Here’s this note from Willis Towers Watson’s Precious Abraham and Puneet Arora:
While much of the congressional focus has been on health care this session, executive compensation has not been totally ignored — it just hasn’t received as much media attention. Below are several pending bills not expected to be enacted this year, but likely to be reintroduced in the 2017-2018 legislative session. Many of the provisions are revenue-raisers likely to remain under discussion regardless of the outcome of the November elections.
– Limiting the 162(m) deduction – Early in the legislative session, Rep. Chris Van Hollen (D-Md.) introduced the “CEO-Employee Paycheck Fairness Act.” The bill would prohibit publicly held companies from using the Section 162(m) performance-based exception to the $1 million pay deduction limit unless the average compensation for U.S. employees exceeds inflation and productivity growth. The “Stop Subsidizing Multimillion Dollar Corporate Bonuses Act,” introduced by Sen. Jack Reed (D-R.I.) and Rep. Lloyd Doggett (D-Texas), would also remove the performance-based exception. In addition, it would make more companies subject to the $1 million deduction limit and broaden the number of employees subject to the limit.
– Amending 409A – Sen. Sheldon Whitehouse (D-R.I.) introduced the “No Windfalls for Bailed Out Executives Act,” which would require repayment of nonqualified deferred compensation for companies that receive extraordinary government assistance. Under the bill, the term “extraordinary governmental assistance” means any grant, loan, loan guarantee or other assistance (whether in cash or otherwise) made by the federal government to or on behalf of an employer that is intended to prevent the employer from becoming imminently insolvent.
– Repealing the CEO pay ratio disclosure – The Securities and Exchange Commission adopted final CEO pay ratio disclosure rules pursuant to Section 953(b) of the Dodd-Frank law earlier this year, but the first disclosures will not be required until the 2018 proxy season. There are a number of pending bills that would repeal this Dodd-Frank requirement.
– Reining in proxy advisory firms – The “Corporate Governance and Reform Act,” introduced by Rep. Sean Duffy (R-Wisc.), would impose new requirements on proxy advisory firms.
After September, lawmakers will focus on the November elections and the lame-duck session following the elections. One-third of the Senate will be facing re-election, which could upset the current Republican majority.
A member recently posted this query in our “Q&A Forum” (#1147):
Generally, a former EGC must hold a say-on-pay vote no later than one year after it ceases to be an EGC (except if a company was an EGC for less than two years after the company’s IPO, it has up to three years after the IPO to hold the vote). The JOBS Act is silent as to when the frequency of say-on-pay vote is required to take place after a company ceases to be an EGC.
SCENARIO 1: If an EGC IPOs in 2012, but in 2016 ceases to be an EGC (because it becomes a large accelerated filer due to its public equity float), then it must hold a say-on-pay vote in 2017. At the same meeting, the issuer would also hold its say-on-frequency vote.
SCENARIO 2: If an EGC IPOs in 2015, but in 2016 ceases to be an EGC (because it becomes a large accelerated filer due to its public equity float ) and therefore was an EGC for less than 2 years, then it would be required to hold a say-on-pay vote in 2018. The say-on-frequency vote would be required at the first annual meeting that takes place after the issuer ceases to be an EGC — in 2017. The frequency vote would thus be required before the say-on-pay vote.
Presumably, the issuer would voluntarily hold its first say-on-pay vote as a non-EGC at the same meeting as the frequency vote, but is there any guidance that would counsel a different result – e.g., it would be OK for the issuer to hold its frequency vote in 2018 when it is required to hold its first say-on-pay vote as a non-EGC?
Here’s the answer that I posted from Mark Borges:
While many of us may have assumed that, in the case of emerging growth companies, the relief from “Say-on-Pay” under section 14A(e)(2)(B) applied equally to the “Say-on-Frequency” vote, it is my understanding that the SEC Staff never agreed with that interpretation and that, if asked, would indicate that an EGC that lost this status within two years of its IPO date had to conduct a “Say-on-Frequency” vote in the first year following the loss of status. In fact, I believe that the JCEB received a response to that effect last year.
Thus, in Scenario #1, the initial “Say-on-Pay” vote and “Say-on-Frequency” vote would occur in 2017.
As for Scenario #2, the “Say-on-Frequency” vote would clearly precede the initial “Say-on-Pay” vote, and I believe it would need to be conducted in 2017.
As always happens this time of year, our Conference Hotel – the Hilton Americas – Houston – is nearly sold out. Our block of rooms is indeed sold out – but there are still rooms outside our block available at essentially the same rate. Reserve your room online or by calling 713.739.8000. If you have any difficulty securing a room, please contact us at 925.685.9271.
And if you haven’t registered for the October 24-25th conference, register now. If you really want to go, but you’re having budget issues – drop me a line…
On TheCorporateCounsel.net, we’ve been providing a ton of coverage on Corp Fin’s new CDIs in the non-Gaap area – as well as Corp Fin’s latest comments on the topic. This memo by Willis Towers Watson delves into the debate of how non-Gaap measures are implicated in pay plans…
Here’s news from this note by Paul Hastings’ Mark Poerio:
Law360 reports that a Delaware Chancery Judge approved the settlement of shareholder derivative litigation under which Citrix agreed to limit annual stock awards to directors to $795,000 (roughly two times the highest past levels), to submit that limit to a shareholder vote next year, to make enhanced proxy statement disclosures about the determination of director compensation, and to use an independent consultant to assist with peer data and the annual determination of proper cash and equity-based compensation.
1. Nice scoop by John about a possible SEC Enforcement sweep over non-GAAP disclosures.
2. The SEC proposes to mandate links to exhibits! A capital idea that was long overdue. I’ll be blogging more about my own ideas on this – & may even submit my 1st personal comment letter to the SEC about a rulemaking!
3. Corp Fin has been able to get out a slew of proposals despite the limitations of having only three sitting SEC Commissioners! Bravo!
4. While I was gone, John did a helluva job with the Penske file – but he clearly isn’t Penske material (I didn’t even know that Mr. Tuttle was finished interviewing)…
This Proskauer blog discusses the 9th Circuit’s recent decision in SEC v. Jensen – which upheld the SEC’s authority to clawback CEO & CFO incentive comp under Section 304 of Sarbanes-Oxley without demonstrating personal misconduct:
The U.S. Court of Appeals for the Ninth Circuit recently held that the Sarbanes-Oxley Act’s disgorgement provision – which requires disgorgement of certain CEO and CFO compensation when an issuer restates its financial statements “as a result of misconduct” – applies even if the CEO and CFO were not personally involved in the misconduct. Although several district courts had previously reached that same conclusion, but the 9th Circuit’s decision in Jensen appears to be the first appellate ruling on the issue.
The 9th Circuit also held that Rule 13a-14 provides the SEC with a right of action against officers who certify false or misleading financial statements. We’re posting memos in our “Clawbacks” Practice Area.
This blog from Cooley’s Cydney Posner highlights a call for companies to reconsider their growing reliance on long-term incentive pay in executive compensation programs. Here’s an excerpt:
In this Bloomberg article, a compensation consultant argues that most current compensation plans are just “a hodgepodge of reactions to ‘accounting rules, tax law, shareholder requirements, and legal considerations.’” These plans, he believes, have “no empirically demonstrated validity.” Instead, based on behavioral economics, this compensation consultant contends that CEOs should be paid with more near-term incentives.
The Bloomberg article notes that investors like long-term incentive based pay – which is increasingly tied to stock price performance, but at least one compensation consultant says that this approach simply does not make sense:
Investors like this arrangement because it suggests that executives have the same goals they do. Yet it flies in the face of what little we know about behavior and pay. Consider a CEO whose board promises her a $5 million pot if company shares rise a certain amount over three years. Behavioral economists argue that the executive won’t weigh the true value of the award because of our tendency—demonstrated in dozens of academic studies—to prefer a dollar today to two dollars some time from now. In theory, this means the board could extract the same effort from the CEO with, say, $3 million doled out at closer intervals.
Here’s a blog from Andrew Abramowitz noting that one well-known VC firm – Andressen Horowitz – is recommending a 10-year option exercise period for departing employees. Why do this? Andressen Horowitz puts it this way:
While everyone wants to do what’s best for the lifeblood of the company — the former, current, and potentially future employees — the 90-day exercise essentially pits cash-rich employees against cash-poor ones. And that isn’t right. Employees who have vested their hard-earned options should not have to forfeit their stock simply because they don’t have the financial resources to exercise their options and pay the resulting taxes.
While this recommendation applies to startups, innovations in Silicon Valley tend to migrate to publicly-traded companies pretty quickly, so this is something to keep an eye on. The Andressen Horowitz piece is worth reading in its entirety, because it discusses many of the potential pitfalls of this extended exercise period as well. In addition, see this DLA Piper memo on the topic.
This evolving view toward the appropriate post-departure exercise period for options may be part of a broader evolution in Silicon Valley’s equity compensation practices. As this NY Times article recently observed, some Silicon Valley companies are taking a more liberal approach to allowing employees to dispose of a portion of their stock prior to an IPO – while at the same time requiring employees to agree to more explicit restrictions on their remaining shares.