In Liang v. Berger, the plaintiff in a derivative action alleged the officers and directors of ARAID Pharmaceuticals failed to disclose material negative information about a drug under development in a timely manner. Among other things, plaintiff claimed that a proxy statement which asked the company’s shareholders to approve executive compensation on an advisory basis failed to disclose:
– the FDA’s concerns about the drug’s safety;
– the agency’s demand that ARIAD continue to monitor and document safety data from a trial;
– ARIAD’s resulting monitoring efforts; and
– changes that ARIAD had made to the enrollment criteria for the trial.
The plaintiff further contended that disclosure “of the truth would have ended the shareholders’ support for compensation of the senior executives and reelection of directors.”
The court noted that to state a claim a proxy statement is false and misleading under Section 14(a) of the Exchange Act, a plaintiff must allege that:
– a proxy statement contained a material misrepresentation or omission;
– which caused the plaintiff injury; and
– that the proxy solicitation itself, rather than the particular defect in the solicitation materials, was an essential link in the accomplishment of the transaction.
The court held the complaint did not sufficiently allege a causal link between the proxy statement and ARIAD’s alleged injury. Insofar as plaintiff claims that ARIAD was injured by the payment of compensation to officers, the claim fails to allege that the underlying corporate transaction (between ARIAD and the compensated executives) required shareholder approval. The proxy statement told the shareholders that their votes were sought on “an advisory basis” with respect to executive compensation but told them that “[b]ecause your vote is advisory, it will not be binding on our Compensation Committee or our Board of Directors.”
The amended complaint also failed insofar as plaintiff claimed that ARIAD was injured because a full disclosure in the proxy statement “would have ended the shareholders’ support for . . . reelection of directors.” Although shareholders’ votes were binding on this issue, the reelection of directors does “not create any cognizable harm [for purposes of the Exchange Act] because the shareholders’ votes did not authorize the transactions that caused the losses.”
– Robbert Gerritsen & Kevin De Pril, ISS Benelux Research
A mandate to cap variable remuneration at 20 percent of base salary for all persons working for a financial institution in the Netherlands was adopted on Jan. 27, 2015, by the Dutch Senate, despite some opposition at the end of 2014. In October 2014, the Dutch Parliament approved the bill and also added additional requirements. The bonus restrictions would not only be applicable to banks and insurers, but also to investment companies, investment managers, and UCTIS. Furthermore, half of the variable remuneration should be based on non-financial performance criteria, and severance pay cannot amount to more than 100 percent of the fixed base salary. The bill now also includes additional publication requirements on the payment of variable remuneration.
The approved bill then received considerable opposition in the Senate where various questions were raised concerning the ineffectiveness of the current regulation, whether circumstances have changed since the implementation, how this bill relates to European-wide regulations, and how the bill fits in the framework of labor laws.
Certain parties were not satisfied with the finance minister’s answers from early January. The bill was nevertheless adopted and will become effective on a date to be determined. Consequently, this new law might affect some of the Dutch AGM agendas.
Here’s a Reuters article on the SEC Staff allowing exclusion of shareholder proposals about government service golden parachutes at Wall Street banks:
Three major Wall Street banks this week lost their bid to block a union-backed shareholder proposal calling for the banks to disclose so-called “golden parachutes” that executives can earn if they leave to work for the government. The Securities and Exchange Commission told Citigroup, Goldman Sachs and Morgan Stanley they cannot exclude the AFL-CIO’s shareholder proposal from their corporate ballots, according to copies of the letters seen by Reuters.
Spokesmen for Morgan Stanley and Goldman Sachs declined to comment on the SEC’s decision. A Citigroup representative was not immediately available for comment.
“Citigroup, Goldman Sachs and Morgan Stanley fought hard to prevent shareholders from having a vote on more transparency around government service golden parachutes,” Heather Slavkin-Corzo, the AFL-CIO’s investment office director, said in an email. “We are pleased that the SEC did not yield to pressure from the big banks on this important issue.”
The AFL-CIO’s shareholder proposal calls for requiring the banks to prepare a report disclosing the vesting of equity-based awards for senior executives that voluntarily leave to go be public servants. The report would have to identify which executives are eligible for government service golden parachutes and the estimated value of their packages. In the labor federation’s petition supporting the measure, it says such disclosure is important because equity-based rewards that vest over time are meant to serve as a powerful incentive for people to remain employed with a company. Those who choose to resign sooner, the union said, typically forfeit any unvested awards. The AFL-CIO also cites examples of people who have left the banks to work in government and were paid handsomely, including Treasury Secretary Jack Lew, who previously worked for Citigroup.
The banks made various arguments to the SEC in their efforts to exclude the measure, including claims that they already disclose most of the compensation arrangements at issue. They also argued that the AFL-CIO’s shareholder proposal was materially misleading. But in letters responding to their arguments, the SEC said the banks’ public disclosures do not appear to “compare favorably with the guidelines of the proposal.” The AFL-CIO has been aggressively lobbying to get its measure on the ballots of the banks. Last month, its president, Richard Trumka, wrote an opinion piece in the Wall Street Journal titled “The Paratroopers of Crony Capitalism: Why give golden parachutes to executives who leave to enter government service?”
Last month, I posted a “Quick Survey on Currency Fluctuations for Incentive Compensation” – for which I still seek more responses. Yonat Assayag of ClearBridge Compensation Group notes that I ask whether companies make adjustments to incentive goals/results based on the percent to which currency exchange rates fluctuate – and that this is certainly one way of dealing with the issue. Another way that he has seen it dealt with is by locking in an exchange rate when setting budget/goals at the beginning of the year, then at the end of the year, actual results are compared to budget/goals based on this “fixed” exchange rate (i.e., neutralizing the effect of exchange rate fluctuations). Yonat is curious how many companies take this approach – if you have any insight, please shoot me an email as many companies are grappling with this issue right now…
By the way, this topic was covered in yesterday’s webcast (audio archive is posted; transcript will be up in 10 days or so)…
With Ira Kay speaking on today’s “The Top Compensation Consultants Speak” webcast, I thought I would highlight this new interesting memo from Pay Governance entitled “Are ISS and Glass Lewis Say on Pay Voting Policies Correlated with Improved Total Shareholder Returns?”…
Tune in tomorrow for the webcast – “The Top Compensation Consultants Speak” – to hear Mike Kesner of Deloitte Consulting, Blair Jones of Semler Brossy and Ira Kay of Pay Governance “tell it like it is. . . and like it should be.”
A few days ago, ISS released the following three new FAQs to its “Equity Plan Scorecard FAQs” (so there were 20 FAQs before; now there are 23):
FAQ #11: Are there additional factors that could result in a recommendation on an equity plan proposal that differs from the EPSC “score” recommendation, including proposals with “bundled” amendments?
Yes. Plans that seek approval solely to qualify awards as tax deductible compensation under Internal Revenue Code Section 162(m), for example, will generally receive a positive recommendation as long as all members of the plan’s administrating committee are determined to be independent directors, per ISS’ standards. In addition, plans being amended without a request for additional shares or another modification deemed to increase potential cost (e.g., extension of the plan term) may receive a recommendation based on the overall impact of the amendments regardless of the EPSC score – i.e., whether they are deemed, on balance, to be beneficial or detrimental to shareholders’ interests.
FAQ #22: How will ISS assess a plan’s minimum vesting requirement for EPSC purposes?
In order to receive EPSC points for a minimum vesting requirement, the plan should mandate a vesting period of at least one year which should apply to no less than 95 percent of the shares authorized for grant.
FAQ #23: How does the treatment of performance-based awards affect determination of whether a plan provides for automatic single-trigger accelerated vesting upon a change in control?
ISS will deem performance-based awards as being subject to automatic accelerated vesting upon a CIC, unless (1) the amount considered payable/vested is linked to the degree of performance attainment as of the CIC date, and/or (2) the amount to be paid/vested is pro-rated based on the time elapsed in the performance period as of the CIC date.
Here’s news from this Davis Polk blog by Ning Chiu & Betty Moy Huber:
BlackRock has revised its U.S. proxy voting guidelines, following their annual review of governance and proxy voting trends. The guidelines are not expected to result in significant differences from how BlackRock has voted in the past.
As expected, board composition is very much an issue of investor focus. BlackRock encourages boards to disclose their views on the director skill sets they view as necessary to effectively oversee management; the process for identifying candidates and whether sources outside of the incumbent directors’ networks have been engaged; the board evaluation process and its significant outcomes, if appropriate and without divulging sensitive information; considerations of diversity in terms of gender, race, age, experience and skills; and any other factors considered in the nomination process. BlackRock is not opposed in principle to long-tenured directors, while also supporting regular board refreshment.
In making decisions on director elections, BlackRock will take into account director tenure, diversity, board evaluation and the relevance of directors’ experience. The independent chair or lead director, members of the nominating committee and/or the longest tenured directors may be held accountable when there are concerns about board composition. The guidelines also specify the expectation for the roles of a lead director as an alternative to an independent chair, including the ability to have formal input into board meeting agendas; call meetings of the independent directors; and preside at meetings of independent directors.
With respect to say on pay, BlackRock encourages direct discussion with issuers, in particular with members of the compensation committee. If engagement is not expected to resolve their concerns about executive compensation, they may hold directors accountable. As a result, the guidelines note that “our Say on Pay vote is likely to correspond with our vote on the directors who are compensation committee members responsible for making compensation decisions.”
BlackRock may also vote against directors if there are concerns that a company is not dealing with social, ethical and environmental issues appropriately, and may support shareholder proposals in these areas if there seems to be a “significant potential threat or realized harm to shareholders’ interests caused by poor management” on these matters.
In its quarterly report dated December 2014, the firm provides several examples of issuer engagement and summarized discussions with companies (without names) for illustrative purposes. Companies that intend to discuss issues with BlackRock may find it useful to understand the wide range of topics that may be on the agenda, including those pertaining to areas of independent directors, tenure and board refreshment, responses to activism and risk mitigation.
Early Bird Rates – Act by April 24th: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by April 24th to take advantage of the 33% discount.
Today, he acknowledges making mistakes. He was too invested in the game: In just his last four years at Tyco, he made more than $300 million, according to regulatory filings. “I’d go to Harvard Business School and get a standing ovation when I was introduced as the highest-paid C.E.O. in the country,” he recalled.