– Broc Romanek
It’s been over a decade since Corp Fin started issuing CDIs to replace its main source of “informal” interpretations – the “Telephone Interpretation Manual.” Oddly, after all these years, some of the “Phone Interps” still haven’t been replaced. That’s finally changing. On Friday, Corp Fin issued 45 new CDIs to replace the interps in the Telephone Interpretation Manual and the March 1999 Supplement that relate to the proxy rules & Schedules 14A/14C. The Staff says it’s in the process of updating other proxy interps – so we can expect more CDIs to come.
Thirty-five of the new CDIs simply reiterate the guidance provided in the Manual & March 1999 Supplement – four make technical changes – and these six CDIs reflect substantive changes (here’s a redline from Cleary):
Question 124.01: Rule 14a-4(b)(1) states that a proxy may confer discretionary authority with respect to matters as to which a choice has not been specified by the security holder, so long as the form of proxy states in bold-faced type how the proxy holder will vote where no choice is specified. If action is to be taken with respect to the election of directors and the persons solicited have cumulative voting rights, can a soliciting party cumulate votes among director nominees by simply indicating this in bold-faced type on the proxy card?
Answer: Yes, as long as state law grants the proxy holder the authority to exercise discretion to cumulate votes and does not require separate security holder approval with respect to cumulative voting. [May 11, 2018]
Question 124.07: The Division has permitted registrants to avoid filing proxy materials in preliminary form despite receipt of adequate advance notification of a non-Rule 14a-8 matter as long as the registrant disclosed in its proxy statement the nature of the matter and how the registrant intends to exercise discretionary authority if the matter was actually represented for a vote at the meeting. See Section IV.D of Release No. 34-40018 (May 21, 1998). Can a registrant rely on this position if it cannot properly exercise discretionary authority on the matter in accordance with Rule 14a-4(c)(2)?
Answer: No. [May 11, 2018]
Question 126.02: Is a registrant required to file a preliminary proxy statement in connection with a proposed corporate name change to be submitted for security holder approval at the annual meeting?
Answer: No. As set forth in Release No. 34-25217 (Dec. 21, 1987), the underlying purpose of the exclusions from the preliminary proxy filing requirement is “to relieve registrants and the Commission of unnecessary administrative burdens and preparation and processing costs associated with the filing and processing of proxy material that is currently subject to selective review procedures, but ordinarily is not selected for review in preliminary form.” Consistent with this purpose, a change in the registrant’s name, by itself, does not require the filing of a preliminary proxy statement. [May 11, 2018]
Question 151.01: A registrant solicits its security holders to approve the authorization of additional common stock for issuance in a public offering. While the registrant could use the cash proceeds from the public offering as consideration for a recently announced acquisition of another company, it has alternative means for fully financing the acquisition (such as available credit under an executed credit agreement in the full amount of the acquisition consideration) and may choose to use those alternative financing means instead. Would the proposal to authorize additional common stock “involve” the acquisition for purposes of Note A of Schedule 14A?
Answer: No. Raising proceeds through a sale of common stock is not an integral part of the acquisition transaction because at the time the acquisition consideration is payable, the registrant has other means of fully financing the acquisition. The proposal would therefore not involve the acquisition and Note A would not apply. By contrast, if the cash proceeds from the public offering are expected to be used to pay any material portion of the consideration for the acquisition, then Note A would apply. [May 11, 2018]
Question 161.03: If a registrant is required to disclose the New Plan Benefits Table called for under Item 10(a)(2) of Schedule 14A, should it list in the table all of the individuals and groups for which award and benefit information is required, even if the amount to be reported is “0”?
Answer: Yes. Alternatively, the registrant can choose to identify any individual or group for which the award and benefit information to be reported is “0” through narrative disclosure that accompanies the New Plan Benefits Table. [May 11, 2018]
Question 163.01: Does a proxy statement seeking security holder approval for the elimination of preemptive rights from a security involve a modification of that security for purposes of Item 12 of Schedule 14A?
Answer: Yes. Accordingly, financial and other information would be required in the proxy statement to the extent required by Item13 of Schedule 14A. [May 11, 2018]
Of course, I can remember – pre-Internet – when it was hard to get a copy of the telephone interps. It was originally drafted to be an internal resource for Corp Fin. Some law firms obtained a copy – when Corp Fin Staffers left the Division or perhaps through a FOIA request – but it wasn’t widely available (or even known) before the late ’90s when it was posted on the SEC’s site…
– Liz Dunshee
In our “Q&A Forum,” a member recently asked (#1232):
A non-NEO is being promoted to Chief Operating Officer, which will be announced under Item 5.02(c). The new COO won’t enter into an employment agreement or any other new plan, contract or arrangement – however, they’ll receive a base salary increase.
Is this a material compensation change that’s reportable under either Item 5.02(c) or 5.02(e)? Is it a question of materiality – and if so, is that measured based on the impact for the officer or for the company? If the raise is reportable, can the company disclose just the amount of the increase or the officer’s total base salary?
John responded:
This is the type of situation that requires disclosure under Item 5.02(c), because the line item specifically calls out material arrangements entered into or amended in connection with the appointment. An employment contract isn’t necessary to trigger disclosure.
Materiality is typically viewed from the perspective of a reasonable investor, but when it comes to compensation, the focus of that inquiry is on the materiality of the compensation to the executive – not its overall materiality to the company.
And if disclosure is required, it should be comprehensive enough to give the complete picture. So I recommend disclosing the new total base salary that the COO will receive. Frankly, just saying that the person’s salary increased by x amount looks like you’re trying to hide the ball – which isn’t going to play well with the audience reading your 8-K.
– Liz Dunshee
Here’s a Crain’s article discussing the “stealth compensation” practice of paying dividends on unvested stock. About 10% of the S&P 500 are still doing this – even though it’s disfavored by shareholders and it’s a “no-no” under the ISS Equity Plan Scorecard and say-on-pay analysis.
There’s a reason executives don’t want to let go of this feature – it tends to increase salary by about 25%. And that number only increases as the stock market climbs. Moving away from this practice probably requires some “weaning,” as this excerpt notes:
In 2016, JPMorgan began granting Dimon a type of restricted stock that doesn’t pay dividends before vesting, but several top executives at the bank are still paid dividends on unowned shares. Asset management chief Mary Callahan Erdoes received $613,000 this way that year, while $580,000 went to Daniel Pinto, head of corporate and investment banking, according to calculations by Crain’s based on data in the firm’s most recent pay-disclosure statement. The firm declined to comment.
Philip Morris International is also trying to wean its CEO off this type of dividends. Under a new plan, only 40% of the restricted shares granted to Calantzopoulos pay dividends before vesting, down from 100%, a spokesman said. The representative did add that the dividend-paying unvested shares “incentivize executive retention” and “align executive interest with that of the shareholders.” Like most tobacco companies, Philip Morris’ dividends are quite generous, with the firm’s $6.5 billion 2017 payout exceeding its profits by about $200 million.
– Liz Dunshee
Here’s a 139-page guide for compensation committees from Wachtell Lipton – which includes sample compensation committee charters at the back…
– Liz Dunshee
This blog from Performensation’s Dan Walter really hit home for me. We’ve probably all worked with some boards who are afraid to give real feedback to CEOs, which creates trust & compensation issues when performance doesn’t improve. As advisors, we’re in a position to help. Here’s an excerpt:
Employees want to be led, and generally want the truth. I also think managers generally want to tell the truth, but seldom have the skills to do so delicately. While these managers do a disservice to employees by not laying out a realistic path, those of us in the compensation community do even worse by not providing them with the tools, words and examples that will allow them to discuss both the good and bad.
This is not about avoiding lawsuits or angry ex-employees. This is about not being jerks in the eyes of those we need to keep working hard. Once the trust on performance has eroded in a single example, you risk the chance of other employees questioning their value to the company. Rebuilding trust is far more difficult than maintaining it.
So look at what you’ve asked managers to communicate. Then ask yourself if you have provided them the skillset to do so with a complete level of truth. It is not only our job to make sure that pay is properly designed and set, it is also our responsibility to ensure that the discussions around pay reflect the sometimes harsh reality of underperformance.
– Liz Dunshee
One of the big unknowns for the first year of mandatory pay ratio was whether companies would include supplemental ratios using a different methodology from the required rules. What situations would justify that extra effort? This Pearl Meyer blog notes that of the first 1039 companies to file proxies this year, only 99 have included a supplemental ratio. That’s less than 10%. Here’s what else they found:
– Most of the supplemental ratios were significantly lower than the required pay ratio.
– The desire to smooth out the impact of one-time or multi-year grants to a CEO was the most commonly occurring reason to provide a supplemental ratio.
– The most profound decrease from the required ratio occurred when companies provided a supplemental ratio that excluded part-time and seasonal employees.
– 14 companies provided a supplemental ratio that was greater than the required ratio, mostly likely to avoid a drastic increased ratio in 2019.
It’s possible that supplemental ratios will become more common in the future, as companies try to explain year-over-year pay ratio changes…
– Liz Dunshee
A lot of ink has been spilled (or keyboards clacked?) on how to avoid pay structures that encourage excessive risk-taking. But we can probably all agree with that old sage Mark Zuckerberg – “the biggest risk is not taking any risk.” And that’s what makes this research interesting. Here’s an excerpt:
When options packages shrink, managers reduce their companies’ operating leverage, a form of risk, the findings suggest. The change effectively turns these organizations into more conservative investments.
Operating leverage, a ratio of a company’s fixed versus variable costs, falls as the firm’s income becomes more predictable, or less risky. Corporations in the study experienced lower earnings variability, lower stock return volatility and a marginal decline in profitability growth when they significantly reduced option-based compensation.
Things like this make it harder to explain why ISS won’t count standard options as “performance-conditioned”…