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Quick Survey on ASC 718
Take the NASPP’s quick survey on the FASB’s update to ASC 718 to find out how companies are responding to this exciting development. And when I say quick; I mean quick! The survey has only seven questions; you can complete it in less than five minutes. Do it today; before you forget!
NASPP To Do List
Here’s your NASPP To Do List for the week:
Last week it was widely reported that the founder of Chobani (yes, the yogurt company) became the latest to join a recent trend of CEOs who are sharing their wealth with employees in the form of stock.
Chobani Founder and CEO, Hamidi Ulukaya, committed to give shares to his 2,000 employees equal to an estimated 10% of the company. Chobani is still a privately held company, so its exact present value is not known. But recent estimates put the company’s value between $3 billion to $5 billion.
While such a practice may be more prevalent in tech startup companies, Chobani is in an entirely different industry – the food industry. That’s part of what makes this move by Chobani’s CEO so unique. Sharing equity (especially pre-IPO) in a food company is not the norm, or even common. It’s a rare occurrence. Additionally, Chobani is giving shares to employees after a decade of being in business and after a value has been established, which makes this even more interesting.
In a New York Times article “At Chobani, Now It’s Not Just the Yogurt That’s Rich,” CEO Ulukaya was quoted as saying “I’ve built something I never thought would be such a success, but I cannot think of Chobani being built without all these people. Now they’ll be working to build the company even more and building their future at the same time.”
One Chobani employee’s reaction was also reported in the NY Times article, and it seemed like the perceived value component that every company strives for when issuing equity to employees. When one of the original employees, Rich Lake, was asked about his new shares, he said “It’s better than a bonus or a raise. It’s the best thing because you’re getting a piece of this thing you helped build.” I know HR consultants and stock plan people everywhere are cheering because isn’t that exactly what you want to hear an employee say about their stock awards?
We’ve seen other CEOs handing over portions of their shares to employees in recent months. Hopefully this trend will continue, as more executives see the value of sharing in the equity pie as a team. After all, to sum it up with a sports phrase – there is no “I” in team. And I’m guessing Chobani’s CEO would agree that given the huge success of the company in a decade, the team is well deserving of their stake in the company.
If you’re feeling curious about how equity plan proposals are performing with shareholder votes, today’s blog has answers. Semler Brossy recently released their 2016 report on Trends in Equity Plan Proposals. Keep reading for some of the highlights.
Upward Trend in Failed Say-on-Pay Votes?
The number of companies each proxy cycle that have failed to obtain say-on-pay (“SOP”) approval from shareholders has remained fairly constant since SOP became mandatory 2011. This time last year, only two of the Russell 3,000 companies had failed their SOP vote. This year, that number has increased to five companies so far. Does this signify an uptick in SOP failures? It appears so, because the number of companies with failed votes so far in 2016 amounts to 3.5%, marking the first time more than 3% of Russell 3000 companies have failed at this time in the cycle to obtain an affirmative vote. Whether this is an anomaly year, or an indicator of a trend, time will tell.
Correlation Between Affirmative Say-on-Pay and Stock Plan Proposal Approvals
One correlation that appears to be rising is that companies who receive a pass Say-on-Pay vote also receive strong support for their equity plan proposals. Since SOP was adopted, the percentage of equity plan proposals that receive affirmative support relative to passing SOP votes has steadily increased (from 83% in 2011 to 90% in 2015). According to the Semler Brossy report,
Similarly, average vote support for equity plans at companies that receive an ISS ‘For’ recommendation has increased over time; this may suggest that ISS voting policies have become well-aligned with shareholder preferences
Companies that fail Say on Pay tend to have significantly lower support for their equity plan proposals, indicating that shareholders are assessing both proposals under similar lenses
A couple of final data points that seem to bring this all full circle are that ISS has recommended that shareholders vote “Against” Say-on-Pay at 10% of the companies it’s assessed so far in 2016, and, on top of that, shareholder support was 32% lower at companies with an ISS “Against” vote. This seems to suggest that companies looking for shareholder support in other areas, such as equity plan proposals, are more likely to gain shareholder support when ISS has recommended an affirmative Say-on-Pay vote. At minimum, there is an intertwining of all these factors and how they drive shareholder support.
For more interesting Say-on-Pay and equity plan proposal trends, view the full Semler Brossy report.
The latest in a long series of SEC enforcement initiatives seemed to arrive last week when both the SEC’s Chair and its Enforcement Director, while visiting Silicon Valley and San Francisco, appeared to deliver a unified message that law firm Fenwick summarized in a publication titled “Securities Enforcement Alert: SEC Increases Scrutiny of “Unicorns” and Other Private Companies and Secondary Market Trading of Pre-IPO Shares” as: “the SEC is closely watching the conduct of private companies as well as emerging platforms that trade in private company securities, and will bring enforcement cases as needed to protect investors. Dubbed the “Silicon Valley Initiative,” the senior officials emphasized that although the SEC wants to encourage capital formation for innovative Bay Area companies, because they play such a critical role in our economy and our markets, the SEC expects even private companies to embrace and demonstrate sound corporate governance.”
It appears to be a growing concern of the SEC’s that private companies may be lacking in sound corporate governance policies, practices and internal controls. Enforcement Director Andrew Ceresney emphasized that companies “can’t simply just turn on effective controls” once they become public; instead companies need to develop such controls while they are still private. This has the makings of a new wave of scrutiny and enforcement actions focused on private company governance.
Secondary Market Focus
The Fenwick memo also described comments made by Chair White suggesting there is concern around secondary market trading of pre-IPO shares. It also captured detail shared by enforcement chief Ceresney:
In particular, enforcement chief Ceresney singled out the SEC’s concern about trading platforms that enable investors to purchase derivative interests in private shares. He noted that this new model has arisen because companies have restricted the transfer of shares, leading to employees and others retaining the shares themselves but selling an economic interest in the shares or promising to deliver shares after a liquidity event. Ceresney noted that, depending on the structure of the deals, such transactions may be securities-based swaps which are most likely illegal if sold to retail investors under SEC rules passed in the wake of Dodd-Frank. Last year, the SEC brought its first enforcement case under these rules against a Silicon-Valley start-up who was offering investors swap contracts based on the value of pre-IPO shares.
Mitigation
While this new wave of enforcement focus may not apply specifically to public companies, I can still think of scenarios where private company actions could still have a ripple effect. Take M&A activity, for example. A public company acquires a private company that has historically shown poor governance practices. Later, those practices become the target of a shareholder lawsuit. Fenwick offered some suggestions to private companies to aid in evaluating their practices and help stand up to a potential SEC investigation.
Develop written and enforceable compliance policies and procedures over financial reporting, disclosure, compensation (including the granting of equity-based compensation), cybersecurity, insider trading, and policies designed to prevent violations of the Foreign Corrupt Practices Act (if the company does business overseas).
Develop a whistleblower program that provides an avenue for employees and consultants to bring issues to the attention of senior management and the Board.
If their shares trade in the secondary market, companies should develop procedures to monitor and review company disclosures or other publicly available information that may impact trading, as well as monitoring what material, nonpublic information is available to directors, employees and others who may be selling shares in the secondary market.
Boards should consider meeting with experienced regulatory counsel on a regular basis—as public companies do—to keep abreast of current issues and best practices.
This is likely not the last word we’ve heard on this topic.
As part of an ongoing effort to keep tabs on interesting developments or resources in the area of administering global stock plans, I round up a few of them in today’s blog.
Switzerland in the House
Exciting news on the NASPP front. We’ve added a brand new Country Guide for Switzerland to our Global Stock Plans Portal. If you’ve got (or are considering) stock plan participants in Switzerland, be sure to check out this resource.
Justifying the Value of Stock Plans Globally
Forbes recently posted an article on their site titled “How to Justify the Value of Stock Options to International Employees.” The post, written by the CEO and Founder of Trucker Path, offered an interesting question he uses to gauge whether additional education is needed on stock options when hiring prospect employees. In his own words,
“Another strategy I have found useful is to ask potential hires to rate their salary-to-stock option ratio expectations on a scale of one to five. “One” means they want a high salary compared to the stock amount, and “five” means they want the stock to carry the most weight.
If a prospective employee gives me a rating of “1″ or “2,” this indicates that either they need a better understanding of how stock options work (see above) or that they are not invested in the company.”
For this particular company, one hiring consideration is whether the employee can see the long term vision of the company (and not just dollar signs). However, if they can see the vision, but still prefer a high salary compared to equity, then perhaps that’s a flag that more education around equity may be useful in the hiring process. This is important, because oftentimes companies reserve that education until after an employee is hired. It certainly raises the question about the timing of education in the hiring process and whether sooner may be better in jurisdictions where equity isn’t rampant among employers.
NASPP Global Portal
In the month of March alone, we’ve received alert-material for the following countries (all alert content is available in the NASPP’s Global Stock Plans Portal): Argentina, Australia, Brazil, Germany, India, Ireland, Japan, Romania, South Korea, and Vietnam. Alert content represents new developments in those areas, so if you have stock plan activity in any of those countries, be sure to check out the updates.
It’s once again time to play the Hot or Not game. I have a list of possible topics for the 24th Annual NASPP Conference; your job is to tell me if each topic is “hot” (or not). Some quick guidelines:
Sizzling hot means you’d definitely want to attend a session the topic
Warm means you might be interested in this topic
Ice cold means that you have no interest in this topic
No opinion means you don’t really know what the topic is or otherwise don’t have an opinion on it
The survey should appear below. If you don’t see it or can’t access it, click here to participate.
This week a couple of news blurbs caught my eye, so I figured I’d summarize them in today’s blog. The first involves LinkedIn’s CEO, the second involves another insider trading case (along with a link to a great perspective article on how to defend against insider trading). Keep reading for full details.
The CEO’s Donation of Stock Trend Continues
Continuing a recent trend of returning stock to employees, LinkedIn’s CEO has declined his 2016 stock award, which is estimated to have represented approximately $14 million in value, requesting that the board instead donate it to the employee pool of stock. It’s widely speculated that the move was intended to boost employee morale after recent stock woes, but regardless of whether or not that’s the case, the action puts a gold star next to a CEO’s name for not having his cake and eating it too.
Another Insider Tipping Case
Earlier this week, the SEC announced that they had settled administrative cases against 5 individuals charged with illegal insider trading of GSI stock in advance of its April 2014 acquisition by eBay. Since that time, a number of individuals have been the subject of SEC investigations for insider trading related to the acquisition. In this most recent investigation of the 5 individuals, the wife of a GSI insider confided in her friend about the upcoming acquisition. The SEC says that the friend then breached the trust of her confider and purchased GSI stock. She also tipped off 3 others who also then purchased stock and tipped off one additional person. We’ve heard this type of tale before in many different ways, but the underlying message is the same: don’t assume inside information shared in confidence will stay that way, and to those who do pass along information, the SEC is catching on – relentlessly and quickly. This acquisition occurred nearly 2 years ago and we are still hearing about related SEC investigations.
Tips to Defend Against Insider Trading
A recent DLA Piper publication titled “Defending Against Insider Trading Claims” takes an in-depth look at what makes up an insider trading claim. The article also explores some recent developments in insider trading litigation and shares tips on how defend against claims of insider trading. Stock Plan Administrators live in the realm of either having access to company inside information, or working closely with those who have access to that information. Of key interest are emerging issues around “tipping” (as in passing along a tip to someone else about company inside information), including:
“What constitutes a personal benefit in a tipping chain case is perhaps the most significant current legal issue in insider trading law. Historically, the personal benefit requirement had a relatively low threshold, but lately it has been the subject of much scrutiny.”
It’s an interesting article worth the read to find out more.
Double Bonus: Early-bird Rate and Free Conference Audio!
Registration is now open for the 24th Annual NASPP Conference in Houston. Register today and you’ll receive the full Conference audio for free, plus you qualify for the early-bird discount.
New HSR Filing Thresholds for 2016: In case you missed this, the FTC has announced HSR Act filing thresholds for this year. This memo from Morrison & Foerster has all the details.
NASPP To Do List
Here’s your NASPP To Do List for the week:
Saddle up, cowpoke! Register for the 24th Annual NASPP Conference in Houston from October 24-27. Register by March 25 to receive the full Conference audio for free and benefit from the early-bird discount!
Leap year can make things complicated. For example, if you use a daily accrual rate for some purpose related to stock compensation, such as calculating a pro-rata payout, a tax allocation for a mobile employee, or expense accruals, you have to remember to add a day to your calculation once every four years. Personally, I think it would be easier if we handled leap year the same way we handle the transition from Daylight Saving Time to Standard Time: everyone just set their calendar back 24 hours. Rather than doing this on the last day of February, I think it would be best to do it on the last Sunday in February, so that the “fall back” always occurs on a weekend.
In a slightly belated celebration of Leap Day, I have a few tidbits related to leap years and tax holding periods.
If a holding period for tax purposes spans February 29, this adds an extra day to the holding period. For example, if a taxpayer buys stock on January 15, 2015, the stock must be held for 365 days, through January 15, 2016 for the sale to qualify for long-term capital gains treatment. But if stock is purchased a year later, on January 15, 2016, the stock has to be held for 366 days, until January 15, 2017, to qualify for long-term capital gains treatment. The same concept applies in the case of the statutory ISO and ESPP holding periods–see my blog entry “Leap Year and ISOs,” (June 23, 2009).
Even trickier, if stock is purchased on February 28 of the year prior to a leap year, it still has to be held until March 1 of the following year for the sale to qualify for capital gains treatment. This is because the IRS treats the holding period as starting on the day after the purchase. Stock purchased on February 28 in a non-leap year has a holding period that starts on March 1, which means that even with the extra day in February in the year after the purchase, the stock still has to be held until March 1. See the Fairmark Press article, “Capital Gains and Leap Year,” February 26, 2008.
Ditto if stock is purchased on either February 28 or February 29 of a leap year. In the case of stock purchased on February 28, the holding period will start on February 29. But there won’t be a February 29 in the following year, so the taxpayer will have to hold the stock until March 1. And if stock is purchased on February 29, the holding period starts on March 1. Interesting how none of these rules seem to work in the taxpayer’s favor.
The moral of the story: if long-term capital gains treatment is important to you, it’s not a bad idea to give yourself an extra day just to be safe–especially if there’s a leap year involved.
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.