It’s not too late to get into the NASPP’s newest online program, Employee Stock Purchase Plan Essentials. The first webcast was yesterday, but it’s been archived for your listening convenience. Register for the next webcast tomorrow.
Check out the just announced program for the 22nd Annual NASPP Conference. The Conference will be held from September 29-October 2, 2014 at the Mandalay Bay in Las Vegas. Don’t wait to register–the price goes up again after July 11.
The newest edition of Peter Romeo and Alan Dye’s Section 16 Forms & Filing Handbook arrived in my mailbox last week. I thought the last edition contained a model form for every possible Section 16 reporting scenario, but no–there are 15 new forms in this version. It’s so big, I practically needed some assistance toting it upstairs to my office. Here are four things I learned from perusing the new forms.
1. Reporting Performance Awards with a Service Tail
New Model Form 135 clears up some of the confusion with respect to a performance award that is still subject to service-based vesting conditions after the performance goal has been achieved. As my readers know, performance awards in which vesting is conditioned on goals other than stock price targets aren’t reportable until the performance goes are achieved. Once the compensation committee has certified achievement of the goals, however, the award is reportable, even where it isn’t paid out immediately or is still subject to time-based vesting requirements. The award essentially becomes a standard RSU once the performance goals have been achieved. Assuming the award can only be paid out in stock, it can then be reported as the acquisition of either a derivative security or common stock, just like any other time-based RSU.
2. Voluntary Reporting of ESPP Purchases
Alan Dye doesn’t always report purchases under Section 423 ESPPs, but when he does, he uses transaction code A of J. (I couldn’t resist–it’s not often that I can invoke beer commercials in my blogs). Because purchases under an ESPP aren’t reportable, there’s no transaction code assigned to them. If you are going to voluntarily report these transactions, New Model Form 145 suggests using code A or J and including a footnote to explain the transaction. Personally, I like code A because it specifically applies to exempt acquisitions, whereas code J can apply to either exempt or nonexempt transactions.
3. Voluntary Exit Forms
I did already know that it isn’t necessary to file an exit form unless the former insider has reportable transactions that occur after his/her termination. Despite this, some companies voluntarily file exit forms for departing insiders anyway. I’d never really thought about some of the specifics related to filing a voluntary exit form when there aren’t any transactions to report on the form. New Model Form 214 provides some guidance. In addition to the obvious (check the “Exit” box and include a note in the remarks field explaining the reason for the filing), if using a Form 4, the date of the “earliest transaction” in box 3 should be the insider’s termination date (if using a Form 5, the date of the fiscal year end is reported in box 3), and the insider’s title in box 5 can either be his/her former title or you can select the “other” checkbox and specify his/her status (e.g., “former insider”).
4. Grants to Spouses of Insiders
Given how common dating is in the workplace, I bet that this situation comes up more frequently than you’d think: an insider meets someone at work, they fall in love and get married and then, unconnected to the marriage, the insider’s spouse is granted an option or an award. Because they are married, the grant has to be reported as an acquisition of an indirectly held security on a Form 4 for the insider. But because the spouse isn’t an insider, the award might not be submitted to the compensation committee/board for approval, making it a non-exempt grant unless the shares underlying the grant are held for at least six months. The 2014 Handbook includes new Model Form 91 explaining how to report the grant.
It’s probably unlikely that the shares underlying the grant would be sold within six months, but even so, my takeaway here is to consider submitting grants to spouses of insiders to the comp committee for approval. I imagine that it wouldn’t be that much extra work for the committee, it seems like it might be a good idea from a shareholder optics perspective anyway, and then the exempt status of the grant is one less thing to worry about.
Luckily, grants to any person(s) the insider is having an affair with probably aren’t considered to be indirectly owned by the insider (unless it’s some sort of weird Woody Allen-type situation) and, thus, aren’t reportable. Moreover, when the insider divorces, Model Form 74 (which is not new) explains that any transfers of securities pursuant to the divorce settlement generally aren’t reportable.
Here’s what’s happening at your local NASPP chapter this week:
Philadelphia: The chapter hosts “Annual Review of CEO Pay and Executive Compensation Trends.” (Tuesday, June 10, 8:30 AM)
Salt Lake City: The NASPP’s newest chapter hosts it’s first meeting. Robert Purser of E*TRADE Financial presents “Accounting for Performance Plans.” (Tuesday, June 10, noon)
Silicon Valley: The chapter hosts its annual all-day conference. The day includes the keynotes “The Inequity of Equity – Have We Lost Our Way (Can We Get It Back?),” and “The Boomers are Coming! The Boomers are Coming!,” as well as a host of other great topics. (Wednesday, June 11, 8:00 AM)
Chicago: Mike Melbinger of Winston & Strawn presents “Ethical Issues in the Executive Compensation Area—Including the ‘Independent Counsel’ Provisions of the Dodd-Frank Act.” (Thursday, June 12, 7:30 AM)
I’ll be at the Silicon Valley chapter all-day, presenting “This? Or That? Considerations for Process Improvements” with Emily Cervino of Fidelity and Kevin Anderson of Agilent. I hope to see you there!
This week I caught up on a new lawsuit filed by the shareholders of Cheniere Energy. Shareholder litigation is nothing new, and I get lots of Google Alerts on the topic. What got my attention about this particular matter are the nuances of the issues at hand – and the takeaways that may benefit other companies.
Background
Described in a blog by energy site Fuel Fix, last week Cheniere shareholders filed a lawsuit claiming that the company’s Compensation Committee approved large stock awards to the CEO and other high ranking executives that they considered “excessive, improper”. The total value of the shares in question is about $1.7 billion, so we aren’t talking chump change (my guess is if we were, there wouldn’t be a lawsuit involved). The gist of the back story is that in February 2013, the company proposed (via its proxy) a compensation plan for shareholder approval that tripled the compensation approved under the prior plan back in 2011. Shareholders voted, the company said the proposal passed, and subsequent awards were made. Okay, sounds benign so far, right?
The Numbers Don’t Add Up
The core of the issue, and the one that caught my attention, is that the shareholders in this case allege that the company miscounted shareholder votes when the compensation plan that included these awards was presented to shareholders for approval. Shareholders claim the proposal did not obtain the required votes for approval, and that the subsequent awards were not approved. How did that happen? According to the lawsuit, the company failed to count shareholder abstentions as “no” votes. The final reported tally of votes was 77 million in favor of tripling the compensation plan, 57.9 million against the proposal, and 36 million abstentions. A side note crash course on abstentions: an “abstention” basically means that the shareholder refrained from voting. It’s not a “vote” per se, but rather a lack of vote. Where a certain percentage or majority of all shareholders is needed to approve something, abstentions are usually counted in the “no” pile of votes.
Shareholders in this case are not arguing that the compensation is not reflective of performance – those types of complaints are fairly common. Rather, the shareholders are arguing a key technicality – that the awards should never have been issued in the first place because (when you count abstentions) the shareholders did not approve the increase to the plan reserve that would have been needed to make the awards.
The Fallout
So what’s the fallout from this pending litigation, aside from headaches having to deal with the matter? For starters, the company chose to delay its annual meeting (originally scheduled for next week, now scheduled for September 11). This seems to be, based on sources cited in the Fuel Fix blog, rather unprecedented. Many companies facing shareholder litigation still continue on with annual meetings without a delay. In Cheniere’s case, shareholders are asking for the company to void the 2013 vote, and for affected executives to “disgorge all compensation distributed as a result of this improper share increase.”
If the company did fail to properly count abstention votes, then the shareholders (in my non legal, purely speculative opinion) seem to have a valid claim – at least based on the surface issues. We all know that increases to plan reserves need to comply with requirements around shareholder approvals. I don’t like to make examples of companies who fall into challenges like these, but I do think there are things that we can all learn. First and foremost, yes, this can happen to you. A simple oversight or mistake is often behind these matters. Cheniere has not commented yet on this case, so it’s important to note that the public hasn’t heard their side of the story, and we can only speculate at this point. As many companies are emerging from proxy season (and others preparing to enter it), this serves as a good reminder to check your shareholder votes carefully – work with your internal and external involved parties to ensure the tally from shareholder votes has been properly counted. I thought the term “recount” only applied to presidential elections (my attempt at humor), but turns out that a simple audit or double (or re) check could go miles in ensuring that a similar situation doesn’t occur on your turf.
Check out the just announced program for the 22nd Annual NASPP Conference. The Conference will be held from September 29-October 2, 2014 at the Mandalay Bay in Las Vegas. Don’t wait to register–the price goes up again after July 11.
Read Andrea Best’s newest blog on interview missteps in the NASPP Career Center and her podcast on how to stand out in an interview.
It’s not too late to sign up for the NASPP’s acclaimed online Stock Plan Fundamentals course; all webcasts have been archived for you to listen to at your convenience.
It was over before I even had a chance to blog about it–a proposal in the California Senate to tax companies based on their CEO to median employee pay ratio. But the question is: is it really over or is this just the beginning?
Background: The CEO Pay Ratio Disclosure
As my readers know (because how could you possibly have missed this news, even if you foolishly don’t read the NASPP Blog religiously), the Dodd-Frank Act requires public companies to disclose the ratio of CEO pay to median employee pay and, last year, the SEC proposed rules to implement this disclosure. The final rules are expected sometime this year. The media has been very excited about this disclosure (and, as a blogger, I can sympathize with the desire for more fodder for headlines on otherwise slow news days) and the SEC received close to 23,000 form letters in support of the disclosure and a petition in support of it with close to 85,000 signatures.
But, despite this overwhelming support, the institutional investors that spoke on the panel “Say-on-Pay Shareholder Engagement: The Investors Speak” at last year’s 10th Annual Executive Compensation Conference were ambivalent about how helpful the disclosure would be to their decision-making process. The SEC also has expressed ambivalence over the usefulness of the disclosure.
The CA State Senate Sees an Opportunity
But, while investors and the SEC aren’t sure how useful the disclosure will be, the CA State Senate found a way to put the disclosure to use: tax revenue. Specifically, a bill introduced by Senator Mark DeSaulnier (whose district is sort of the far east bay area–I’m sure there’s a better name for it and you think I’d know it, since I live just over the district border, but I don’t) proposed a corporate tax on a sliding scale tied to the CEO pay ratio. Some companies with low ratios might have ended up paying less corporate tax but most companies would have likely ended up paying more. Towers Watson provides more detail on how the tax would have worked in the May 1 entry in their Executive Pay Matters Blog (“California Legislation Would Limit Tax Deductions for Companies Where the CEO Pay Ratio Is Too High“).
Just to make things even more fun, the proposed legislation called for a different calculation than the SEC’s rules. CA would have included only US employees in the ratio and would have required it to be based on FICA wages.
The question remains, however: is this the end of this sort of legislation, or only the beginning? The bill was defeated 19-17, which certainly isn’t overwhelming opposition. BTW–that was 19 votes for and 17 against; in CA, tax increases require a two-thirds majority in both houses of the legislature (so the bill needs 27 votes to pass in the CA Senate). In a Democratic state that doesn’t have this two-thirds requirement for tax increases, this bill would still be in business (of course, it would still have to get past the State Assembly and the Governor). Only five democratic senators voted against the bill; the rest of the opposition was republican (no republicans voted for the bill). Moreover, the CA Senate has voted to reconsider the bill–it is still in play (although there are not enough democrats in the Senate to ensure passage, some republican support would be required).
The Dallas NASPP chapter hosts its 2nd annual all-day event. The day includes sessions on executive compensation in pre and post-IPO companies, the latest tax reform measures, and trends in equity compensation and plan design. The program also features a keynote from Bob Ravener, the author or “Up! The Difference Between Today and Tomorrow is You,” a local company showcase, and a discussion of best practices. The all-day workshop will be held this coming Friday, June 6.