The Delaware Supreme Court found in In re Investors Bancorp Stockholders Litigation that director equity grants based on director discretion are subject to an entire fairness standard of review. According to the Court, “when stockholders have approved an equity incentive plan that gives the directors discretion to grant themselves awards within general parameters, and a stockholder properly alleges that the directors inequitably exercised that discretion, then the ratification defense is unavailable to dismiss the suit, and the directors will be required to prove the fairness of the awards to the corporation.”
Accordingly, the Delaware Supreme Court reversed the Court of Chancery’s decision which found that the stockholder ratification defense applied because the plan provided for “specific limits on the compensation of” the non-employee and executive members of the Board. The Court of Chancery had reasoned that the stockholders’ approval of the plan reflected their ratification of all of the specific awards later approved by the Board. Hence, the Court of Chancery found that the director grants should be subject to the business judgement standard of review.
In this article, Stephen O’Bryne shares four analyses that can be part of an institutional investor’s toolkit:
1. Measuring realizable pay
2. Calculating market rates and estimating the expected future value of market pay to express realizable pay as a “market pay multiple”
3. Calculating “industry betas” and relative TSR adjusted for industry beta
4. Calculating pay leverage
I love the new “Vea World Recipes” crackers – particularly the flavor of “Andean Quinoa & Spices.” In this 20-second video, Cap’n Cashbags foregoes holiday bonuses for employees so he can buy Vea World Receipes for himself!
As we continue to post memos about the tax reform bill, I thought I would highlight this Winston & Strawn memo that came out yesterday given that time is of the essence. Mike Melbinger is also quoted in this MarketWatch article about how executive pay arrangements & disclosure will change going forward…
This MSCI study on CEO pay and company performance indicates that CEO pay was “poorly aligned” with total shareholder return over a 10-year cumulative period for three-fifths of the companies reviewed. That’s a lot…also see this blog…
Among our memos that we have posted about tax reform are some that deal with likely possibility of changes to Section 162(m) – and how to plan for the loss of deductibility. Here’s an excerpt from this Latham & Watkins memo on the topic:
Due to the proposed reduction in the corporate tax rate under both versions of the Bill, deductions taken in 2017 could be more valuable to companies than those taken in 2018.Companies may want to consider securing compensation deductions in 2017, if possible. For example, companies that normally would not be able to deduct 2017 bonuses (such as those that require employment on the date of payment in 2018) may have an opportunity to secure a deduction in 2017 for that compensation by accelerating payment of cash bonuses into 2017. Alternatively, companies could establish a minimum bonus liability under bonus plans by year-end to secure 2017 deductions. Similarly, companies could consider accelerating the vesting and/or payment of equity awards that otherwise would have been vested and/or paid in 2018 into 2017.
Companies would need to ensure actions would not run afoul of the Section 162(m) performance-based compensation requirements, such as the need to certify actual performance through the performance period prior to payment, or constitute impermissible accelerations under Section 409A. Various technical requirements under tax and accounting rules also apply to ensure the acceleration of the timing of the deduction will be honored.
Yesterday, the SEC announced an enforcement action against Provectus for insufficient controls surrounding the reporting & disclosure of travel and entertainment expenses submitted by its executives. The former CEO swindled millions using fake or non-existent documentation – the former CFO’s take was closer to $200k.
Here’s an excerpt from the SEC’s press release:
The SEC separately charged Dees in federal district court in Knoxville, Tennessee, alleging that, while Dees was Provectus’ CEO, he treated the company “as his personal piggy bank.” According to the complaint, Dees submitted hundreds of falsified records to Provectus to obtain $3.2 million in cash advances and reimbursements for business travel he never took. Instead, he concealed the perks and used cash advances to pay for personal expenses such as cosmetic surgery for female friends, restaurant tips, and personal travel.
As noted in this blog by Steve Quinlivan, the company itself was not hit with a penalty – perhaps due to the board’s cooperation in the investigation. Steve notes that a somewhat similar case drew a $750k penalty from a company about 30 months ago. We’ve added this case to our list of perk enforcement actions in our “Perks” Practice Area…
Here’s a big sleeper for you. The November-December issue of “The Corporate Executive” has a lead piece about how many companies are not disclosing all their non-deductible, non-complying 162(m) compensation. This is a big deal, particularly because it all will need to be disclosed under the coming tax reform legislation which – when you add up all the bonuses, RSUs, options & all other performance-based compensation – will be huge, embarrassing numbers. Like pay ratio, once companies appreciate the magnitude & sensitivity of this sleeper, they will all be concerned about how to address this sensitive disclosure.
On page 2 of that important lead article in “The Corporate Executive,” it’s mentioned that an excellent series of tables will be posted on CompensationStandards.com – these tables are now posted (courtesy of Deloitte Consulting’s Mike Kesner & Ed Sim). They provide examples of the possible cost to companies of 162(m) non-deductible compensation.
As you will see, the tables highlight the large numbers that many companies with 162(m) non-compliant compensation apparently are failing to disclose right now. You now have a “heads up” on the impact of what companies will no longer be able to deduct under new 162(m) — and what they will need to be disclosing going forward…
If you’re not a subscriber to “The Corporate Executive,” try a 2018 no-risk trial now & receive this November-December issue for free…