A few days ago, as noted in this Cooley blog, Corp Fin issued two new CDIs on Form S-8 & Rule 457 (regarding filing fee calculations) and two revised ones:
A few days ago, as noted in this Wachtell Lipton memo, ISS announced changes to its pay-for-performance methodology for companies in the US, Canada, and Europe that will become effective on February 1st. Following feedback from constituents, ISS will present relative evaluations of return on equity, return on assets, return on invested capital, revenue growth, EBITDA growth, and cash flow (from operations) growth to supplement ISS’ legacy (and continued) use of TSR as the key metric for P4P.
Pay-for-performance updates for US companies include:
– A new standardized comparison of the subject company’s CEO pay and financial performance ranking relative to its ISS-defined peer group will be added to ISS’ benchmark policy proxy research reports beginning Feb. 1, 2017. Financial performance will be measured by a weighted average of multiple financial metrics including return on equity, return on assets, return on invested capital, revenue growth, EBITDA growth, and cash flow (from operations) growth. The metrics and weightings will be based on the company’s four-digit GICS industry group, and are based on extensive back-testing over multiple years. The financial performance and pay ranking information will be displayed for all companies subject to ISS’ quantitative pay-for-performance screens. While this information will not impact the quantitative screening results during the 2017 proxy season, it may be referenced in the qualitative review and its consideration may mitigate or heighten identified pay-for-performance concerns.
– Relative Degree of Alignment (RDA) assessment will only be considered in the overall quantitative concern level when the subject company has a minimum of two years of pay and TSR data. Companies that only have one year of data will receive an N/A (not applicable) concern for their RDA test.
ISS’ peer submission window will be open starting on November 28th – and will close on December 9th…
To say that we are in a state of uncertainty is one of the few certainties I know. But I would say that the odds of at least a partial repeal of Dodd-Frank certainly improved, whether it be in the form of the “Financial Choice Act” (see this Cooley blog for a summary of the provisions) – or perhaps even a stronger rebuke to Dodd-Frank. Here are other open questions:
– How fast would a repeal come? Companies are preparing to comply with the adopted pay ratio rules now – even though disclosure wouldn’t be seen until 2018.
– What will be the fate of the SEC’s disclosure effectiveness project? It’s seemingly non-partisan. But the SEC may be busy with rulemakings mandated by this shift in power to deal with projects they started themselves for quite some time…
– Does the sole sitting SEC Commissioner – Mike Piwowar – become the SEC Chair? There is precedent for a non-lawyer in that role (ie. Arthur Levitt; Piwowar is an economist). Piwowar almost certainly will become interim Chair once Chair White vacates her seat. It might take a while for a Trump Presidency to tap new agency heads, as that is the norm. As noted in this WSJ article, former Commissioner Paul Atkins is heading up the President-elect’s transition team that oversees the SEC, CFTC & other financial regulators that historically operate independently of the White House…
– I used to think a “risk factor” for political instability & unrest was reserved only for non-US jurisdictions. Will we see some in the US now?
Recently, Corp Fin posted this no-action response to Apple about “engage multiple outside independent experts or resources from the general public to reform its executive compensation principles and practices.” The retail investor proponent – Jing Zhao – appears to have represented himself in rebutting the company’s (i)(3), (i)(6) and (i)(7) arguments. Corp Fin’s response to the ordinary business argument is that “the proposal focuses on senior executive compensation.”
The proponent’s supporting statement cites Professor Thomas Piketty of France, the darling of the income inequality movement. There likely will be more income inequality-oriented proposals in the coming years…
In this no-action letter, Apple also lost its battle to exclude a proxy access shareholder proposal from Jim McRitchie…
Poll: How Many Comp Consultants Should Apple Hire?
Keying off the shareholder proposal mentioned above, please participate in this anonymous poll:
To date, 1,972 Russell 3000 companies have held Say on Pay votes and 93% have passed with above 70% support. 31 companies (1.6%) have failed Say on Pay thus far in 2016; no additional companies have failed since our last report. Proxy advisory firm ISS has recommended ‘Against’ Say on Pay proposals at 12% of companies it has assessed thus far in 2016. Our special topic this week features a breakdown of Say on Pay results for S&P 500 companies compared against all other companies in the Russell 3000. So far in 2016, smaller companies are receiving higher average Say on Pay support compared to larger companies despite having a slightly higher failure rate. This development is a reversal from prior years when larger companies had noticeably stronger Say on Pay results.
Over the past two years, a growing number of U.S. banks has capped their directors’ earnings, but the ceilings are so high that they primarily serve to fend off potential shareholder litigation rather than control the pace of pay increases. Most of the caps are typically 2-3 times what directors now get paid, according to data and filings reviewed by Reuters.
Here’s some information from Vicki Westerhaus of Stinson Leonard Street that should help you consider whether to adopt ASU 2016-09 & how to implement maximum share withholding (also see this Mike Gettelman blog on TheCorporateCounsel.net summarizing the discussions on this topic at last week’s NASPP conference):
1. Stock Exchanges
Last week, Nasdaq issued new FAQ #1269 confirming that an amendment to an equity compensation plan to allow for increased withholding to satisfy tax obligations, such as from the minimum tax rate to the maximum tax rate, would not be considered a material amendment to the plan, so we now have confirmation from both Nasdaq and NYSE that stockholder approval of the amendment is not required. (NYSE earlier this year issued a similar FAQ on its website clarifying that an amendment to allow tax withholding above the minimum tax withholding is not a material amendment.) [This note from Exequity’s Ed Hauder also delves into the NYSE & Nasdaq’s guidance (or lack of guidance).]
2. Insider Trading Policy Issues
Whether a change in withholding rates can implicate insider trading issues is a grey area and can depend upon whether shares withheld are sold into the market in a broker-assisted transaction or withheld in a transaction involving only the company/issuer. Many insider trading policies include carve outs for tax withholding, although companies should consider mandatory vs. voluntary (at award recipient’s discretion) alternatives.
From an insider trading standpoint, mandatory withholding is arguably a more conservative approach because there is no decision to be made by an award recipient. If a company allows an insider to choose between satisfying his or her withholding obligations by paying cash or withholding shares, the appearance of manipulation is possible, especially if a person knows company stock will likely fall as a result of an upcoming announcement. By removing the choice, a company can help avoid the appearance of insider trading. A middle ground could be a combination of methods, such as a default tax payment method (e.g., withholding at applicable supplemental rates only) with no changes permitted during a blackout period. Companies also should consider adding Rule 10b5-1 language with respect to tax withholding provisions in grant agreements to help secure an affirmative defense against allegations of insider trading.
3. Section 16 Issues
An insider’s election to have increased share withholding to satisfy tax withholding obligations in excess of the minimum statutory withholding rate would be nonreportable for Section 16 purposes, so long as the amount withheld applies only to the tax obligation generated by the underlying award transaction. If an insider elects to have shares withheld in an amount above the tax obligation, the excess amount would be deemed a reportable derivative security. The actual withholding of shares for tax purposes would continue to be a reportable event, subject to an exemption from the short swing profit provisions of Section 16(b), if the share withholding was approved by a properly composed Compensation Committee or Board.
4. Applicable IRS Rules
As noted above, under current IRS rules, awardees are not permitted to have discretion to determine the applicable tax withholding percentage. Instead, companies must either apply the withholding rate generated by a grantee’s current Form W-4 filing or apply the applicable flat supplemental rate. A grantee, however, may file a revised W-4 from time to time to change the number of exemptions, but as noted above, to avoid the appearance of possible insider trading, a grantee should not file a revised W-4 during a blackout period.
A few days ago, ISS announced the latest release of its governance ratings product – which also was renamed to “QualityScore” from “QuickScore.” Here’s the 139-page technical document. Not much new in the executive pay area – here’s one:
Does the company employ at least one metric that compares its performance to a benchmark or peer group (relative performance)? This factor will consider whether the company has a pre-established metric in any short- or long-term incentive plan that is measured relative to an external group such as a peer group, index or competitors.
In addition to board diversity and board refreshment areas being added, one area that appears to have been updated involves proxy access – with subscribers now being able to view the details of a company’s proxy access bylaw provision.
Last year, ISS included a question on proxy access, but that was “zero weighted” & was included for informational purposes only. This year, it counts. The QualityScore will give credit to a company for having proxy access – but the existence of any “problematic provisions”- e.g. counting mutual funds under common management as separate shareholders under the aggregation limit, requiring a pledge to hold shares past the annual meeting date, providing the board with broad & binding authority to interpret the proxy access provision or combinations of other problematic provisions – could be deemed sufficient to “nullify the proxy access right” & result in no credit being given. See this Gibson Dunn blog for a larger summary of the changes.
As noted in this blog from Davis Polk’s Ning Chiu, the data verification period began yesterday – and runs through November 11th. QualityScores will be published on November 21st.
By the way, with this rebranding to “ISS QualityScore,” it now has made more name changes than Jefferson Airplane. My favorite was GRid 2.0…although CGQ was nice…
Here’s an excerpt from this blog by Allen Matkins’ Keith Bishop:
Companies often include a choice of law provision in their equity and other compensation plans. Some companies include a choice of law in the award agreement, either in lieu of, or in addition to, the plan document. Specifying applicable law helps to ensure that plans are consistently interpreted and applied. Uniformity may be particularly important for companies with employees in multiple jurisdictions. Occasionally, I see award agreements or plan documents that also include a choice of forum clause. Companies often specify Delaware law and courts even when they have no employees in Delaware – apparently because the they are incorporated in Delaware.
A recently enacted California statute will soon cast a shadow on these provisions. New California Labor Code Section 925 will prohibit an employer from requiring an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following:
– Require the employee to adjudicate or arbitrate outside of California a claim arising in California.
– Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.
Any provision of a contract that violates this statute will be voidable by the employee. If a provision is rendered void at the request of the employee, the matter must be adjudicated in California and California law must govern the dispute. In addition to injunctive relief and any other remedies available, a court may award an employee who is enforcing his or her rights under this section reasonable attorney’s fees. The law will apply to any contract entered into, modified, or extended on or after January 1, 2017. There is an exception for contracts with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement.
Section 925 doesn’t expressly invalidate contractual provisions specifying non-California law. Such provisions are voidable (not void) and only when they deprive the employee of the substantive protection of California law with respect to a controversy arising in California.
This legislation started life as a “spot bill”. A “spot bill” makes trivial changes to a statute as a placeholder for future substantive changes. The author amended the bill to prohibit choice of law and forum provisions in consumer contracts. After a Senate Judiciary Committee informational hearing in March, the author amended the bill again to add similar prohibitions in employment agreements. Later, the consumer contract prohibitions were dropped.