Lawmakers in the Delaware Senate voted 16-5 on Tuesday to approve legislation that would ban corporations from adopting bylaws that impose corporate legal costs on shareholders who file unsuccessful lawsuits. The fee-shifting legislation has been controversial, attracting opposition from the U.S. Chamber of Commerce. The Chamber says the legislation protects frivolous shareholder litigation and threatens Delaware’s business-friendly image. “Companies that incorporate in Delaware have valued the state’s clear and fair corporate law principles,” said Lisa A. Rickard, president of the U.S. Chamber Institute for Legal Reform. “But they are increasingly becoming victims of ‘extortion through litigation.'” More than nine of every 10 corporate mergers or acquisitions are challenged in court.
The Delaware State Chamber of Commerce remained neutral on the legislation, which is sponsored by Delaware Sen. Bryan Townsend, a Newark Democrat and a practicing corporate lawyer at Morris James in Wilmington. In May 2014, the Delaware Supreme Court upheld a bylaw adopted by a private non-stock corporation, ATP Tour Inc., that shifted legal costs onto the loser in shareholder litigation. Delaware lawyers, concerned that stock corporations could seek similar bylaws, recommended that the General Assembly change the law to ban such bylaws.
The legislation now heads to the Delaware House of Representatives.
Meanwhile, here’s two blogs by Allen Matkins’ Keith Bishop:
Here’s a recap of a recent Towers Watson webcast that includes the results from some polls. Here’s an excerpt of the recap:
As the end of the year approaches, many companies are reviewing 2014 performance and pay levels, with a focus on key pay decisions that need to be made for the upcoming fiscal year. As part of our December 3 webcast on the year-end pay landscape and 2015 proxy season preview, we polled the audience — primarily senior executive compensation professionals in large U.S. companies — to get a quick snapshot of directions related to two critical components of executive pay: 2014 bonus funding levels and 2015 long-term incentive (LTI) award levels for senior executives. About 180 companies participated in the polls.
The webcast provided a summary of 2014 actual and 2015 projected pay trends for base pay, bonus and LTIs for top executives. Trend data were drawn from Towers Watson Data Services’ executive compensation and long-term incentive surveys, which include over 1,000 participants and cover more than 40 functions and more than 150 jobs as well as the detailed LTI data.
Recently, I blogged about the Polycom enforcement action brought by the SEC. The former CEO falsified expense reports – and the company was charged with inadequate proxy disclosure and improper internal controls. These perks-related cases are infrequent – but I also note that most of the SEC’s enforcement cases over executive compensation involve perks somehow (here’s the list of SEC enforcement cases – here’s memos on the Polycom action).
We have this checklist about CEO expense approvals. In addition, this blog by David Smyth has these steps you can take to reduce your risks in this area – including this excerpt:
1. Require a specific reason for each reimbursement request (see flights above). My assistant has to remind me of this for mine every time, but it’s not onerous; it’s reasonable and necessary.
2. Do not allow anyone to approve his own expenses (see P-card nonsense above).
3. Give extra attention to extra-large expenses. You needn’t comply yourself into bankruptcy, but if someone is buying over $10,000 in clothes, consider asking what and who they’re for. It should be an easy answer to get. If it’s not, you may have stumbled into a problem that needs fixing.
Tune into today’s webcast – “P4P: What Now After the SEC’s Proposal” – featuring Compensia’s Mark Borges, Deloitte Consulting’s Mike Kesner, Morrison & Foerster’s Dave Lynn & Gibson Dunn’s Ron Mueller to learn everything you need to know about the SEC’s new proposal. And we’re posting memos in our “Pay-for-Performance” Practice Area.
And here’s a poll regarding your level of participation in the comment process on the SEC’s pay-for-performance proposal (comments on the proposal are due on July 6th):
Comments on the SEC’s pay-for-performance proposal are due on July 6th. Here’s a poll regarding your level of participation in the comment process on the SEC’s pay-for-performance proposal:
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And don’t forget to tune into Monday’s webcast – “P4P: What Now After the SEC’s Proposal” – featuring Compensia’s Mark Borges, Deloitte Consulting’s Mike Kesner, Morrison & Foerster’s Dave Lynn & Gibson Dunn’s Ron Mueller to learn everything you need to know about the SEC’s new proposal. And we’re posting memos in our “Pay-for-Performance” Practice Area.
This report of a survey by Towers Watson shows that 92% of Fortune 500 companies (a universe of 478 public companies) have either ownership guidelines or a retention policy. 90% have stock ownership guidelines, while 45% have both stock ownership guidelines and some sort of retention policy. This represents a steady increase from 43% of large U.S. companies that had guidelines in place in 2004 and the 75% reported in 2007, the year after the SEC required companies to disclose details of ownership guidelines in the new CD&A section of the proxy.
We’re doing CEO pay wrong. Incentive pay — compensation based on verifiable performance measures like stock price — is on the rise. It’s supposed to help align executives’ interests with those of shareholders. Instead, it leads corporate boards to pay executives more than necessary, and ultimately hurts shareholders and workers.
With incentive pay, the company could end up paying the CEO for something over which he had no real influence. Or the company could end up not paying the CEO for actions that were good for the company, but for some reason didn’t raise the stock price. Most likely, the CEO will single-mindedly pursue actions that will boost the metric he’s paid on, even if they only succeed in the short term. Over the longer term, paying your CEO a fantastic amount can hurt stock performance.
The solution, according to a new paper by Peter Cebon, of the Melbourne Business School, and Benjamin Hermalin, a finance professor at the University of California’s Haas School of Business, is for the government to limit performance-based executive contracts and make informal pay agreements more attractive.
An informal contract, in its broadest and perhaps too-simple but illustrative sense, is like a board telling a CEO: “We will pay you for being a good CEO. The better a CEO you are, the more we’ll pay you.” It is, Hermalin said, really just a “series of promises” that aren’t legally enforceable.
Alluding to Odysseus’ escape from the Sirens, the paper’s authors write that corporate boards setting executive pay need be to “lashed to the mast” with restrictions on the size of formal executive pay packages, which are the sorts of contracts that tie pay to objective, verifiable outcomes like the company’s stock price or specific accounting metrics.
But boards can’t actually tie themselves to a mast, Hermalin noted to The Huffington Post. That’s why they need the government to restrict their options. This could be done, he said, by boosting taxes on all performance-based pay, by dramatically increasing taxes on incentive pay above a certain level, or simply putting a cap on total formal incentive-based pay.
In Calma v. Templeton et al, the Delaware Court of Chancery held that grants of restricted stock units, or RSUs, to directors of Citrix Systems, Inc. were subject to an entire fairness standard of review. The court found that the grants were a conflicted decision because all three members of the compensation committee that approved the grants also received the RSU awards. Citing Delaware Supreme Court precedent, the court noted director self-compensation decisions are conflicted transactions that “lie outside the business judgment rule’s presumptive protection, so that, where properly challenged, the receipt of self-determined benefits is subject to an affirmative showing that the compensation arrangements are fair to the corporation.”
The court rejected the defendants position that prior stockholder approval of the plan ratified the grants at issue. The court found that Citrix did not seek or obtain stockholder approval of any action bearing specifically on the magnitude of compensation paid to non-employee directors.
The case was before the court on a motion to dismiss. Accordingly, the court found the defendants’ motion must be denied unless, accepting as true all well-pled allegations of the complaint and drawing all reasonable inferences from those allegations in plaintiff’s favor, there is no “reasonably conceivable set of circumstances susceptible of proof” in which plaintiff could establish that defendants breached their fiduciary duties.
The defendants contended the grants were entirely fair because the grants were in line with 14 companies identified in Citrix’ proxy as its peer group. The plaintiff claimed that the appropriate peer group should be limited to only five of those companies based on comparable market capitalization, revenue and net income metrics.
In the court’s view the plaintiff raised meaningful questions as to whether certain companies with considerably higher capitalization, such as Amazon.com, Google and Microsoft, should be included in the peer group used to determine fair value of compensation for Citrix’s non-employee directors. The court therefore refused to grant the motion to dismiss.
As a result of this decision, many advisors will now likely recommend that concrete, realistic limitations on grants to directors be built into a plan so that directors can rely on a stockholder approval defense. If the decision becomes a prelude to the next wave of compensation litigation, many companies may submit their grant practice for stockholder approval even if they do not need a new plan approved.
If you’re a member of TheCorporateCounsel.net, tune in tomorrow for the webcast – “Form S-8: Share Counting, Fee Calculations & Other Tricks of the Trade” – to hear Gibson Dunn’s Krista Hanvey, Davis Polk’s Kyoko Takahashi Lin, Kaye Scholer’s Jeff London and Goodwin Procter’s John Newell discuss a topic rife with uncertainty and traps for the unwary…
Taped an interview with NPR a few weeks ago on virtual shareholder meetings and thought they scraped it. But a ton of folks reached out on Friday night and said they heard it on the radio. Luckily, NPR trimmed my 4-minute interview down to 7 seconds because I wasn’t fab…
It’s been a long time since we revamped the home page on CompensationStandards.com. But I just retooled it. The content on the site remains exactly the same – but hopefully you can find your destination more easily with much larger tab buttons at the top, etc. Let me know what you think…