This week the SEC announced a settled enforcement action against the former CFO of Marrone Bio Innovations, Inc. At issue were bonuses the former CFO received within 12 months of various financial filings containing results that the company was later required to restate. Using Section 304 of the Sarbanes-Oxlely Act of 2002 (SOX 304), the SEC pursued the clawback of $11,789 in bonuses from the former CFO.
As we await final clawback rules from the SEC (which originate from Dodd-Frank and would apply to national securities exchanges), it’s important to remember that the SEC already has the present ability to enforce clawbacks in certain situations under SOX 304. The SOX provisions apply only to CEOs and CFOs and the courts have determined that only the SEC has the power to enforce clawbacks under SOX. One common misunderstanding about SOX 304 centers on “misconduct.” A Latham & Watkins memo once described SOX 304 as follows: “The statute states that, in the event an issuer is required to prepare an accounting restatement caused by “misconduct,” the CEO and the CFO “shall” reimburse the company for any bonus or other incentive-based or equity-based compensation, and any profits from the sale of the issuer’s securities, received during the year following the issuance of the misstated financial statements.” The memo later explained that the misconduct does not necessarily need to be on the part of the CEO or CFO who is subject to the clawback, a fact sometimes overlooked in our view of the type of misconduct that would trigger a clawback.
The recent SEC enforcement in the case of the former MBI CFO is a prime example that the SEC appears to have determined the misconduct by someone or something other than the person subject to the clawback (the CFO) as a legitimate grounds to demand the repayment of the CFO’s compensation. In this case, the former CFO had to return $11,789 in bonuses, but the SEC did not allege misconduct on his part. They did, however, allege that by not voluntarily returning his incentive compensation once the restatements occurred, he had violated SOX 304. It’s important to understand that in order for the circumstances for a clawback to be ripe, misconduct specifically by the CEO or CFO does not need to be present. Misconduct by someone or something else leading to a restatement can be enough to require the clawback of incentive compensation under SOX 304.
It’s important for companies to evaluate the circumstances regarding any restatement to ensure that appropriate measures have been taken to clawback the appropriate compensation from the CEO and CFO under SOX 304.
The SEC’s proposed clawback rulemaking resulting from Dodd-Frank will require national securities exchanges to adopt standards that, among other things, expand the scope of clawbacks – making them applicable to more individuals and for a longer period of time. The types of compensation subject to the clawback will be more limited under the proposed rules. These rules will not replace SOX 304; the SEC can still continue to rely on SOX 304 as means to enforce clawbacks. For full details on the proposed rules, visit the NASPP Alert on this topic.
Tip #3 to Submit a Success Speaking Proposal: Don’t Wait Until the Last Minute
Things always go wrong at the worst possible moment—like when you are rushing to submit your speaking proposal at the last possible minute before heading out for your Friday evening plans. Give yourself a little extra time; submit your proposals before the last day, so that you have time to address any unexpected hiccups before the deadline.
The NASPP is now accepting speaking proposals for the 24th Annual NASPP Conference. Proposals can be submitted online and will be accepted through Friday, February 26. Check out ten more tips for submitting a successful proposal.
Don’t Miss Your Chance to Save on the Online Fundamentals
Taught by the industry’s leading experts, the NASPP’s acclaimed online program, “Stock Plan Fundamentals,” is the definitive training program for stock plan professionals, covering both the regulatory framework and day-to-day administrative procedures key to overseeing stock plans. Don’t wait to register—the early-bird rate is only available until February 26.
NASPP To Do List
Here’s your NASPP To Do List for the week:
Register for the NASPP’s acclaimed online course, “Stock Plan Fundamentals”—early-bird rate available until February 26.
Submit a speaking proposal for the 24th Annual NASPP Conference. We are accepting proposals through February 26.
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.
Last week’s news that the CEO of Telsa Motors, Elon Musk, had exercised stock options with an estimated value of $100 million spread like wildfire. Picked up by the national news outlets – the news was well covered. It’s not every day that a CEO exercises $100M worth of stock options and pays cash for the taxes (yes, the company confirmed he paid cash for his taxes). This was a cash exercise with no sale involved. As I read several articles on this transaction, I realized there is still much taken for granted when an executive transacts in the company’s stock. I’ll cover highlight some of those areas in today’s blog.
The article that caught my rapid attention was Forbes’ “Elon Musk Exercising Stock Options Could Mean Tesla Will Disappoint Next Week.” Now, before I get too far down this path, I have to say I know nothing about Tesla’s inner-workings and nothing about their earnings. So anything I am saying IS pure speculation. The title of the article got me interested, though. I mean could the exercise of stock options really, single handedly foreshadow less than stellar earnings? If I had to dissect that assumption, my own thoughts went to something far more benign – I mean, what if the CEO had a 10b5-1 plan (after all, these options that were exercised were scheduled to expire in December 2016) that was merely acting on autopilot in an attempt to exercise these stock options before they expire? I have no idea whether Tesla’s CEO has a 10b5-1 plan or not. According to Tesla’s proxy statement, 3 officers do have 10b5-1 plans. And, according to the NASPP’s 2014 Domestic Stock Plan Administration Survey, co-sponsored by Deloitte, of the companies that do allow (but not require) 10b5-1 plans for insiders, 62% of CEOs of those companies were using the plans. Is it possible? Yes, it is. Do we know? No, we do not. That’s not even the point, though.
What does a 10b5-1 plan have to do with things taken for granted? These plans got some negative publicity a couple of years ago when the SEC looked into whether or not the plans, in principle, were being abused. There were some situations where it appeared that 10b5-1 transactions were well-timed around negative news – as in the company may have delayed or accelerated the timing of that news around the planned transactions. Nothing much ever happened from that speculation, and, for the most part, I’d venture to say these plans are not being abused. Rather, this type of plan works fairly well if used as intended, especially in aiding executives and other insiders to put distance between their decision making about their shares and the execution of those transactions. What worries me is that the possibility of a 10b5-1 plan’s existence still often seems to be overlooked when the media casts the spotlight onto these larger, high profile transactions. Not all of it is their fault, though. There is no present requirement for the existence of a 10b5-1 plan to be disclosed. Some companies voluntarily disclose the existence of plans and subsequently footnote their Form 4s noting transactions that occurred pursuant to a trading plan. Without disclosure, the media remains unaware that the executive may be operating under one of these plans. Does disclosure need to happen? The law firm of Morrison and Foerster summarized that consideration in an FAQ on 10b5-1 plans:
Should a Rule 10b5-1 plan be publicly announced?
A public announcement by any person of the adoption of a Rule 10b5-1 plan is not required. A company may choose to disclose the existence of certain Rule 10b5-1 plans in order to reduce the negative public perception of insider stock transactions. A company making such disclosu
re generally will disclose the existence of a plan but not the specific details. Typically, the disclosure will be for executive officers, directors, and 10%
shareholders required to file ownership forms under Section 16(a) of the Exchange Act (that is, Forms 3, 4,and 5). A company can choose whether to announce the existence of a Rule 10b5-1 plan by a press release followed by a Form 8-K or solely by a Form 8-K. The applicable Form 8-K item is Item 8.01, although Item 7.01 may be used under appropriate circumstances.
If a company decides to publicly announce the adoption of a Rule 10b5-1 plan, it is advisable to publicly announce changes to or termination of such plan as well. Under the Dodd-Frank Act, the SEC is required to implement a regulation prescribing disclosure by reporting issuers of their hedging policies. The proposed rule, if it becomes final in its current form, may result in more companies disclosing the existence of trading programs of executive officers.
While we await final hedging rules from the SEC, companies may consider proactively looking at their 10b5-1 disclosures and the potential positive potential such disclosures could have on mitigating public perception of their executive transactions. Disclosing the existence of a plan and attributing transactions related to an automatic plan in a Form 4 footnote may go miles in helping to ease some of the rampant speculation around transactions that could occur absent this information.
We won’t know anytime soon if CEO was operating under a 10b5-1 plan when he exercised his stock options, but if he did, a footnote on the Form 4 could have alleviated some of the speculation about the timing of the transaction and its relationship to earnings and other important company events.
Submit a Speaking Proposal for the 24th Annual NASPP Conference
The NASPP is now accepting speaking proposals for the 24th Annual NASPP Conference. Proposals can be submitted online and will be accepted through Friday, February 26.
Tip #1 to Submit a Success Speaking Proposal: Many Egg and Many Baskets
Don’t put all your eggs in one basket. Smart submitters know that the more proposals they are on, the more likely they will get to speak at the NASPP Conference. Each company can submit up to three proposals and can be included in proposals submitted by other speakers. Don’t wait to be invited; proactively reach out to your network now to let your colleagues know that you are interested in speaking and would be happy to join them on any proposals where you have something to add. Note, however, that individual speakers can participate in no more than two panels and firms can be represented on no more than six panels; if you are included on proposals in excess of this number that we have designated for acceptance, we will ask you to step down from a panel(s).
CEP Institute Seeks Public Comments on GPS
The CEP is asking for people to submit comments on its newly revised GPS|Stock Options document. The GPS series provides unbiased, university based research to address risk assessment and identify best practices for the equity compensation community. Review the Stock Options draft today.
NASPP To Do List
Here’s your NASPP To Do List for the week:
Register for the NASPP’s acclaimed online course, “Stock Plan Fundamentals“—early-bird rate available until February 26.
Submit a speaking proposal for the 24th Annual NASPP Conference. We are accepting proposals through February 26.
In just a couple of weeks, employees will begin receiving Forms 1099-B for sales they conducted in 2015. Here are five things they need to know about Form 1099-B:
What Is Form 1099-B? Anytime someone sells stock through a broker, the broker is required to issue a Form 1099-B reporting the sale. This form is provided to both the seller and the IRS. It reports the net proceeds on the sale, and in some cases, the cost basis of the shares sold. The seller uses this information to report the sale on his/her tax return. [Same-day sale exercises can be an exception. Rev. Proc. 2002-50 allows brokers to skip issuing a Form 1099-B for same-day sales if certain conditions are met. But your employees don’t need to know about this exception unless your broker isn’t issuing a Form 1099-B in reliance on the Rev. Proc.]
The Cost Basis Reported on Form 1099-B May Be Too Low. For shares that employees acquire through your ESPP or by exercising a stock option, the cost basis indicated on the Form 1099-B reporting the sale is likely to be too low.
Sometimes Form 1099-B Won’t Include a Cost Basis. If employees sold stock that was acquired under a restricted stock or unit award, or if they acquired it before January 1, 2011, the Form 1099-B usually won’t include the cost basis (although procedures may vary, so check with your brokers on this).
What To Do If the Cost Basis Is Incorrect (or Missing). If the cost basis is incorrect, employees will need to report an adjustment to their gain (or loss) on Form 8949 when they prepare their tax returns. If the basis is missing, they’ll use Form 8949 to report the correct basis.
An Incorrect Cost Basis Is Likely to Result in Employees Overpaying Their Taxes. It is very important that employees know the correct basis of any shares they sold. They will subtract the cost basis from their net sale proceeds to determine their taxable capital gain (or deductible capital loss) for the sale. Reporting a cost basis that is too low on their tax return could cause them to pay more tax than necessary. In some cases, this doubles their tax liability. The only person who wins in this scenario is Uncle Sam; your employees lose and you lose, because no one appreciates the portion of their compensation that they have to pay over to the IRS. Your stock compensation program is a significant investment for your company; don’t devalue the program by letting employees overpay their taxes.
Employees should review any Forms 1099-B they receive carefully to verify that the cost basis indicated is the correct basis. If it is missing or incorrect, they should use Form 8949 to report the correct basis.
The Portal also has examples and flow charts, all of which have been updated for the 2015 tax forms. [In case you are wondering, there were no significant changes to Form 1099-B, Form 8949, or Schedule D in 2015.]
Connecticut: Brian Burke of TD Ameritrade, Andrew Gewirtz of KPMG, and Andrea Kagan of Solium present “Tax Compliance and the W-8.” (Tuesday, January 12, 10:00 AM)
Carolinas: The chapter hosts meetings/socials in both Charlotte and Raleigh. The meetings will be relatively informal, with updates from last year’s NASPP Conference, upcoming meeting dates, and an expert providing topical updates at each location. In Charlotte, Taylor French from McGuireWoods will address legal hot topics, while Amanda Newby of Red Hat will lead a broad-based discussion including ISS Equity Plan Scorecards in Raleigh. (In Charlotte on Wednesday, January 13, 4:30 PM. In Raleigh on Thursday, January 14, 4:30 PM.)
Philadelphia: Erin Bass-Goldberg and Jarret Sues of Frederic W. Cook & Co. present “CEO Pay Ratio: Now What? .” (Thursday, January 14, 8:30 AM)
I think holiday brain is getting to me, because I’m starting to have flashbacks. I remember this time last year the stock plan world was buzzing about ISS’s “new” Equity Plan Scorecard, intended to revamp the way ISS analyzes stock plan proxy proposals. Fast forward to now: we’ve got a full season of proxy reporting behind us and are gearing up towards the next one (see the NASPP Blog: “ISS Scorecard: What’s New for 2016?“). While preparing for this year’s season, it may be helpful to look back at this past year and see how the scorecard really impacted stock plan proposals.
2015 Scorecard Post Mortem
In a recent memo, “The New Equity Plan Approval Landscape: A Post Mortem on the 2015 Proxy Season,” consulting firm Towers Watson looked back on the voting results of stock plan proposals brought to shareholders of S&P 1500 companies. A key question in evaluating the data was how did the proposals fare in light of the new scorecard? (remember, it was first used this year.) Did more proposals fail to get a passing vote? Let’s see how the the scorecard scored when looking at the overall outcome of stock plan proposals.
According to Towers Watson, the average shareholder support in equity plan votes actually rose, even if just slightly (up to 90% in 2015 from 87% in 2014). Only one company failed in its quest to gain shareholder support for an equity plan proposal. This outcome showed a decrease in failure rate (only 0.03% this year compared to 0.9% in 2014).
The Verdict on the Scorecard?
While it’s hard to attribute the above changes to any one variable, it’s probably safe to say that the scorecard didn’t hurt equity plan outcomes. It may have even helped, because it gave flexibility to companies to structure their practices and plans such that they could lose a few points here and gain a few points there, having a better idea about the impact those decisions would have on the scorecard results. It wasn’t like a steep test with a high curve that makes it nearly impossible to succeed. For the most (emphasis on most) part, companies came through unscathed. While the flexibility of the scorecard may have contributed to that success, even Towers Watson points to the fact that this could also be attributed to factors such as improved Compensation Discussion and Analysis and Say-on-Pay. From their memo:
This modest increase in favorable outcomes is notable in a year in which ISS updated its methodology, the first major revamp in nearly a decade, and even more so when we consider that the level of negative ISS vote recommendations on equity plans stayed consistent with 2014, at 12%. The 2015 voting outcomes suggest that the EPSC methodology gave companies greater flexibility to structure key equity plan provisions and appropriately size their share requests.
With this added flexibility, however, came greater accountability as companies in our experience devoted much more preparation and analysis time for this year’s equity plan proposals, including more outreach to shareholders to understand individual voting policies and decision points. Additionally and equally as important, many companies took the opportunity to enhance their proxy disclosures to tell a more complete story around the share request. In short, the equity plan proposal enhancements we saw this year somewhat mirror the evolution of the Compensation Discussion and Analysis in recent years as a result of say-on-pay votes.
What’s Next?
While the overall structure of the scorecard is unchanged, there are some other changes for 2016. If you missed the earlier blog from Barbara Baksa on this topic (“ISS Scorecard: What’s New for 2016?“), be sure to check it out.
ISS’s updated FAQ for the 2016 scorecard has also been released.
This week I provide additional coverage of the decisions the FASB made on the ASC 718 simplification project (see my blog from last week for Part 1).
Cash Flow Statement
The Board affirmed both of the proposals related to the cash flow statement: cash flows related to excess tax benefits will be reported as an operating activity and cash outflow as a result of share withholding will be reported as a financing activity. Nothing particularly exciting about either of these decisions but, hey, now you know.
Repurchase Features
The board decided not to go forward with the proposal on repurchases that are contingent on an event within the employee’s control. The proposal would have allowed equity treatment until the event becomes probable of occurring (which would align with the treatment of repurchases where the event is outside the employee’s control). The Board decided to reconsider this as part of a future project. The Board noted that this would have required the company to assess whether or not employees are likely to take whatever action would trigger the repurchase obligation, which might not be so simple to figure out (we all know how hard it is to predict/explain employee behavior).
Practical Expedient for Private Companies
The Board affirmed the decision to provide a simplified approach to determining expected term for private companies, but modified it to allow the approach to be used for performance awards with an explicitly stated performance period. I’m not sure that many private companies are granting performance-based stock options, but the few who are will be relieved about this, I’m sure.
Options Exercisable for an Extended Period After Termination
Companies that provide an extended period to exercise stock options after retirement, disability, death, etc., will be relieved to know that the FASB affirmed its decision to eliminate the requirement that these options should be subject to other applicable GAAP. This requirement was indefinitely deferred, but now we don’t have to worry about it at all.
A dozen NASPP chapter meetings in one week—that has to be some kind of record:
Philadelphia: Mona Ghude and Rob Jensen of Drinker Biddle & Reath, Liz Stoudt of Aon Hewitt, and Tami Bohm of Radian present “Equity Award Modifications – Implications and Considerations.” (Monday, December 7, 8:30 AM)
Seattle: Peter Kimball of ISS Corporate Solutions presents “Sweet Sixteen: ISS Policy Updates and the Proxy Season Preview.” (Monday, December 7, 7:30 AM)
DC/VA/MD: Nathan O’Connor and Amit Tekwani of Equity Methods present “2015 Stock Compensation Accounting Best Practices: From Our Survey to You.” (Tuesday, December 8, 4:00 PM)
Nashville: PJ Gabel of Radford and Thierry Vo of UBS present “Show Me the Value, Spare Me the Expense.” (Tuesday, December 8, 7:30 AM)
Sacramento: The chapter hosts a year-end challenges roundtable. There will be food, drinks, raffles, and prizes! (Tuesday, December 8, 11:00 AM)
San Diego: The chapter hosts its popular annual social at Rough Draft Brewing Company. (Tuesday, December 8, 3:00 PM)
KS/MO: The chapter hosts a holiday roundtable luncheon. The meeting will include highlights from the 2015 NASPP Conference, planning for chapter meetings for 2016, and a discussion of hot topics. (Wednesday, December 9, 11:30 AM)
Las Vegas: The chapter hosts its 2015 holiday meeting and happy hour at Tom’s Urban, along with a tour of the new MGM Las Vegas Arena. Denise Glagau of Baker & McKenzie will present “Get Ready For 2016: Top 10 Legal Developments from 2015 Impacting Equity Awards & Plans in the U.S. and Beyond.” (Wednesday, December 9, 3:30 PM)
Los Angeles: The chapter hosts a holiday networking event with Baker & McKenzie. Valerie Diamond and Brian Wydajewski present on the latest developments on global equity in 2015 and share a few predictions for 2016.
NY/NJ: Christine Cognetti McCasland of Morgan Stanley and Mike Andresino of Posternak present findings on Rule 10b5-1 plans from a joint NASPP/Morgan Stanley survey. After the presentation, the chapter hosts a holiday party at Haven Rooftop at the Sanctuary Hotel. (Thursday, December 10, 3:30 PM)
Austin: The chapter hosts its 2nd annual Austin NASPP Holiday Social & Networking Event in a private suite at the Texas Stars hockey game. (Friday, December 11, 7:00 PM)
Connecticut: Sharon Podstupka and Aalap Shah of Pearl Meyer present “Executive Compensation & Communication: Striking the Balance.” The meeting will conclude with a holiday lunch and door prizes! (Friday, December 11, 9:00 AM)
And since there’s only chapter meeting scheduled for next week, I’m just going to mention it now:
Atlanta: The chapter is hosting its first annual holiday event at Maggiano’s at Perimeter Mall. There will be cocktails, light hors d’oeuvres, and lots of networking. (Wednesday, December 16, 4:00 PM)