As Jim Hamilton recently noted in his blog, “a growing consensus among federal courts that, under Delaware law, a negative shareholder say-on-pay vote does not rebut the business judgment rule presumption normally accorded to a company’s board of directors.”
On July 13th, a federal judge in the Northern District of Illinois, ruled as such on the basis of Delaware law (Gordon v. Goodyear, ND Ill., No. 12 C 369, July 13, 2012). In the derivative suit, involving Navigant, the judge noted that the plain language of Dodd-Frank, which requires the shareholder vote on pay, “makes clear that the shareholders vote is non-binding on the corporation and that it does not create or imply any change in the board members’ fiduciary duties.”
I’ve added two more companies to our failed say-on-pay list for 2012 as Applied Micro Circuits and Iconix Brand Group have failed during the past week or so. We are now at 57 companies in ’12 that have failed to garner major support. Hat tip to Karla Bos of ING Funds for keeping me updated.
Ahead of our panel – “How to Work with the Proxy Advisors: Navigating the Say-on-Pay Minefield” – during our “Say-on-Pay Workshop: 9th Annual Executive Compensation Conference” on October 9th, Pearl Meyer & Ptrs is conducting this brief survey about your experience with proxy advisors during the past year. Please participate.
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As noted in these memos posted in our “Airplane Use” Practice Area, the IRS has finally issued final regs concerning the deductibility of expenses associated with personal use of corporate aircraft – which may have implications for executive compensation disclosures, as well as for those who must apply the rules to prepare federal income tax returns.
At some point in the near future, we predict that executive medical benefits will be the next perk destined for the dust bin. Under the healthcare reform law (PPACA), the IRS is to issue rules implementing nondiscrimination requirements for insured medical plans. The IRS is virtually certain to apply those new rules to self-insured plans too. While there is much debate about the exact scope that the nondiscrimination rules will take, it is hard to see how health insurance that covers only senior executive will be a viable option from an economic standpoint. There will either be a penalty on the company (insured plans) or a significant tax hit on the executive (self-insured plans).
The final blow may be the proxy disclosure consequences of the penalty. If a company incurs a penalty to provide special health insurance to named executive officers, that penalty would be part of the company’s aggregate incremental cost for the perk. That could lead to footnote disclosure of the amount of the penalty as part of the methodology for computing the aggregate incremental cost of the executive health insurance. Disclosing both the cost of executive medical insurance and a penalty for a discriminatory plan may be too much for many companies to swallow.
This recent article from “The Telegraph” spells out potential reforms by Barclays for its bonus arrangements. Here is an excerpt: “Barclays is planning radical bonus reforms that could see staff having to wait until they retire to collect their awards, as the bank tries to overhaul its culture.”
Simon Property Group Inc. (SPG) directors were accused in a lawsuit by an investor of improperly increasing Chief Executive Officer David Simon’s compensation last year without seeking shareholder approval. The board of the largest U.S. shopping-mall owner wrongfully authorized a compensation package for Simon that provided $1.25 million annual salary, a cash bonus of double his salary, and $120 million in special stock awards as an incentive to stay with the company through 2019, a Louisiana pension fund claimed in the suit, filed yesterday in Delaware Chancery Court.
The $120 million retention award “is not tied to the company’s performance and instead guarantees enormous payments to Simon simply if he stays employed by the company” for seven more years, the fund alleged. Simon, based in Indianapolis, raised its dividend and increased its full-year forecast for funds from operations last month, citing increased demand for space from retailers at regional malls and outlet centers. Earlier this year, Simon bought a 29 percent stake in European shopping-center operator Klepierre SA and formed a venture with Rio de Janeiro-based BR Malls Participacoes SA (BRML3) to develop outlet centers in Brazil. Les Morris, a spokesman for Simon Property Group, said by e-mail that the suit is “meritless” and the company will defend itself against its claims.
The suit comes more than two months after Simon officials disclosed that 73 percent of the Simon shares voted at the company’s annual meeting opposed the granting of the retention award to the company’s chief executive.
Say-On-Pay Vote
Simon officials sought to defend the CEO’s compensation plan prior to the so-called “say-on-pay” vote, noting that total stockholder returns for the past 10 years were 597 percent compared with 58 percent for the S&P 500. Simon had been one of the company’s top executives during that period. Simon, son of the company’s co-founder, has been CEO since 1995 and chairman since 2007. The Louisiana Municipal Police Employees Retirement System, a Simon shareholder, accused the company’s directors of exceeding their authority by amending the company’s stock- incentive plan, created in 1998, without seeking shareholders’ approval.
The plan allowed the board to change its terms unilaterally unless shareholder approval was “required by law, regulation of listing requirement,” the pension fund said.
Tax Implications
Since changes to executives’ performance goals under the plan implicate tax laws, the board was required to have investors vote of them, the pension fund said. The investors filed a so-called derivative suit against Simon’s board, which would return any recovery from insurance covering the company’s officers and directors to the company’s coffers. The case is Louisiana Municipal Police Employees Retirement System v. Bergstein, CA No. 7764, Delaware Chancery Court (Wilmington).
The creators of a website devoted to getting mining executive Tye Burt fired declared “success” this week. The Kinross Gold Corp. CEO was relieved of his position on Wednesday. Where does a one-theme website like FireTyeBurt.com go after that? Not away, according to the site’s postings on Friday. After a victory lap, in which the website declared “great news, goodbye Tye,” the site hinted at a new direction: making sure Mr. Burt doesn’t get a pay-off. “We can only wish that the Board took a principled stand and did NOT pay off Tye Burt with a huge departure bonus,” it said.
In announcing Mr. Burt’s departure earlier this week, Kinross said it “needed a new leader to carry out a plan to improve the company’s investment returns and to optimize its projects.” That news didn’t come as a surprise for many. Gold miners’ stock prices have lagged behind the rise in gold prices, and Kinross has been under extra pressure since early this year, when it reported delays in development projects in Chile, Ecuador and Mauritania.
Firetyeburt.com put it a little less diplomatically, pointing to compensation packages and a share price that has been flat during a seven-year period in which the price of gold has risen by four times. “About the only person who has made money off of Kinross has been Tye Burt,” it said in recent weeks.
By Thursday the website’s banner had changed from “Tye Burt needs to be fired” to “Tye Burt needed to be fired.” Then came the new demand: “Take a stand, cut him loose with nothing.” The website didn’t respond to requests for comment. Mr. Burt, who was replaced by Kinross executive J. Paul Rollinson, couldn’t be reached for comment. Kinross didn’t return calls seeking comment.
Here’s something that Steven Seelig and Russ Hall of Towers Watson recently blogged:
A recent Delaware Chancery Court case (Seinfeld v. Slager) may provide the impetus for companies to refine the process by which independent directors set their own compensation. At issue in the case was whether the directors were protected under the “business judgment rule” from a potential self-dealing transaction in approving their own pay in accordance with a shareholder-approved stock plan that set upper limits on their compensation. The court recently refused to dismiss the plaintiff’s claim, finding that the shareholder-approved plan set compensation limits at such a high level that they were tantamount to the board being free to use its own discretion. Because no evidence was presented that the directors considered the grants entirely fair under the circumstances, the court permitted the case to move forward to determine whether the pay decision was in violation of the board’s fiduciary duties and constituted corporate waste.
The problem for the court was that, although the stock plan was approved by shareholders in accordance with Section 162(m), the plan put few, if any, limits on the board’s ability to set its own stock awards. The plan provided that the committee has the sole discretion to set compensation for the directors. Like many equity compensation plans, this plan provided upper limits on the number of shares granted to an eligible individual, but made no distinction between employees, officers or directors in applying these limits. Under the plan’s individual limits, theoretically each director could have been awarded restricted stock or stock units worth approximately $21.7 million each year. Even though the actual stock grant for the year was around $750,000 for each director, the court refused to dismiss the plaintiff’s claim, ruling that the stock plan lacked sufficient definition to afford protection under the business judgment rule due to the absence of a “meaningful limit” imposed by the shareholders.
Issues to Ponder
The court’s ruling did not provide any details on how the compensation committee arrived at its decision regarding its grant levels. This raises questions about whether the committee was advised by a compensation consultant who presented relevant market data to support the decision-making process or whether the committee documented any rationale for its decision in the minutes. Although there was no mention of such issues in the ruling, it’s possible they were not proffered simply because the defendant directors believed the case would be dismissed out of hand, as are many Delaware compensation-related claims. We will be interested to see whether the court’s ultimate ruling provides more information on these issues because prior Delaware cases have tended to set the bar fairly low for protection under the business judgment rule, typically holding that compensation committees need merely to have a rational basis for their pay decisions. We would hope that having a qualified expert advise the compensation committee on appropriate director pay levels would help meet this standard.
But would such actions have been enough in this case, given a rather open-ended, shareholder-approved plan? That’s not clear. The court was unwilling at this stage to describe any bright-line standard, noting that the sufficiency of plan provisions to provide potential protection under the business judgment rule “exists on a continuum.”
Among the questions this case raises are the following:
– Should companies consider drafting equity plans that set a separate “meaningful” maximum for director compensation levels when having their stock plan approved by shareholders?
– Should companies be more restrictive and provide for director compensation to be based on specific guidelines or criteria?
– Would the addition of a plan provision stating that the form and amount of director compensation should be set with respect to relevant market norms and/or appropriate for the time and energy required of directors be helpful in defending similar suits?
– Are any of these plan restrictions necessary if the board obtains and follows the advice of compensation advisers?
Assuming the Seinfeld case is not settled before the court renders its decision on the merits, the ruling could provide additional guidance on such issues. We’ll keep you posted on the litigation’s progress.