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.
When public companies are contemplating changes to their stock compensation programs, it is not uncommon to ask the NYSE (or Nasdaq, depending on where their stock is trading) for an informal opinion as to whether the changes require shareholder approval. Today I blog about a recent Delaware court ruling that calls the authority of these informal opinions into question.
Here is the sequence of events:
A company wants to grant a large ($120 million) “performance award” to its CEO that will vest only upon continued service; the stated purpose of the award is retention. The company’s stock plan doesn’t allow grants of performance awards that vest merely on continued service, so this requires a plan amendment.
The company asks the NYSE if the plan amendment requires shareholder approval and an NYSE staffer tells the company that the amendment doesn’t require shareholder approval.
The company proceeds with the amendment and issues the grant.
The grant quickly garners a lot of negative attention from the media.
A shareholder (a large pension fund) sues the company’s board and CEO, alleging that the plan amendment was illegal. The gist of the argument is that shareholder approval of the amendment is required under the NYSE listing standards and that, because the plan has a provision in it requiring shareholder approval of amendments when such approval is required by the exchange on which the company’s stock is traded, the amendment isn’t legal under the terms of the plan.
The lawsuit has along ways to go before we get an actual decision, but the Delaware Chancery Court has allowed the lawsuit to proceed, despite the fact that the company has an informal opinion in writing (an email) from an NYSE staffer stating that the amendment did not require shareholder approval.
My synopsis here is based on the very excellent Sullivan & Cromwell memo summarizing the case that is posted on Naspp.com. In addition to the highlights I’ve covered here, the memo includes a great discussion of some of the key factors the judge considered in issuing the ruling. If you are going to be seeking informal guidance from the NYSE or Nasdaq, you should definitely check it out–you might pick up a couple of pointers to make the opinion you receive a little more reliable.
I Have a Couple Questions
This saga raises a couple of questions for me (and since the company involved does not appear to have any NASPP members, I feel unfettered in my contemplation of them).
First, why didn’t the company just amend the plan to allow for the grant of RSUs, rather than the seemingly much more convoluted and backwards amendment to allow the grant of performance awards that don’t vest based on performance. Honestly, in today’s “pay-for-performance” world, that just seems like asking for trouble. The plan already allows the grant of restricted stock that vests based purely on service and question C-3 of the NYSE’s FAQs on the shareholder approval requirements specifically states that where a plan already allows the grant of restricted stock, an amendment to allow the grant of RSUs is not material. Seems like not only might this have avoided the lawsuit (or at least the ruling allowing the lawsuit to proceed) but the company also wouldn’t have had to bother with the informal opinion from the NYSE. I’m sure there must be good reason, but I’m completely baffled as to why the company didn’t approach the amendment this way.
Second, how much do you have to pay your CEO to get him to stay? $120 million seems like a lot, just to get the guy to stick around. And, in this case, the CEO’s last name happens to also be the name of the company, which isn’t a coincidence–he’s the son and nephew of the co-founders of the company. And it takes $120 million to get him to stick around? That just seems wrong.
Some Barbara Trivia
One interesting piece of trivia is that the company involved is a large real estate investment trust that happens to own the shopping mall that was my sister’s and my favorite when we were growing up. We spent a lot of time at that mall. (What? We lived in the suburbs and that’s what suburban kids did back then–they went to the mall).
On January 16, the SEC approved the new NYSE and NASDAQ listing standards relating to compensation committee independence. As noted in the NASPP’s alert on the original proposals (“Exchanges Issue New Standards for Compensation Committee Independence“), the new standards include three primary requirements:
The compensation committee must be comprised of independent directors, based on a number of “bright line” tests (many of which were already applicable to independent directors under each exchange’s prior listing standards) as well as additional factors that the SEC suggested should be considered in determining a director’s independence. Also, NASDAQ will now require a separate compensation committee (the NYSE already required this).
The compensation committee must have authority and funding to retain compensation advisors and must be directly responsible for appointment, compensation, and oversight of any advisors to the committee.
The committee must evaluate the independence of any advisors (compensation consultants, legal advisors, etc.).
The final rules make only a few minor changes to the original proposals, including clarifying that the compensation committee will not be required to conduct the required independence assessment as to a compensation adviser that acts in a role limited to:
consulting on a broad-based plan that does not discriminate in favor of executive officers or directors of the company, and that is available generally to all salaried employees; or
providing information (such as survey data) that is not customized for a particular company or that is customized based on parameters that are not developed by the adviser, and about which the adviser does not provide advice.
Public companies now need to assess whether the compensation consultants and other advisors engaged by their compensation committee raise any conflicts of interest and disclose any identified conflicts in their proxy statement (for annual meetings after January 1, 2013 at which directors will be elected). Although not required, where no conflict of interest is found, we expect that many companies will include a disclosure to indicate this.
In his Proxy Disclosure Blog on CompensationStandards.com, Mark Borges of Compensia highlights a recent disclosure on this topic in Viacom’s proxy statement, which might be useful to review as you draft your own disclosure (if this isn’t your gig, perhaps you can score some points by forwarding it on to the person that will be drafting this disclosure).
As required by Exchange Act Rule 10C-1, which was recently adopted by the SEC pursuant to the Dodd-Frank Act (see my June 26 entry, “Comp Committees and Their Advisors“), the NYSE and NASDAQ have proposed changes to their listing standards with respect to compensation committee independence.
The More Things Change, the More They Stay the Same
I almost titled this blog that way, because, frankly, I thought we already had rules in place on compensation committee independence. And, it turns out, I was at least partly correct. We definitely already have them under Section 16 and Secton 162(m), but the exchanges already had their own standards in this area as well. The proposed rules continue to require companies to have compensation committees comprised of independent directors and largely just reaffirm the requirements that already exist in each exchange’s current listing standards with respect to director independence.
So What’s New?
The SEC’s rule calls for a couple additional factors that should be taken into consideration in assessing director independence: (1) the source of the director’s compensation, including consulting, et. al. fees, and (2) any affiliations the director has with the company. Both exchanges propose to incorporate these additional assessments into their standards.
Under both proposals, #2 is not a dealbreaker, however; the proposals concede that there could be some situations where affiliation does not impair a director’s independence (e.g., in the case of a director that is an affiliate by virtue of stock ownership). The NYSE and NASDAQ proposals depart with respect to #1 however. Under NASDAQ’s proposal, any fees paid to the director (other than for service as a director) preclude independence; the NYSE proposal just includes this as a factor to consider–the fees aren’t necessarily a dealbreaker.
NASDAQ also proposes to require that companies have a formal compensation committee (the NYSE already requires this).
What Else is New?
Probably the most significant new requirement is that the compensation committee must evaluate the independence of any advisors (compensation consultants, legal advisors, etc.) that it relies on. Given that I think this is significant, you’d think I’d have more say about it, but that’s all I’ve got. I’m sure you don’t need me to blather on about why this is significant.
In addition, the compensation committee must have authority and funding to retain compensation advisors and must be directly responsible for appointment, compensation, and oversight of any advisors that it uses.
Last week, the SEC issued final rules requiring US exchanges to adopt listing standards on the independence of compensation committee members and the use of compensation advisors by said committees.
I don’t have a lot to say about these rules because they don’t directly relate to stock compensation. Sure, the compensation committee typically has authority over the company’s stock plans and changing who sits on the committee and which advisors the committee relies on could have implications for the company’s stock plan, but there’s nothing specific to stock compensation in the rules. And, let’s face it, for purposes of this blog, there are only two categories of stuff: 1) Stock compensation and things that explicity impact it and 2) Things I don’t care about. But, despite that fact that the new rules seem to fall into category #2, it is a current development that, at least peripherally impacts our world, so I figured a blog entry might be in order.
Rules to Create Rules
The final rules issued by the SEC are 124 pages (and no, I haven’t read them all–see #2 above–but I did read a nifty summary by Morrison & Foerster). What strikes me is that here we have 124 pages of rules, but these aren’t actually the real rules yet. These rules just direct the exchanges (Nasdaq, NYSE) to adopt the rules. They don’t even tell Nasdaq and the NYSE what the rules should be, they just suggest things that should be considered in creating the rules. The exchanges now have around 90 days to propose the actual rules, which presumably will be subject to comment (although the SEC rules were already subject to comment) and then eventually the actual, final rules will be adopted. Just an observation, not a criticism of the SEC–they are just doing what they were instructed to do under Dodd-Frank.
Three Independence Standards
The rules require the exchanges to adopt rules requiring compensation committee members to be independent, taking into consideration sources of compensation paid to directors and any relationships directors have with the company or its officers. If you’re thinking that this sounds familiar, you’re right. For purposes of Section 16, most companies maintain a committee of two or more “nonemployee” directors and for purposes of Section 162(m), companies also ensure that the members of that committee are “outside” directors. Now the committee members will also have to be “independent” under the listing standards the exchanges adopt. My guess is that they aren’t going to just adopt the Section 16 or 162(m) definition (which are similar to each other but just different enough to be confusing) and that we’ll have a third standard to comply with.
Compensation Advisors
The rules also stipulate that the exchange listing standards require that compensation committees have sole authority to engage advisors (compensation consultants and/or attorneys) and that company provide funding to the committee to pay the advisors. The rules specify a number of independence factors that the exchanges are to direct compensation committees to consider when engaging advisors. The rules don’t preclude the committee from receiving advise from non-independent counsel or consultants (e.g., the company’s in-house or outside legal counsel).
Compensation committee reliance on independent advisors has been a best practice for many years now; I suspect that many companies already have practices that partially or fully comply with this requirement. Even so, given that the advisors your compensation committee hires are likely to be making recommendations on stock compensation issued to executives, it’s something to be aware of. See topics #1 and #2 in our recent webcast “Ten Equity Compensation Issues That Affect All Stock Plan Professionals (That No One Told You About).”
Disclosures
The final rules also update the disclosures companies are required to make with respect to compensation consultants, expanding the factors that must be considered in evaluating the independence of the consultants.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so we keep an ongoing “to do” list for you here in our blog.