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If the FTC’s new rule survives court challenge, existing noncompetes with most employees will be rescinded when the new rule goes into effect.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).
We’ve blogged about the concept of “say-on-director-pay” from time to time around here. Most recently as part of the director compensation settlement at Tesla. That settlement led to a new development this season: a shareholder proposal at 13 companies for “Double Binding Director Say-on-Pay.”
The proposal is unique because it’s structured as a binding bylaw amendment (rather than a precatory request). This framing seems to be more popular this year – I blogged a few weeks ago on our Proxy Season Blog on TheCorporateCounsel.net about an “independent chair” proposal that was also submitted as a binding resolution. The bylaw provision would say:
Compensation. The compensation of directors the corporation pays shall be fixed at $1 in a f iscal year; provided, however, the corporation may pay, grant, or award compensation greater than $1 in a fiscal year if such compensation has been (1) disclosed to stockholders in advance of the fiscal year in which the corporation will pay, grant, or award such compensation; (2) submitted to an approval vote of stockholders at an annual or special meeting of stockholders in advance of the fiscal year in which the corporation will pay, grant, or award such disclosed compensation; and (3) approved by a majority of stockholder votes present in person or represented by proxies and entitled to vote cast in favor of the disclosed annual compensation at an annual or special meeting of stockholders in advance of the fiscal year in which the corporation will pay, grant, or award such compensation. In the fiscal year in which this Section [] takes effect, the Board shall continue to pay, grant, or award any such compensation that the Board has previously approved for such fiscal year.
If this proposal is approved, it means that director pay would be subject to an annual, binding vote. Directors could consider whether they would be excluded from participating in this vote. If you want more detail on this proposal (submitted by Michael Levin at The Activist Investor), check out the “Proxy Preview” report that I flagged last month. Michael recently shared this update about how the proposals are faring. Here are key points:
1. Going to a vote at 5 companies (NiSource on May 13th, PayPal on May 22nd, Fortiv, Alphabet, and Devon Energy)
2. Excluded with no-action relief at 6 companies, based on the argument that excluding directors from the vote would violate state law (Michael says “he won’t make that mistake again”)
3. 2 companies still in process
It will be interesting to see the voting results. Michael implies that there will be more proposals to come…
The new T+1 settlement timeframe is only about a month away. As Dave recently reminded everyone on TheCorproateCounsel.net, it will be implemented over the Memorial Day holiday weekend. The new settlement cycle may raise some issues with your equity award withholdings. In the latest 14-minute episode of “The Pay & Proxy Podcast,” Meredith interviewed Troutman Pepper’s Sheri Adler about what we need to know & do. They discussed:
1. When tax becomes due for common types of equity awards
2. Withholding methods for employers
3. Employer responsibilities for depositing federal income tax withheld
4. Potential penalties for a failure to timely deposit
5. New timing for depositing tax following the shift to T+1 settlement
6. Actions & considerations before the May 28th effective date of T+1 settlement
If you have an executive compensation topic that would be good for a podcast, reach out to Meredith! She’s at mervine@ccrcorp.com.
Earlier this month, the Treasury Department and IRS jointly announced proposed regulations with new guidance on the stock repurchase excise tax created by the Inflation Reduction Act. The IRS previously published temporary interim guidance in Notice 2023-2. This Wilson Sonsini alert notes that “the newly published proposed regulations will effectively replace the Notice and may generally be relied upon by taxpayers until the regulations are finalized.”
The alert then details the impact of the tax and guidance on various transactions, including compensatory transactions. Here’s an excerpt regarding the treatment of net share settlements, sell to cover arrangements and forfeitures of restricted stock:
Net Share Settlements: The proposed regulations generally expand the approach taken in the Notice to provide that stock withheld by a corporation to satisfy the exercise price of a stock option or to cover any withholding obligation (including state or foreign tax withholdings in addition to federal tax withholdings) is not treated as issued for purposes of the “netting rule.”
“Sell to Cover” Transactions: The proposed regulations provide that stock issued pursuant to a “sell to cover” arrangement (where stock is typically issued to a third-party broker and then sold to satisfy a corporation’s withholding obligations) is treated as an issuance for purposes of the “netting rule.”
Restricted Stock: The Notice did not expressly address the treatment of a subsequent forfeiture of restricted stock for purposes of the excise tax. In general, the proposed regulations treat a forfeiture of restricted stock as a repurchase on the date of forfeiture (in an amount equal to the fair market value of such stock on the date of forfeiture) if such forfeited stock was originally treated as issued because a Section 83(b) election was made. As a result, a corporation may have a potential mismatch (positive or negative) for purposes of the “netting rule” with respect to the fair market value of restricted stock that may be issued in one taxable year and subsequently forfeited in another taxable year.
Yesterday at an open meeting, the FTC voted 3-2 to approve an expansive ban on the use of non-competes. The WSJ reported that this was particularly historic rulemaking.
[It] marks the first time in over 50 years that FTC officials have issued a regulation to mandate an economywide change in how companies compete. The commission has historically operated like a law enforcement agency, investigating and suing individual companies over practices or deals deemed to violate the law.
Proposed in January 2023, this rulemaking received upwards of 26,000 comments. Here are the 570-page final rule and fact sheet. This excerpt from the fact sheet summarizes the basics:
– The final rule bans new noncompetes with all workers, including senior executives after the effective date.
Specifically, the final rule provides that it is an unfair method of competition—and therefore a violation of Section 5 of the FTC Act—for employers to enter into noncompetes with workers after the effective date.
– For existing noncompetes, the final rule adopts a different approach for senior executives than for other workers. For senior executives, existing noncompetes can remain in force. Existing noncompetes with workers other than senior executives are not enforceable after the effective date of the final rule.
Fewer than 1% of workers are estimated to be senior executives under the final rule.
Specifically, the final rule defines the term “senior executive” to refer to workers earning more than $151,164 annually who are in a “policy-making position.”
While not addressed in the fact sheet, the final rule contains an exception (expanded from the rule’s proposed form) for non-competes entered into in connection with a bona fide sale of a business entity. John described this exception in today’s blog on DealLawyers.com.