Join us tomorrow at 2pm Eastern for our annual webcast, “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn analyze this season’s highlights & lowlights. We’ve also extended the duration of this program to 90 minutes so that our experts can share practical insights that will help you finalize your Dodd-Frank clawback policy!
For all the lawyers out there, if you attend the live version of this 60-minute program, CLE credit will be available. You just need to fill out this form to submit your state and license number and complete the prompts during the program.
Members of CompensationStandards.com are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. If you have any questions, email sales@ccrcorp.com – or call us at 800.737.1271.
Late last year, Liz and John blogged about the new rules that will require institutional investment managers to disclose their say-on-pay votes on Form N-PX. This post on Latham’s Global Financial Regulatory Blog reminds Form 13F filers that they will need to file their first Form N-PX by August 31, 2024. The form will cover July 1, 2023 to June 30, 2024, so 13F filers must update their policies, procedures, and systems now to capture the required information starting this July. This also means, for issuers and investors, that we’ll have greater transparency next summer into managers’ voting decisions on say-on-pay proposals in the 2024 proxy season.
Yesterday, the SEC announced that it settled charges against a company and a former executive related to an alleged failure to disclose approximately $1.3 million worth of perquisites predominantly related to personal use of corporate aircraft by four of its executive officers and one of its directors over four years. During the years in question, the company’s proxy did not disclose any compensation related to personal use of a corporate plane.
The SEC’s order against the company states that the company’s process did not apply the “integrally-and-directly-related standard” to certain expenses, which resulted in the company understating the executives’ and director’s “All Other Compensation” by $325,000 per year, on average.
In the SEC’s order against the former executive, the SEC alleges that the executive failed to disclose approximately $280,000 in personal expenses charged to the company, including chauffer services, other travel, meals, apparel, and car repair services, in response to the company’s D&O questionnaire and after reviewing drafts of the proxy statement. As a result of the executive’s submission of these reimbursements and approval of payments to vendors, the company incorrectly recorded these as business expenses and not compensation.
Perks disclosure is technical, nuanced and, if the number of related enforcement actions is any indication, easy to get wrong. The SEC’s order has a good reminder that the “integrally-and-directly-related standard” is very limited:
According to the Adopting Release, even where the company “has determined that an expense is an ‘ordinary’ or ‘necessary’ business expense for tax or other purposes or that an expense is for the benefit or convenience of the company,” that determination “is not responsive to the inquiry as to whether the expense provides a perquisite or other personal benefit for disclosure purposes.” Indeed, “business purpose or convenience does not affect the characterization of an item as a perquisite or personal benefit where it is not integrally and directly related to the performance by the executive of his or her job.”
While the perks footfault here may not be unusual, one notable aspect of this settlement is that the SEC declined to impose a civil penalty on the company, citing its self-reporting, cooperation and implementation of remedial measures. The former executive agreed to pay $75,000 in civil penalties to settle the charges.
In its latest report on say-on-pay, Semler Brossy’s findings are consistent with studies we’ve previously blogged about — that say-on-pay outcomes in 2023 so far have improved from 2022 — but the report also quantifies the impact of a low say-on-pay vote on director elections in recent years:
Over the past five years, average Director election vote support at companies that received a Say on Pay vote below 50% in the prior year is five percentage points lower than at companies that received above 70% support
A helpful chart in the report shows average director election results stepping down a few percentage points in the year following a say-on-pay vote of 50-70% and below 50%. As Liz recently reminded us, if you receive less than 70% support (ISS) or 80% support (Glass Lewis), both proxy advisors have expectations for engagement and responsiveness and will recommend against the reelection of compensation committee members or the entire board in subsequent years when companies fail to demonstrate that responsiveness.
For more on say-on-pay, join us Tuesday, June 27th, at 2 pm Eastern for our “Proxy Season Post-Mortem: The Latest Compensation Disclosures” webcast to hear from Compensia’s Mark Borges, Morrison Foerster’s Dave Lynn and Gibson Dunn’s Ron Mueller.
One of the common questions that companies are facing with respect to the (thankfully extended) Dodd-Frank clawback policy rule is whether the prohibition on indemnifying covered executives against the loss of erroneously awarded compensation means that the company cannot cover executives’ legal costs in connection with a clawback dispute. K&L Gates’ Ali Nardali sent me this view:
“Indemnification” is used pretty broadly in the release and covers legal costs:
“The Proposing Release acknowledged that state indemnification statutes, indemnification provisions in an issuer’s charter, bylaws, or general corporate policy and coverage under directors’ and officers’ liability insurance provisions may protect executive officers from personal liability for costs incurred in a successful defense against a claim or lawsuit resulting from the executive officer’s service to the issuer. However, Section 10D’s listing standard requirement that “the issuer will recover” is inconsistent with indemnification because a listed issuer does not effectively “recover” the excess compensation from the executive officer if it has an agreement, arrangement, or understanding that it will mitigate some or all of the consequences of the recovery.”
We do not believe that it is necessary to amend indemnification agreements, because the release contemplates that they are auto-nullified to the extent they are inconsistent with the clawback rule, per Section 29(a) of the ’34 Act.
Here’s something John recently blogged on TheCorporateCounsel.net:
For many companies, this is a “say-on-pay frequency” year, and as Dave pointed out a few months ago, failing to timely file an Item 5.07(d) Form 8-K disclosing the company’s decision, in light of the results of that vote, about how frequently it will include a say on pay vote in its proxy materials can have significant negative consequences for public companies, including the loss of S-3 eligibility & WKSI status.
There are a number of ways to skin the cat when it comes to complying with the Item 5.07(d) disclosure requirement, and this excerpt from a recent Goodwin blog sets out a few common approaches:
– Report Item 5.07(b) and Item 5.07(d) in a Single Form 8-K Report. The company can simultaneously report the results of the annual meeting shareholder votes under Item 5.07(b) and its decision on the frequency of say-on-pay votes under Item 5.07(d) in the same Form 8-K report. It is important to review the Form 8-K report to confirm that it complies not only with Items 5.07(a)-(c) but also with Item 5.07(d) before filing.
– Report Item 5.07(b) in a Form 8-K Report followed by Item 5.07(d) in a Form 8-K/A Amendment. If the company reports its annual meeting voting results in an Item 5.07(b) Form 8-K report but does not, or cannot, include the information required by Item 5.07(d) in the same Form 8-K report, the company can report its frequency decision in a Form 8-K/A amendment to the original Item 5.07(b) Form 8-K report. In this case, the Item 5.07(d) report should not be filed as a new Form 8-K report.
– Report Item 5.07(b) in a Periodic Report followed by Item 5.07(d) in a Subsequent Form 8-K Report. The company can report the annual meeting voting results in a Form 10-Q or Form 10-K report that is filed on or before the due date for the Item 5.07(b) Form 8-K, as permitted by General Instruction B.3 to Form 8-K. If the company does not, or cannot, report its decision on the say-on-pay frequency vote in the periodic report, it should file a new Item 5.07(d) Form 8-K to report its decision. In this case, the Item 5.07(d) report should not be filed as an amendment to the periodic report. If the filing of the Form 10-Q or Form 10-K report is delayed to a date more than four business days after the company’s annual meeting, the company should comply with Item 5.07 by filing a Form 8-K report before the filing deadline for the Item 5.07(b) report on the shareholder votes on other matters at the meeting.
It’s nice to have alternative ways to comply with this disclosure requirement, but I wish the SEC would consider eliminating it. It made sense when the say-on-pay requirement was introduced and there was uncertainty about how often votes would be held, but with an annual say-on-pay resolution now an almost ubiquitous practice among public companies, this requirement is little more than a trap for the unwary. It seems to me that a better approach would be to require this disclosure only if a company decided to hold its say-on-pay vote on something other than an annual basis.
Here’s the good news that Meredith blogged yesterday on TheCorporateCounsel.net:
Liz blogged last week that the NYSE and Nasdaq proposed amendments to their listing standards to implement the Dodd-Frank clawback rules. The amendments would extend the effective date of the rules to October 2, 2023. The consequence is that companies will have until December 1, 2023 to adopt compliant clawback policies and that they’ll apply to incentive-based compensation received by executive officers on or after October 2, 2023.
The open question was whether & how the SEC would approve these amendments, since Friday was the last day that they could act on the original proposals. The Commission came through at the 11th hour with notices for the NYSE and Nasdaq (and other exchanges) that granted accelerated approval of each exchange’s proposal, as modified by the amendment.
Although a number of companies have already adopted a Dodd-Frank clawback policy in anticipation of these listing standards, there are also a significant number who were going to be attempting to cram it into summer board agendas. This is a welcome development that gives companies & boards more breathing room to carefully consider their policies. We’ve posted several helpful samples in our “Clawbacks” Practice Area for members of this site!
This FW Cook blog has a nice chart that summarizes regulatory developments to-date on this topic. As is the case with any new rule, there are some lingering interpretive & implementation questions. We’ll be discussing these questions and sharing practical pointers for handling them at our “Clawbacks – Key Action Items Now” session of our “20th Annual Executive Compensation Conference,” which is combined with our “Proxy Disclosure Conference” and happening virtually September 20th – 22nd. Register today for this pair of conferences to get all the info you need – and ongoing access to the archives afterwards. You can sign up online or email sales@ccrcorp.com.
Join us tomorrow at 2pm Eastern for the webcast, “Pay Vs. Performance: Lessons From Season 1.” We’ll be hearing practical “lessons learned” from Weil’s Howard Dicker, Freshfields’ Nicole Foster, Aon’s Daniel Kapinos, and Mercer’s Carol Silverman.
For all the lawyers out there, if you attend the live version of this 60-minute program, CLE credit will be available. You just need to fill out this form to submit your state and license number and complete the prompts during the program.
Members of CompensationStandards.com are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. If you have any questions, email sales@ccrcorp.com – or call us at 800.737.1271.
As Liz blogged yesterday and today on TheCorporateCounsel.net, NYSE and Nasdaq have now filed amendments to their proposed listing standards, which set an October 2nd effective date. If the amendments are approved by the SEC as proposed, companies will have until Friday, December 1st to adopt a compliant Dodd-Frank clawback policy covering incentive-based compensation received by executives on or after October 2, 2023.
In addition, the NYSE Amendment changes the proposal to allow for a cure period when the Exchange believes that a company has failed to enforce the policy. It still requires NYSE companies to provide notice to the Exchange if they haven’t adopted a compliant clawback policy before the compliance date (and the proposal continues to provide a cure period for late adoption scenarios). NYSE’s changes to the delisting procedures align with comments on the proposal and the Nasdaq approach to delisting for lack of clawback policy enforcement. This Wilson Sonsini blog provides color here:
Other than the change to the effective date, proposed Section 303A.14 of the NYSE Listed Company Manual is the same as proposed in the NYSE’s initial filing and as noted above, closely follow the requirements outlined in Rule 10D-1. Notably, this means that, similar to Nasdaq’s proposed listing standards, proposed Section 303A.14 does not include any guidance or factors that the NYSE will consider when making a determination as to whether the issuer has recovered “reasonably promptly” the amount of erroneously awarded incentive-based compensation.
However, the blog also highlights that in Amendment No. 1, the NYSE stated the following:
“The issuer’s obligation to recover erroneously awarded incentive based compensation reasonably promptly will be assessed on a holistic basis with respect to each such accounting restatement prepared by the issuer. In evaluating whether an issuer is recovering erroneously awarded incentive-based compensation reasonably promptly, the [NYSE] will consider whether the issuer is pursuing an appropriate balance of cost and speed in determining the appropriate means to seek recovery, and whether the issuer is securing recovery through means that are appropriate based on the particular facts and circumstances of each executive officer that owes a recoverable amount.”
We’ve posted several very helpful sample policies on this site. In our “Proxy Season Post-Mortem: The Latest Compensation Disclosures” webcast coming up on June 27th, Morrison Foerster’s Dave Lynn, Gibson Dunn’s Ron Mueller and Compensia’s Mark Borges will be sharing even more practical insights on how to finalize your policy. If you don’t already have access to CompensationStandards.com, email sales@ccrcorp.com to start a no-risk membership or sign up online.
A CEO transition is anxiety provoking for all involved. It’s a complex process with many legal and business challenges. This Skadden article identifies nine common mistakes companies often make during a CEO transition. Here are some compensation-related reminders from the article:
– Failing To Consider How the Rights of Other Senior Executives May Be Triggered by the CEO’s Termination — The termination of a CEO may trigger contractual rights for other senior executives within the organization, such as “good reason” provisions. Boards should carefully review the provisions in those employment agreements to ensure compliance and avoid potential legal disputes.
Apart from any legal rights, the impact of a CEO transition on retention of other key leaders (who often were, or considered themselves, candidates for the CEO role) should also be considered, and a plan should be developed to address those concerns via compensation or some other means.
– Neglecting the Impact of Termination on Noncompetes and Restrictive Covenants — The nature of a CEO’s discharge can impact the enforceability of noncompetition covenants and other restrictive covenants. In some states, for instance, non-competition and similar covenants may not be enforced against an employee who was discharged without cause.