The Advisors' Blog

This blog features wisdom from respected compensation consultants and lawyers

March 5, 2024

Tornetta v. Musk: Who Pays the Litigation Bill?

The stories keep coming from the Delaware Court of Chancery’s decision to invalidate the 2018 “moonshot” award to Elon Musk. The WSJ reported late last week that the plaintiff’s lawyers have asked the court to approve a fee payment in Tesla stock with a value of $5.6 billion!! The directors’ defense costs also need to get paid.

The D&O insurance arrangements will dictate whether the company can pass that bill along to the insurance carrier. At least at one point, Tesla had a custom insurance policy, so it’s hard to know what the mechanics will be here. This blog from Woodruff Sawyer’s Priya Huskins explains how the coverage typically works – which is good to think through if you’re looking at your own policy:

The Tesla case was a derivative suit against the board of directors, so the proceeds of the shareholder’s win technically go back to the company. This is also what happens anyway when an equity grant is rescinded.

Legal defense costs of directors subject to a derivative claim are indemnifiable by a company, assuming the company is not bankrupt. Thus, if a company is buying classic D&O insurance, one would expect the directors’ defense costs to be paid by the D&O insurance policy, subject to the self-insured retention (similar to a deductible).

These costs will not be paid by D&O insurance if a solvent company is only buying a Side A policy, a policy that only responds to non-indemnifiable claims.

Companies of Tesla’s size will often choose to self-insure indemnifiable claims, and some might go so far as to set up a captive to handle non-indemnifiable claims.

In any case, don’t expect insurance carriers to “pay” anyone the value of an executive’s voided compensation agreement given the standard exclusions in D&O insurance policies for that sort of thing. Even worse, to the extent a board is found to have engaged in wrongdoing, you might see insurance carriers attempt to claw back defense costs from the company.

Liz Dunshee

March 4, 2024

Perks: IRS Launches “Aircraft Audit” Initiative

I blogged a few weeks ago that personal travel is the perk that is most likely to catch the attention of the SEC. The Commission isn’t the only agency that is scrutinizing the use of corporate jets, though. This NYT article says that the IRS is rolling out an “aircraft audit” initiative to evaluate whether companies have improperly deducted expenses for airplanes that were sometimes being used for personal travel, and whether individuals have properly recognized income relating to personal travel benefits. They’re starting with about four dozen audits and will go from there. Here’s more detail:

The scrutiny of corporate jet use will involve new data analytics tools, which the I.R.S. has been developing with the $80 billion in funds it was granted through the Inflation Reduction Act of 2022, to determine when executives or other company officials might be using corporate planes for vacations and private trips. The agency plans to begin dozens of new audits that will focus on large companies, partnerships and wealthy taxpayers.

The deductions can be worth tens of millions of dollars. And according to this WSJ article, more companies have been jumping on the bandwagon:

Overall, the number of big companies providing the perk rose about 14% since 2019, to 216 in 2022, figures from executive-data firm Equilar show. The number of executives receiving free flights grew nearly 25%, to 427.

The article says that this worked out to an aggregate spend of $65 million on executives’ personal jet travel in 2022. Keep in mind that the SEC has made a big deal of using data analytics in its enforcement initiatives and loves a good headline. If the IRS is leveraging these tools to identify perks, the SEC – which as I mentioned, is already focused on personal travel – may not be far behind with its own type of sweep. It is a good time to pay extra attention to your perks analyses & disclosures! This blog from Gunster’s Bob Lamm recaps what goes into the perquisite analysis for the purpose of proxy statement disclosure:

– A benefit (such as aircraft usage) is “not a… personal benefit if it is integrally and directly related to the performance of the executive’s duties”.

– “[A]n item is a… personal benefit if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees.”

– The “concept of a benefit that is ‘integrally and directly related’ to job performance is a narrow one” and would not be satisfied by a determination that the benefit would qualify as an “ordinary” or “necessary” expense for tax or other purposes or that the perquisite provides some benefit or convenience to the company, as well as to the executive.

– “If an item is not integrally and directly related to the performance of the executive’s duties, the second step of the analysis comes into play. Does the item confer a direct or indirect benefit that has a personal aspect (without regard to whether it may be provided for some business reason or for the convenience of the company)? If so, is it generally available on a non-discriminatory basis to all employees? For example, a company’s provision of helicopter service for an executive to commute to work from home is not integrally and directly related to job performance (although it would benefit the company by getting the executive to work faster), clearly bestows a benefit that has a personal aspect, and is not generally available to all employees on a non-discriminatory basis” (emphasis added).

If, as seems apparent, the SEC doesn’t view the helicopter example as being a close call, what do you think it would say about an executive claiming that her husband’s travel on the company jet to a conference she is attending in Costa Rica is “integrally and directly related” to the company’s business? And many other examples would reach similar conclusions.

For a great primer on corporate aircraft use, check out this 22-minute podcast that I taped a couple years ago with Cooley’s Brad Goldberg and Jet Counsel’s Stewart Lapayowker.

Liz Dunshee

February 29, 2024

Director Pay Limits: Current Levels for the S&P 500

As Liz blogged last October, more and more companies are adopting annual limits on director pay, which became a common consideration in the wake of Delaware’s Investor Bancorp opinion. If you’re proposing a new plan this proxy season, this Pay Governance memo on director compensation discusses current levels of director compensation limits among S&P 500 companies.

Practice is split between defining annual limits as equity-based awards only or defining limits as a total of all cash and equity-based compensation. Both definitions have a median value of $750,000.

A limited number of S&P 500 companies define cash-only annual non-employee director pay limits with a median value of $500,000.

Meredith Ervine 

February 28, 2024

Trending Executive Compensation Shareholder Proposals

In our recent webcast — “The Latest: Your Upcoming Proxy Disclosures” — Ron Mueller discussed this year’s hot topics for compensation-related shareholder proposals. As we’ve discussed, we saw many proposals seeking shareholder approval of severance agreements last year. Ron noted in his commentary that this proposal is still common.

Ron also discussed three proposals that are new this year. Here’s an excerpt from the webcast:

One is requesting that companies amend their clawback policies […] the supporting statement alludes to the fact that if one executive engages in misconduct and, as a result, payouts are higher than they should have been, then other executives should also be forfeiting their compensation regardless of whether those executives themselves engaged in misconduct.

From the conservative side, there were some proposals out there asking companies to eliminate greenhouse gas reduction metrics as performance measures. More and more companies are including environmental metrics as part of their bonus programs, as one of their performance metrics. Here’s a proposal saying, “No, stop doing that.” It’ll be interesting to see what kind of traction that gets.

Lastly, another new proposal is asking for an annual Say-on-Pay vote on director compensation. As if that’s not novel enough, the two twists on that are that it has to be an advance vote before the directors get paid, not after the fact vote like Say-on-Pay for executives, and the proposal is in the form of a binding bylaw amendment. If it was approved by shareholders, it would go into effect automatically under most corporate law programs and most bylaws.

Ron also noted that it’s not always clear what exactly the proposals are asking for. And, in some cases, companies are increasing their engagement with proponents — especially since institutional shareholders are asking companies what each proposal is asking for, what the company is currently doing on that front and whether it met with the proponent and tried to negotiate out the proposal.

Meredith Ervine 

February 27, 2024

The Eligible Sell-to-Cover Exception in Rule 10b5-1: The Staff Provides Some Guidance

Here’s something Dave shared last week on

The SEC’s amendments to Rule 10b5-1 back at the end of 2022 spawned quite a few interpretive questions that are still being sorted out to this day. One of the areas that prompted questions is the scope of the exception to the limitation on overlapping open-market trading plans and the limitation on single-transaction trading plans that is provided for “eligible sell-to-cover” transactions. Exchange Act Rule 10b5-1(c)(1)(ii)(D)(3) defines an “eligible sell-to-cover” transaction as one where an agent is authorized to sell “only such securities as are necessary to satisfy tax withholding obligations arising exclusively from the vesting of a compensatory award” where the employee does not otherwise exercise control over the timing of such sale.

Last summer, the ABA’s Joint Committee on Employee Benefits submitted a request for interpretive guidance to the Corp Fin Staff seeking clarification as to what actually qualifies as an “eligible sell-to-cover” transaction. There was a concern among practitioners that the language of the definition would limit the amount of securities to only the amount required to satisfy statutory minimum tax withholding rates, when some companies allow employees to designate a higher expected effective tax rate as the rate at which their employer will withhold taxes upon the vesting of a compensatory award. The group proposed the following interpretive Q&A to the Staff:

Question: Can a contract, instruction, or plan qualify as one providing for the sale of “only such securities as are necessary to satisfy tax withholding obligations arising exclusively from the vesting of a compensatory award,” and thus be an “eligible sell-to-cover transaction” under Exchange Act Rule 10b5-1(c)(1)(ii)(D)(3), if it provides for the sale of shares at the rate identified by the employee as the employee’s expected effective tax rate, provided such rate does not exceed the aggregate of the maximum applicable federal, state, and local tax rates applicable to the employee, as permitted under tax and accounting rules?

Suggested Answer: An “eligible sell-to-cover” transaction under Exchange Act Rule 10b5-1(c)(1)(ii)(D)(3) means the sale of shares up to the tax rate designated by the employee for withholding, provided such rate does not exceed the aggregate of the maximum applicable federal, state, and local tax rates applicable to the employee, as permitted under tax and accounting rules.

In a memorandum to the members of the ABA Subcommittee on Employee Benefits, Executive Compensation, and Section 16, Mark Borges, Alex Bahn and Ron Mueller describe their discussions with the Staff on this interpretive question, and note:

As a result of our informal discussion with the SEC Staff, we understand that the reference in Exchange Act Rule 10b5-1(c)(1)(ii)(D)(3) to “only such securities as are necessary to satisfy tax withholding obligations” is not intended to mean only the number of shares required to satisfy minimum tax withholding requirements and that the rule is not intended to use technical tax language or to disrupt practice with respect to legitimate tax arrangements. Put another way, the focus of the SEC Staff appears to be on whether the arrangement is designed to pay the tax obligation arising in connection with the vesting event, which can take into account the expected effective tax rate and is not focused on only the required tax withholding rate.

It appears the SEC Staff agrees with our proposed response and will interpret the provision to allow sales of shares to satisfy an employee’s expected effective tax rate. This interpretation, however, does not apply if any of the proceeds from the sale are intended to satisfy taxes relating to income from sources other than the vesting of a compensatory award. The SEC Staff thus cautioned that persons could not characterize a sale as an “eligible sell-to-cover” transaction where shares are sold with the intent of covering taxes for events unrelated to the vesting event. For example, selling shares in an “eligible sell-to-cover” transaction where the proceeds are intended in part to cover taxes for the sale of property other than the shares received in the vesting event would not be considered an “eligible sell-to-cover” transaction.

It is very helpful to know that the Staff is not reading the “eligible sell-to-cover” transaction exception so narrowly as to exclude the many situations where an expected effective tax rate is used to determine the amount of securities to be sold rather than the statutory minimum tax withholding rate, thus making this exception more useful to avoid running afoul of the overlapping plan and single trade restrictions.

In a separate blog, Dave also shared guidance on whether a non-employee director can rely on the eligible sell-to-cover transaction exception.

Meredith Ervine 

February 26, 2024

Transcript: “The Latest: Your Upcoming Proxy Disclosures”

We’ve posted the transcript for our annual webcast “The Latest: Your Upcoming Proxy Disclosures” with Mark Borges from Compensia and, Dave Lynn of Goodwin Procter, and, Alan Dye from Hogan Lovells and and Ron Mueller from Gibson Dunn. They broke down all you need to know for the upcoming proxy season. The webcast covered the following topics:

1. Clawbacks
2. Pay vs. Performance Disclosures
3. CD&A Enhancements & Trends
4. Shareholder Proposals
5. Proxy Advisor & Investor Policy Updates
6. Perquisites Disclosure
7. ESG Metrics & Disclosures
8. Say-on-Pay & Equity Plan Trends, Showing “Responsiveness” to Low Votes
9. Status of Related Rulemaking

This webcast was a doozy – they spoke for over 90 minutes and covered quite a lot of ground. You will definitely want to check this out as we enter the proxy season, and the transcript is a low-time-and-effort way to get up to speed.

Meredith Ervine 

February 22, 2024

A Golden State of Mind: Our 2024 Proxy Disclosure & 21st Annual Executive Compensation Conferences

We’ve been getting a ton of queries about our 2024 Proxy Disclosure & 21st Annual Executive Compensation Conferences – and one of the most frequently asked question is whether we’ll be back in person this year. The answer is yes! Join us for these timely conferences taking place in San Francisco on October 14-15, 2024, or join us virtually (we will continue to offer a “hybrid” format).

The SEC’s regulatory agenda continues in 2024 amidst all types of uncertainty. We are truly “living in interesting times.” Make sure you are getting the practical guidance and expert knowledge you need (and expect!) from our conferences as rules, regulations and procedures continue to evolve. We will be posting the conference agendas and announcing the speakers soon, so stay tuned.

You can register now by one of two methods: by visiting our online store or by calling us at 800-737-1271. Sign up now for our early bird in person Single Attendee Price of $1,750, which is discounted from the regular $2,195 rate!

Liz Dunshee

February 21, 2024

The Pay & Proxy Podcast: Rethinking the Complexity of Pay Programs

Meredith & I have blogged many times about the alluring concept of simplifying executive pay. Wouldn’t we all appreciate a bit less complexity in our lives? In this new 14-minute episode of the “Pay & Proxy Podcast,” Meredith explored this topic with Ani Huang, who is the CEO of the Center On Executive Compensation. Meredith & Ani discussed:

1. How did pay design get so complex?

2. Calls for “radical simplification” of pay design from prominent institutional investors

3. A real-world example of a company that has sought to simplify its pay programs

4. Key questions to ask when exploring simplification

5. Alternative ways to simplify pay design

Liz Dunshee

February 20, 2024

Perks Disclosure: What SEC Enforcement is Watching

Perks are a sensitive topic for investors – and as Meredith blogged last week, they may take you to court over the board approvals. In addition, the SEC’s Enforcement Division frequently investigates whether they are properly disclosed. A recent Bloomberg Law article from Jones Day identifies which types of perquisites are most likely to draw regulatory scrutiny. Here’s an excerpt:

Personal travel is the perk most frequently flagged by the SEC, appearing in all but two cases in the last 10 years. Most of those cases involved travel on commercial or chartered aircraft for vacations, sporting events, or other personal activities. Personal use of a company owned or leased aircraft came up in seven cases.

In those situations, the SEC requires a company to report the “aggregate incremental cost” of the executive’s personal use of the aircraft—that is, the direct operating cost attributable to the personal travel. In one case, the SEC faulted a company for disclosing the taxable value of its executives’ personal use of company aircraft, rather than the aggregate incremental cost — a much higher figure.

Several cases involved undisclosed payments for family and friends to accompany an executive to business events, such as a board meeting to which directors’ spouses were invited or to customer and industry receptions.

Not all the travel in these cases had an obvious personal purpose. In one case, a company reimbursed its CEO for flights to attend entertainment events sponsored by a company supplier. But in the SEC’s view, merely having a connection to the company’s business wasn’t enough to justify nondisclosure, because the travel wasn’t integrally and directly related to the executive’s duties.

The article says that undisclosed payments for personal expenses, personal entertainment, personal transportation (e.g., company vehicles), charitable donations, professional services, and housing expenses, round out the most common enforcement topics. The article then gives several pointers to mitigate risk. Check out our “Perks” Practice Area for our treatise chapter and other practical resources that can help you navigate this topic.

Liz Dunshee

February 15, 2024

Not Just Whistleblower Enforcement: Many Reasons to Reconsider Your Forms

Given recent legal developments, this perspective from Shearman & Sterling encourages companies to consider a wholesale review of existing forms, including:

– offer letters and employment agreements
– separation agreements
– restrictive covenant agreements (including proprietary information and confidentiality agreements)
– equity award agreements
– employee handbooks

Many companies were already taking a fresh look at some of these forms in light of 2023 enforcement actions focused on language that potentially stifles corporate whistleblowing, but the alert highlights a number of other developments that should be considered for updates. Those include:

– Restrictions, notification requirements, outright bans and other regulator attention on non-compete clauses and other restrictive covenants that could operate as non-competes
– Developments impacting confidentiality provisions, including NLRB decisions and changes in state law regarding non-disclosure and non-disparagement covenants
– Potential interest in expanding definitions of cause to include behaviors causing reputational harm
– State laws impacting social media policies
– Separation disclosure considerations and timing requirements for a valid release

If your forms haven’t been “refreshed” in a while, it sounds like it’s time to get them back in front of your employment lawyers!

Meredith Ervine