This Morgan Lewis blog walks through the key decision points deal teams need to address when determining how to treat performance-vesting awards in connection with corporate transactions — after nailing down what is permitted under the terms of equity plans, award agreements and employment arrangements. To the extent awardees may be able to argue that the desired treatment of awards may not be permitted, the blog recommends the parties consider requiring consent from each participant.
It also has this good reminder to buyers to consider what constitutes “good reason” upfront for any awards with double-trigger vesting:
The awards may be subject to “double-trigger” vesting terms, pursuant to which vesting would accelerate upon a postclosing termination of the awardee’s services by the company without “cause” or by the awardee for “good reason.” If such double-trigger protection is to remain in effect postclosing, the buyer should assess whether the “good reason” concept is appropriately tailored and should revise any overbroad “good reason” definitions accordingly. For example, the buyer would not want an awardee to be able to resign for “good reason” and receive accelerated vesting solely as a result of the transaction and without any corresponding diminution in role or compensation.
Tune in at 2 pm Eastern tomorrow for the webcast – “The Top Compensation Consultants Speak” – to hear Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Jan Koors of Pearl Meyer discuss what compensation committees should be learning about – and considering – today. They’ll be covering these topics:
– Year 2 of Pay vs. Performance – Incentive Plans – Setting Goals and Considering Adjustments
– Trends in Strategic and Operational Metrics
– Clawback Policies – What HR Teams and Compensation Committees Are Focusing on Now
– Human Capital Management – Recent Considerations and Disclosure Trends
– Director Compensation Today
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, subscribe now. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
We will apply for CLE credit in all applicable states (with the exception of SC and NE, which require advance notice) for this 60-minute webcast. You must submit your state and license number prior to or during the program using this form. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval, typically within 30 days of the webcast. All credits are pending state approval.
This recent blog from Zayla Partners discusses the “comprehensive reevaluation of executive compensation” that’s usually necessary in the IPO process to reflect the shift from a private to a public company. It addresses key steps in the process, including the following, all of which need to happen in tandem with the innumerable action items on the broader IPO timeline:
– Establishing your executive compensation philosophy
– Defining the new competitive market for talent
– Creating a go-forward total rewards program
– Considering special pre-IPO equity awards
– Implementing new performance metrics and developing a plan for annual equity spending
– Setting the new director compensation program
– Addressing compensation governance matters (like a clawback policy)
The shift to a public company equity award program can be a particularly bumpy part of this process, and the blog acknowledges some of the challenges companies face on this front:
– Varying ownership levels among executives and employees
– Converting pre-IPO equity interests into a form that is more standard for public companies
– The IPO is often a significant vesting event
– Ensuring special awards have the intended retentive effect
– Shifting to more performance-based program with regular, annual grants
– Uncertainty for executives and the need to manage expectations
The blog tackles each step in more detail. It’s a helpful overview for teams looking to better understand the compensation planning needed for IPO readiness.
Executive personal jet use is back in the news. The WSJ recently reported on the difference between the value of personal jet use reported in companies’ proxy statements versus the actual cost to the companies:
Under federal securities rules, companies must report as compensation the “aggregate incremental cost” of perquisites such as free personal flights. Most say they count expenses directly tied to a specific trip, including fuel, landing fees, airport taxes, catering, crew lodging and meals, and an hourly rate for maintenance, plus the cost of repositioning empty aircraft for later use, securities filings show. […]
Typically left out: fixed costs that don’t change by flying more, including pilot salaries, insurance and the cost of acquiring the aircraft. Companies say they would pay these costs anyway, because the aircraft are primarily used for business. Charter companies charge customers thousands of dollars an hour to fly on similar jets, fees set to cover both the incremental costs reported by the executives’ employers as well as fixed costs—and a margin for profit. The result: a gulf between what executives save by taking personal flights in the company jet and what companies report spending on the trips.
In the meantime, this Morgan Lewis blog post highlights that the SEC continues to focus on perks disclosure—in particular, executive use of corporate jets. In enforcement actions from 2020 to 2023, the violations stemmed from the issues below. Keep these in mind as you consider whether and how to improve your controls:
– Improper internal disclosure and financial reporting controls
– Executives’ failure to provide the necessary information (most commonly in response to directors and officers insurance (D&O) questionnaires) to enable companies to identify and properly disclose perquisites
– Lack of an adequate company process to determine whether executive flights were perquisites that should be disclosed
– Failure to appropriately train employees in the roles responsible for making the determination of whether items were perquisites
– Lack of a formal company policy regarding approval and use of noncommercial aircraft and aviation expense reimbursement, including one case where the lack of a formal reimbursement policy resulted in the CEO being responsible for approving his own expenses
For more resources, also check out the Perks & Other Personal Benefits Chapter of the “Executive Compensation Disclosure Treatise.” We also have twopodcasts on this complicated issue featuring Brad Goldberg of Cooley and Stewart Lapayowker of Lapayowker Jet Counsel.
This ArentFox Schiff alert notes that employers will likely face questions from employees about the enforceability of existing non-competes restrictions following the FTC’s ban — despite the Chamber’s challenge and a litigation schedule that would allow the Court to issue an order prior to the September 4 effective date. The alert includes sample questions and talking point responses. Here’s an example:
Employee Question: What happens to our existing noncompete agreements? Will the company enforce our noncompete agreements if we leave?
Proposed Response: The FTC’s final rule does not go into effect until 120 days after it is published in the Federal Register. We are aware of multiple court challenges to the FTC’s authority to issue the rule. We are monitoring these challenges. For now, we are not taking any action to rescind or revoke our existing agreements.
The company intends to continue to enforce employee noncompete agreements consistent with established law, unless and until the courts determine that the FTC’s new rule is actually enforceable.
If the FTC’s new rule survives court challenge, existing noncompetes with most employees will be rescinded when the new rule goes into effect. Existing noncompetes with senior executives, however, will continue to be enforceable. Confidentiality covenants, and customer nonsolicitation covenants, and employee nonsolicitation covenants for all of our employees will remain enforceable, even if the FTC rule ever actually takes effect.
In addition to preparing for employee questions, this Morgan Lewis memo suggests companies “take inventory” of noncompete clauses before the effective date to determine which employees may need to receive the required notice.
Here’s something I recently shared on TheCorporateCounsel.net:
The memos started rolling in last week as after the FTC approved an expansive ban on the use of non-competes, with limited exceptions. As expected, at the end of the week, the US Chamber of Commerce filed suit in the U.S. District Court for the Eastern District of Texas challenging the rule.
As reported by HR Dive, the lawsuit argues that the FTC lacks authority to issue substantive regulations regarding unfair methods of competition, invokes the “major questions” doctrine and claims the ban is impermissibly retroactive — since the rule largely renders existing non-competes unenforceable, with an exception for “senior executives” as defined in the rule. This Simpson Thacher alert describes the potential timing for a decision:
The Court overseeing the Chamber’s lawsuit has set a schedule that would permit the Court to issue an order on the merits of the Chamber’s legal challenge before the Rule’s effective date. Assuming no changes to the schedule, the Court could therefore declare the Rule unlawful before the rule comes into effect.
Since that post, according to this Morgan Lewis LawFlash, the final rule was published in the Federal Register and will be effective September 4, assuming no changes due to the pending litigation.
Keep in mind that the notice of proposed rulemaking will not be published in the Federal Register until all six agencies propose it, and the memo gives the status of the rule with each of the three remaining agencies:
– The National Credit Union Administration is expected to propose the same rule in the near future.
– The Securities and Exchange Commission has included a rulemaking to implement Section 956 of Dodd-Frank on its rulemaking agenda.
– The Board of Governors of the Federal Reserve System has not joined the FDIC’s, OCC’s and FHFA’s proposal.
Despite the delay in the formal comment period, the memo states that the FDIC, OCC and FHFA have each made the proposed rule text available on their websites and will accept comments. Take a look at the memo for a summary of key provisions.
Last spring, during the banking industry turmoil, Dave reminded us about one piece of Dodd-Frank rulemaking that remained in regulatory limbo. Section 956 of the Dodd-Frank Act directed multiple regulators of financial institutions to jointly prescribe regulations addressing incentive-based compensation practices at covered financial institutions. Specifically, as Dave described:
Section 956 requires that the regulators prohibit any types of incentive-based compensation arrangements, or any feature of any such arrangements, that the regulators determine encourage inappropriate risks by a covered financial institution: (1) by providing an executive officer, employee, director, or principal shareholder of the covered financial institution with excessive compensation, fees, or benefits; or (2) that could lead to material financial loss to the covered financial institution.
Under the Section 956, a covered financial institution also must disclose to its appropriate regulator the structure of its incentive-based compensation arrangements sufficient to determine whether the structure provides excessive compensation, fees, or benefits or could lead to material financial loss to the institution. The Dodd-Frank Act defines “covered financial institution” to include specific types of financial institutions that have $1 billion or more in assets.
Dave’s blog also gave the regulatory history of this rulemaking — which includes two prior proposals that faced some considerable opposition (from the financial services industry). Those following the rulemaking may have noticed that the Fall 2023 Reg Flex agenda listed April 2024 as a tentative target date for a third Notice of Proposed Rulemaking. And, in case you missed it, the WSJ recently reported that the agencies involved “are pushing to propose the measure in the coming days” although the SEC was still working on a new economic analysis.
I’m super pumped to see people live and in “3D” at this year’s “2024 Proxy Disclosure & 21st Annual Executive Compensation” Conferences – happening this year in San Francisco! Not to mention that we’ve got a terrific lineup of experienced speakers who will be addressing timely topics. With the SEC’s regulatory agenda continuing apace and no end in sight to the global, economic and political uncertainty we’ve faced in recent years, make sure you’re getting the guidance and knowledge you need (and expect from us!) through our conferences.
I hope you decide to join us in San Francisco on October 14th & 15th. Our “early bird” deal for individual in-person registrations ends May 31st, so you need to act soon to take advantage of that rate. (Our early bird in-person Single Attendee Price is $1,750, which is discounted from the regular $2,195 rate!)
We understand that travel isn’t always possible. If you can’t make it in person, we also offer a virtual option so you won’t miss out on the practical takeaways our speaker lineup will share, and we also offer discounted rate options for groups of virtual attendees.
You can register now by visiting our online store or by calling us at 800-737-1271. See y’all soon!
Average say-on-pay support for Russell 3000 companies is sitting at 91% so far this year – with only 1 failure – which is trending higher than last year’s results. That’s according to this WTW snapshot from last week. The update also notes:
– Last year’s season-long failure rate was 2%, based on a total of 53 failed votes, compared to 1% so far this year
– ISS is issuing fewer negative vote recommendations (8% this year vs. 13% last year)
– Pay-for-performance continues to be the biggest driver of ISS “against” recommendations
Depending on when the snapshot is taken, S&P 500 companies are either experiencing similar results (per the WTW snapshot) or lagging slightly behind (according to this Semler Brossy report that’s available for download).