It’s been a long time since I’ve heard much buzz about the Sarbanes-Oxley Act of 2002 (affectionately known as “SOX”). Yet in the past week, I think I’ve heard more about it than in the past several years combined. That’s probably because SOX has been around for over a decade and nothing has changed, leaving not too much to discuss. Last week, in what I think is my first blog ever about a SOX related matter, I covered the SEC’s pursuit of a clawback under Section 304 of SOX. As more firms have taken notice of the SEC’s action, it’s becoming clear that there are some emerging signals from the SEC on clawbacks that should be of note to companies.

To learn about the background of SOX 304 and the impact on clawbacks, see A CFO’s (Non) Misconduct Brings Clawback Under SOX.  Last week’s blog centered on the former CFO of Marrone Bio, who was required to pay back 11k in bonuses he received after financial disclosures that later required restatement. The interesting nugget in the SEC’s action is that the CFO was not accused of any wrongdoing, but was deemed to be in violation of SOX 304 since he did not repay his bonuses to the company. This is a significant example of how the SEC views misconduct under SOX 304, because often companies seem to think that clawbacks under SOX are only necessary if the CFO or CEO engaged in misconduct themselves, which is not the case.

As more discussion around this topic has ensued over the past week, details of another case came to light. In a settlement action involving Monsanto Company of St. Louis, the company was found to have materially misstated earnings over a three-year period. The company’s former COO was charged with wrongdoing. In announcing that they had settled the case with the company for an $80 million penalty (among other requirements), the SEC clarified that the CEO and CFO were not charged with misconduct and no clawback would be sought because the executives had already voluntarily reimbursed the company for certain bonuses and stock awards paid during the period in question. However, the SEC was clear that the reimbursement was necessary under SOX 304.

A recent Davis Polk & Wardwell memo on the topic opined that:

“Although the Monsanto and Marrone Bio actions are interesting in that they illustrate the SEC’s focus on financial reporting and disclosure and the SEC’s willingness to charge individuals believed to be engaged in wrongdoing, what is most noteworthy about these cases is whom the SEC did not pursue in its actions against the companies. These actions appear to signal the SEC’s evolving approach to Section 304 enforcement, including an expectation of reimbursement of some forms of compensation, a willingness to forego an enforcement action if reimbursement is made, and a willingness to pursue an enforcement action to compel what the SEC considers appropriate (indeed required) reimbursement.”

Companies involved in restatements should take careful note of the SEC’s recent 304 actions in considering whether reimbursement of compensation (including stock compensation) is necessary. The Commission seems to be sending a fairly clear message that reimbursement is expected in restatements born from misconduct, even if not on the part of the CEO or CFO. In both of the recent cases, the CEO and CFO were not found to have engaged in misconduct, yet still were obligated to comply with the clawback of their incentive compensation. The difference between the two is that the SEC had to bring a clawback action in the the case where the CFO did not voluntarily reimburse the company. In the other case, voluntary reimbursement had already occurred and no further action was needed. The difference between the two resolutions can be a lot of time and expense, so voluntary reimbursement seems much more practical than waiting for the SEC to bring a clawback option.

-Jenn

Divorce is almost never pretty, and sometimes the more there is at stake, the more complicated the process becomes. In today’s blog I’ll explore how a couple of states are taking a more definitive stance on how stock compensation is handled in divorce proceedings.

In Illinois (an equitable distribution state for purposes of dividing marital assets in a divorce), recent changes to the divorce laws included that stock options and restricted stock acquired during the marriage and prior to a divorce are presumed to be marital property unless the holder can prove they were acquired by way of a gift, legacy, or in exchange for other non-marital property. As a result, Illinois divorce courts will allocate and divide the applicable stock options or restricted stock (or something else representative of their value) in awarding each spouse property from their marital estate. This appears to streamline many of the “are they or aren’t they?” property of the marriage questions. According to a blog by Illinois divorce attorney Mark Schondorf,

“Courts understand that stock option’s values may not be realized until years after a divorce is finalized. The new divorce laws instruct the courts to consider 1) the vesting schedule of an option; 2) the time between the granting of the option and the exercise date and 3) whether the option was granted as a reward for past performance, or whether it was designed to promote future performance or employment. It would be unfair for the court to award the husband a large portion of a stock option’s value if the wife would have to work for a number years after being divorced to realize the options value.”

On another divorce related note, a Massachusetts court of appeals ruling confirmed that the vesting of RSUs counts as income for child support purposes. In the trial court case of Hoegen v. Hoegen, the father claimed that he retained his RSUs as property division under the parties’ divorce judgment, and that the wife waived all rights, title and interests in the RSUs. Accordingly, he argued that income from the RSUs should be excluded when the parties periodically recalculated child support after the divorce by agreement.  The trial court agreed with him. The mother appealed the case and the appellate court reversed the trial court’s decision, on the grounds (in part) that “just because you receive the value of an asset at the time of divorce, it does not mean that the income you derive from that asset should not be included in the definition of gross income for purposes of a subsequent child support calculation.” (Source: “Restricted Stock Units:  Income for Child Support Purposes” by Jeffrey A. Soilson, Fitch Law Partners LLP, Divorce & Family Law Blog, January 29, 2016.)

It’s not surprising that stock compensation can be a significant issue at the core of many divorce and post-divorce cases. In years past it seemed that many states took a reactive approach to handling this type of compensation in divorce litigation, and the results were mixed. It appears more states are now recognizing the “loophole” arguments that are made in these cases and are attempting to take a firmer and clearer stance on how stock compensation should be handled.

It’s important to keep an eye on the changes emerging at the state levels in divorce cases, because as we all know, sometimes new legislation or court rulings emerge that conflict with language in the plan, grant agreement or company practices in handling these situations. While stock plan administrators are not usually involved in the process of negotiating divorce settlements or child support agreements, they do have a role in administering the after-effects of those arrangements. As more states and courts aim to settle some of the arguments over this type of property, we should we watchful to ensure our practices, policies and plan terms can be administered efficiently and effectively as more and more non-employee spouses retain what can be long-term rights to stock compensation.

-Jenn