’s highest salaries. That may soon change. With more than 100,000 Swiss citizens having signed a petition to limit 'fat-cat' pay, voters will decide at a March 3 referendum whether" . . . .
>>> Related Article: "Two Strikes" Rule Working [in Australia], with Glass Lewis reporting . . . .
2013.Feb.15 FINRA Proposes Disclosure of Hiring Incentives paid to Registered Members
For registered members who are soliciting former customers to transfer their accounts to a new firm, FINRA has proposed a rule requiring disclosure of "enhanced compensation" that the registered member will receive from the new financial services reporting firm. For tax lawyers, it is interesting to see reference to forgivable loans (which require careful drafting to avoid tax mis-fires). FINRA announced this proposal in Notice 13-02, with some of the details involving . . . .
2013.Feb.08 Schlumberger Obtains TRO to Stop Ex-Engineer from Joining Halliburton
As reported in Law360: "A Texas court on Friday blocked a former employee of a Schlumberger Ltd . unit, who allegedly stole proprietary oil well development technology, from going to work for Halliburton Co ., finding he likely violated confidentiality and noncompete agreements he signed."
2013.Feb.07 Excess Comp Litigation Strikes AmerisourceBergen due to 162(m) Limits
A stock plan's provision setting forth per-individual limits for Code §162(m) purposes has spurred shareholder derivative litigation alleging that CEO awards in excess of the limits involved breaches of fiduciary duties, corporate waste, and unjust enrichment. For a copy of the complaint . . .
2013.Feb.04 "Moody's Warns Jeffries on 'Excessive' Pay" - New York Times
This article from the New York Times begins: "To Moody’s, the high pay [of $78 million for top executives] is a reminder of 'excessive compensation' among Wall Street firms, potentially leading investment banks to take excessive risks and irritating critics on Capitol Hill and among regulators ." Fast forward to the proxy statement disclosure implications: how will the company handle its discussion of the riskiness of its executive compensation structures? Going to the design of the firm's executive compensation, Moody's has apparently expressed concern that . . .
2013.Jan.30 "Nearly half of Ralcorp shareholders voted against golden parachute" (eWallstreeter article)
What a contrast - 99% of Ralcorp shareholders approved its sale to Conagra, but a majority of its shareholders did not vote favorably on the "say-on-parachute" advisory vote that the Dodd-Frank Act requires with respect to the extra compensation that executives receive from the transaction. Described as "futile" by the St. Louis Post-Dispatch (because the vote is advisory and does not effect the merger or the amounts payable to executives), this is the seventh . . .
2013.Jan.29 Claw-back Ordered for Employee's Disclosure of Confidential Information (8th Cir.)
In Hallmark Cards v. Murley, the 8th Circuit upheld a jury award under which a former Hallmark employee forfeited all of her severance benefits - $735,000 - due to her disclosure of confidential information to a competitor, in violation of her separation agreement. The court stated: "Hallmark's terms under the separation agreement clearly indicated its priority in preserving confidentiality." This is a healthy reminder to employers to express the purpose behind non-competition and other loyalty-related covenants, because that may form the basis for later employer requests for relief ranging from injunctions to benefit forfeitures. See Clawbacks Enforced.
2013.Jan.28 Stock Option M&A Cash-outs and Deduction Timing . . . IRS Advice
The IRS has published generic legal advice (GLAM 2012-010) with respect to stock options and SARs that a target company cashes-out within several days after an acquisition closes (using its own funds or those received from the acquiring company). The IRS advises that "these deductions are governed by the end-of-the-day rule [under Treas. Reg. 1.1502-76(b)(1)(ii)(A)] and are properly reported on Target's short-year return for the taxable year".
2013.Jan.23 ISS Releases Revised Pay-for-Performance Approach Memo
ISS has revised its publication titled "Evaluating Pay for Performance Alignment: ISS' Quantitative and Qualitative Approach." with Appendix I addressing the construction of peer groups for shareholder meetings held on or after February 1, 2013. The introduction to the publication explains generally that ISS issued a "new approach to evaluating pay-for-performance in 2012" and that "[i]t comprises an initial quantitative assessment and, as appropriate, an in-depth qualitative review to determine either the likely cause of a perceived long-term disconnect between pay and performance, or factors that mitigate the initial assessment."
2013.Jan.22 Towers Watson Publishes CD&A Content Checklist
This 10-page report lists CD&A content requirements in one column, with "qualitative guidelines" being presented in an opposite column. Towers Watson has aptly described its "Scorecard" as an aid for compensation committees.
2013.Jan.14 Code §162(m) Claims Resoundingly Dismissed - DE Supreme Court
"The decision to sacrifice some tax savings in order to retain flexibility in compensation decisions is a classic exercise of business judgment." So holds Delaware's Supreme Court in Freedman v. Adams. Despite this dismissal of another §162(m)-based action, employers should be mindful of three points. . . .
2013.Jan.10 Say "Before" Pay? Israel's New Law Brings Innovation
This posting at Harvard Law's Corp. Governance Blog describes a new "Say Before Pay" law that took effect in Israel just about a month ago. The authors advised the Justice Department's committee that formulated Israel's executive compensation reform. Although not going so far as to require binding say on pay (see the next blog), Israel has injected a twist in that the shareholder advisory vote on executive compensation - and CEO employment agreements - must occur before they become final. As described in the blog, Israel's law reflects US and UK rules relating to compensation committee independence, as well as policies favoring clawbacks and long-term performance-based compensation that takes risk into consideration. These practices are consistently being endorsed as executive compensation controls continue to go global . . . with all trending toward more and more shareholder empowerment.
2013.Jan.5 "Binding" Say on Pay - Locked on the Radar Screen
The UK has taken the lead with its binding say on pay rules that take effect later this year. A recent Wall Street Journal poll shows over 80% of 10,000+ readers support this initiative, indicating a level of popular support that makes this initiative likely to cross the Atlantic within a year or two.
2013.Jan.2 Stock Plan Award Limits: Shareholders Challenge Mindspeed Tech
While it is common for stock plans to impose per-person limits on award amounts, it is rare to see litigation asserting violations. That has occurred with respect to Mindspeed Technologies, with its board members being struck with claims they breached fiduciary duties by making CEO awards in excess of plan limits.
2013.Jan.3 Defusing Non-competes through Smarter On-boarding
Amazon and Google recently squared off in a non-compete dispute in which Amazon prevailed in asserting Washington law controlled over California law, thereby leading to injunctive relief to enforce non-solicitation obligations against a former executive. Nevertheless, the limited scope of the relief and its duration - less than three months - reflects a judicial balancing that seems to give less respect to Amazon's noncompete than to Google's on-boarding of the executive.
Copyright © Joseph Poerio. All rights reserved.