It’s been a while since I posted a stock compensation grab bag. Here are a few recent developments that don’t warrant their own entry but are still worth knowing about.
HSR Filing Thresholds
Good news: now executives can acquire even more stock! Under the Hart-Scott-Rodino Act, executives that acquire company stock in excess of specified thresholds are required to file reports with the Federal Trade Commission and the Department of Justice. The thresholds at which these reports are required have increased for 2015. See the memo we posted from Morrison & Foerster for the new thresholds, which are effective as of February 20, 2015.
If you have no idea what I’m talking about, check out our handy HSR Act Portal.
Final FATCA Regs
The Foreign Account Tax Compliance Act (FATCA) requires employees to report any overseas accounts that hold specified foreign financial assets, which could be interpreted to include stock awards issued by non-US corporations. The assets (stock awards, for our purposes) are reported on IRS Form 8938 (“Statement of Specified Foreign Financial Assets”), which is filed with the annual tax return. Final FATCA regulations, released in December 2014, clarify that unvested awards, do not need to be reported on Form 8938 until they have “substantially vested” (except in the case of a Section 83(b) election).
Dodd-Frank Rulemaking Update
The SEC has pushed back its agenda of rulemaking projects under the Dodd-Frank Act. The proposed rules for clawback requirements, disclosure of hedging policies, and pay-for-performance disclosures and the final rules for the CEO pay ratio disclosure have been pushed back to October 2015 (just in the time for the 23rd Annual NASPP Conference). This is despite comments from SEC Chair Mary Joe White last fall that the SEC was pushing to issue the final CEO pay ratio rules by the end of year. That’s a big delay—from the end of 2014 to October 2015—especially given the pressure on the SEC to issue these rules.
Section 83(b) Election Update
When making a Section 83(b) election, employees are required to include a copy of the election with their tax return for the year in which the election is made. In PLR 201438006, the IRS ruled that a Section 83(b) election was valid even though the taxpayer failed to attach a copy of the election to his Form 1040. If the failure had invalidated the election, employees could effectively revoke the election by “forgetting” to include it with their tax return—and, as we all know, Section 83(b) elections are irrevocable once the deadline to file them has elapsed.
I have another grab bag of topics for you this week.
2013 Say-on-Pay Results Just in time for the 2014 proxy season, Steven Hall & Partners has published a quick summary of the Say-on-Pay vote results for last year’s proxy season. Here are a few facts of interest.
73 companies failed (out of a total of 3,363 companies that held votes. This seems to be up from 2012. Oddly, even with a Google search, I could not find an apples-to-apples comparison, but it seems like just over 60 companies had failing votes in 2012. It’s possible the increase is partly due to more companies having held Say-on-Pay votes.
In the category of “Not Getting the Message,” 15 of the companies with failing votes had failures in prior years.
At one company, Looksmart, 100% of the votes on their Say-on-Pay proposal were against it (which makes them look not so smart). That’s right, even the board voted against their own Say-on-Pay proposal. Apparently there was a complete board turnover, all the executives were fired, and the new execs didn’t own any stock.
New HSR Act Filing Thresholds New HSR Act filing thresholds have been announced for 2014. Under the new thresholds, executives can own up to $75.9 million of stock before potentially having to make the HSR filings. See this memo from Morrison & Foerster for more information. If you have no idea what the HSR Act is, see the NASPP’s excellent HSR Act Portal.
NASDAQ Amends Rules on Compensation Committee Independence NASDAQ has amended its rules on compensation committee independence to provide that compensatory fees (consulting, advisory, et. al.) paid by the company to board members should be considered when evaluating eligibility to serve on this committee, rather than prohibiting these fees outright. The NYSE has always imposed the more lenient standard and apparently NASDAQ received feedback that their more stringent standard might make them less popular. This alert from Cooley has more information.
Last week I provided an overview of how the Hart-Scott-Rodino Act applies to stock compensation (“The $16K Per Day Mistake,” February 19, 2013). This week I answer some of your burning follow-up questions about the HSR Act.
How Do the “Size of Party” Thresholds Apply to Executives?
You will recall that when an individual engages in an acquisition that causes his/her company stock holdings to be somewhere between $70.9 million and $283.6 million, the acquisition is only reportable if one party to the transaction has annual net sales or assets exceeding $14.2 million and the other has annual net sales or assets exceeding $141.8 million.
But how do these thresholds apply to a human being? That is a good question. The executive is usually going to the be smaller party and the company is usually going to be the larger party, so the $14.2 million threshold is probably the operable number to worry about for the individual.
My understanding–which I would describe as “sketchy, at best”–is that unless the individual happens to have financial statements (unlikely), he/she creates a pro forma balance sheet to determine his/her assets. The net annual sales test typically wouldn’t apply, but it can sometimes and includes certain types of investment income or revenues of entities that the individual owns. And, some assets don’t count for purposes of the assets test. As I explained last week, I think the key take-away here is that if an individual’s stock holdings exceed $70.9 million, it’s time to get the lawyers involved and let them figure this out.
Can Stock Price Appreciation Cause an Executive to Be Subject to the HSR Act?
No, an executive will not become subject to the HSR Act merely because the value of his/her stock holdings increase above the threshold; only an acquisition of stock triggers the filing requirements.
For example, say that an executive owns company stock worth $60 million. Now let’s say the stock price subsequently increases so that the executive’s holdings ultimately have a value in excess of $70.9 million. The increase in value would not trigger the HSR Act filing requirements. But, now the executive’s holdings are above that minimum $70.9 million threshold, so any acquisitions the executive makes from here on out have the potential to trigger the filing requirements (unless, of course, the value of the executive’s stock declines below $70.9 million or the size of party thresholds aren’t met).
Which Stock Plan Transactions Could Trigger HSR Act Filings?
Any stock plan transaction in which executives are acquiring common stock or other voting securities, regardless of whether or not the executive voluntarily engages in the transactions. Typically this would include the following transactions:
Exercise, but not grant, of employee stock options
Grant of restricted stock
Settlement, but not grant, of RSUs
Exercise of SARs that are settled in stock
Purchase of stock under an ESPP
Acquisition of stock under a dividend reinvestment program (but not acquisition of dividend equivalent rights–those would not result in an acquisition of voting stock until settled)
Can the Company Pay the Filing Fees?
As I noted last week, the HSR Act filing fees are substantial, starting at $45,000. This is an individual obligation, so the fees apply to the executive. If the company reimburses the executive for the fees, that should be disclosed in the Summary Compensation Table.
We recently posted an alert about the filing thresholds under the Hart-Scott-Rodino Act increasing. The alert reminded me that this is a topic I’ve been meaning to blog about for a while now.
The HSR Act
The Hart-Scott-Rodino Antitrust Improvement Act was enacted to provide the Federal Trade Commission and the Department of Justice with advance notice of large mergers and acquisitions by requiring the entities involved in the transaction to file reports with the FTC and the DOJ.
What does this have to do with stock compensation? I’m glad you asked! It turns out that the HSR Act applies to individuals as well as corporations. If an individual’s holdings in a company’s stock exceed the filing thresholds, that individual is responsible for making the required filings with the FTC and the DOJ.
The Filing Thresholds
Any acquisition that does not cause an individual’s holdings to exceed more than $70.9 million is exempt from the filing requirement.
Any acquisition that causes an individual’s holdings to exceed $283.6 million triggers the filing requirements.
Stuck in the Middle With You
Transactions that cause an individual’s holdings to fall somewhere in between these two thresholds trigger the filing requirements only if the smaller party in the transaction has annual net sales/assets exceeding $14.2 million AND the larger party has annual net sales/assets exceeding $141.8 million.
If you aren’t confused about this, you are probably a lawyer that specializes in antitrust laws. The rest of you are likely wondering how these “size of party” thresholds apply when individuals are acquiring company stock. I’ll provide some more information on this next week. For now, however, I think the key takeaway is that if an executive at your company is in danger of acquiring more than $70.9 million in company stock, it’s time to get the lawyers involved so they can figure all this out.
Thresholds Increase Annually
The size of transaction and the size of party thresholds increase every year (they just increased as of February 11 of this year).
Filing Requirements and Penalties
The filings must be completed before the acquisition is closed. In the context of a merger, there is typically an extended period between when the parties agree to the deal and when it closes, providing time to complete these filings. Where an individual becomes subject to the filing requirements as a result of an acquisition of stock through, say, the company’s stock compensation program, there may not be as much time to make the filing. Thus, monitoring executive’s stock ownership levels with respect to the minimum filing threshold should, at a minimum, be part of your annual procedures. Where executives are close to the threshold, this should be verified before every transaction.
There are some steep fees that go along with the filings–the minimum filing fee is $45,000. But the penalty for not making the filings can be up to $16,000 per day–three days late and the penalty could already exceed the filing fees. We are aware of an executive that was fined $500,000 for failure to comply with the HSR Act. Luckily, according to an O’Melveny & Myers memo, first-time offenders are rarely fined, provided that the error was inadvertent and the filings are completed as soon as the error is identified.
Stay Tuned
Next week I’ll discuss more specifically how the HSR act applies to stock compensation. If you just can’t wait ’til then, see the NASPP’s new HSR Act Portal for more information.