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SEC votes to propose executive compensation rules

On April 29, 2015, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Securities and Exchange Commission (SEC) voted 3 to 2 to approve a proposed amendment to executive compensation rules in Item 402 of Regulation S-K. The proposed amendment directs the SEC to adopt rules requiring registrants to disclose in their proxy or information statements the relationship between executive compensation actually paid and the financial performance of the registrant.

Specifically, the SEC is proposing new Item 402(v) of Regulation S-K that would require “a registrant to provide a clear description of (1) the relationship between executive compensation actually paid to the registrant’s NEOs [(Named Executive Officers)] and the cumulative total shareholder return (TSR) of the registrant, and (2) the relationship between the registrant’s TSR and the TSR of a peer group chosen by the registrant, over each of the registrant’s five most recently completed fiscal years.” Such disclosure should be made taking into account any change in the value of the shares of stock and dividends of the registrant and any distributions.

The SEC is seeking comments to the proposed rules which can be made in the following manner:

Electronic comments:

Paper comments:

  • Send paper comments to: Brent J. Fields, Secretary, Securities and Exchange Commission 100 F St. NE

Substantial risk of forfeiture guidance clarifies when Section 16 short-swing profit liability can defer taxation of equity compensation awards

Legend had it at my law school that one day, a lost student walked into a torts class and asked the professor if this class was wills, trusts, and estates. The torts professor replied, “We haven’t gotten that far yet.” A dry sense of humor on the professor’s part? Perhaps. His point, however, was that the law can be a seamless web, with one area of law often having an impact on another. This point often is true with respect to the tax and securities laws.

We blogged previously that the IRS and Treasury issued final regulations under Code Section 83 to “clarify” the definition of “substantial risk of forfeiture” with respect to restricted stock (and other property) grants. One of the clarifications was that transfer restrictions, in and of themselves, do not constitute a substantial risk of forfeiture. For taxation to be deferred on restricted stock grants, the stock must be both non-transferrable and subject to a substantial risk of forfeiture. An example might help illustrate this point. Suppose that a company grants its CEO restricted stock that vests on the fifth anniversary of the date of grant, provided that the CEO has been continuously employed through that date. Also suppose that the CEO satisfies this vesting condition, but on the vesting date, the company’s insider trading policy prohibits the CEO from selling the shares for several months. The CEO would be taxed on the value of the shares on the vesting date, despite the fact that the CEO …

“Substantial risk of forfeiture” clarification impacts restricted property (stock) grants

As complex as the Internal Revenue Code is, many people still assume that the rules contain a great deal of specificity and precision, perhaps because of the mathematical nature of calculating taxes. They often are surprised to learn that the Code leaves a lot of room for discretion and subjectivity. A great example of this subjectivity is Code Section 83’s regulations governing the taxation of restricted stock (and other property). The underlying stock subject to these grants generally does not become taxable to the employee until the stock no longer is subject to a “substantial risk of forfeiture.” As you might guess, whether a risk is “substantial” can be quite a subjective determination.

In that backdrop, the IRS and Treasury recently issued final regulations that clarify the definition of substantial risk of forfeiture for purposes of Code Section 83. The final regulations will have the most direct impact on employers who have granted awards of restricted stock or other restricted property on or after Jan. 1, 2013. That is because the regulations stress the need for these agreements to contain a service or performance-based vesting condition that is not substantially certain to be satisfied. The retroactive effective date of may seem strange at first. It is the same effective date that the IRS provided in proposed regulations from May 2012. The good news is that the final regulations generally offer “clarifications” of the former regulations rather than new guidance. Still, it is important that affected employers review their restricted stock …

Affordable Care Act update: agencies extend reprieve for employer pay-or-play mandate

Hot off the press are the final regulations for the employer shared responsibility provisions of the Affordable Care Act (more commonly referred to as the “pay-or-play mandate”). In fact, the regulations are so new that they will not actually be published in the Federal Register until tomorrow, February 12. For those of you who are dying to get a first glimpse, a pre-publication version can be found here.

While the regulations are extensive (227 pages), many of the provisions of the proposed regulations have been retained. However, there are a couple important transition rules buried in the final regulations that provide a welcomed reprieve from the pay-or-play mandate for certain employers.…

Shareholder Approval of Equity Incentive Plan; Has It Been Five Years?

Most equity incentive plans have a number of different shareholder-approved business criteria for setting performance goals and allow the compensation committee to select the criteria each year. This practice generally requires re-approval of the goals by the shareholders under Internal Revenue Code Section 162(m) whenever the committee makes a material change to the criteria. If the committee has not made any material changes to the performance criteria but retains discretion to select the performance targets from year-to-year, shareholders generally will need to reapprove the criteria every five years under Code Section 162(m).

If shareholder approval last occurred in 2009, then it is time to prepare for re-approval in 2014. This is also a good time to consider if an amendment is needed to increase the authorized share pool.…

SEC Formally Proposes CEO Pay Ratio Disclosure Rule

On Wednesday, by a 3-2 vote, the SEC approved proposal of the long-anticipated CEO pay ratio disclosure rule (read the press release). The proposed rule, part of the 2010 Dodd-Frank Act, would require a public company to disclose the ratio of compensation between its CEO and the median compensation of all its other employees.

The rule derives from Section 953(b) of the Dodd-Frank Act, and will require a public company to make the following disclosures:

  1. The median of the annual total compensation of all employees, except its CEO;
  2. The annual total compensation of its CEO; and
  3. The ratio of CEO compensation to median employee compensation.

Are You Sure You’re S-3 Eligible? A Reminder to Disclose the Board’s Decision Regarding Frequency of Say-on-Pay Vote on Form 8-K

Though most reporting companies conducted their first say-on-pay vote in 2011 and disclosed the shareholder voting results on Form 8-K, some companies overlooked the additional requirement to disclose the board of directors’ decision (in light of the shareholders’ advisory vote) regarding the frequency that the company will conduct say-on-pay votes. A company’s failure to file this Form 8-K regarding the board’s decision on the say-on-pay vote frequency could result in the company being an untimely filer and ineligible to use Form S-3. Fortunately, the SEC staff indicated in its 2012 “SEC Speaks” conference that it will likely grant waivers to companies if:

  1. they file an amended Form 8-K indicating the board’s decision on the say-on-pay vote frequency; and
  2. the board’s decision on say-on-pay vote frequency followed the shareholder’s recommendation.

However, anecdotal conversations with the SEC staff have indicated that:

  • waivers are not always granted;
  • the board’s decision on say-on-pay vote frequency must match the board’s recommendation in addition to matching the shareholder’s recommendation for a waiver to be granted; and
  • the SEC does not intend to grant waivers forever.

Could This Happen Here?

Last weekend, voters in Switzerland strongly backed a plan giving shareholders unprecedented authority over executive pay.  The Minder Initiative, named after the Swiss businessman who created it, was supported by approximately 68% of Swiss voters.  The measure gives shareholders of Swiss companies the power to approve or block proposed compensation for executives and directors.

Novartis AG and UBS AG are two of the multinational companies listed in Switzerland that will be affected by the Minder proposals.  The proposals now go to the government for legislative drafting.  Implementation is not expected until 2014 at the earliest.

Switzerland has provided a supportive environment for Mr. Minder’s ideas.  In 2008, the Swiss government was forced to bail out UBS, the country’s largest bank.  Also lending support to the success of the Minder Initiative was Daniel Vasella, the departing chairman of Novartis.  He was to receive 72 million Swiss francs ($76 million) over six years as part of his exit.  Novartis went back to the drawing board on Mr. Vasella’s package after it created backlash among the Swiss people.…

SEC Approves SRO Listing Standards Relating to Independence of Compensation Committees

The SEC has approved the listing standard changes relating to compensation committee independence and consultants for both Nasdaq and the NYSE.

The proposed listing standards implement Rule 10C-1 under the Securities Exchange Act of 1934, which was added by the Dodd-Frank Act.

With respect to the Nasdaq listing standard changes, most listed companies will be required to comply with the new rules, but Nasdaq has exempted "smaller reporting companies" from compliance.  First, by July 1, 2013, the listed company must have a formal written charter that provides:

  • The compensation committee will review and reassess the adequacy of the charter on an annual basis;
  • The scope of the committee’s responsibilities and how it carries out those responsibilities, including structure, processes, and membership requirements;
  • The committee’s responsibility for determining or recommending to the board for determination, the compensation of the CEO and all other executive officers of the company, and provide that the CEO may not be present during voting or deliberations on his or her compensation; and
  • The committee’s responsibilities and authority with respect to retaining its own advisers; appointing, compensating, and overseeing such advisers; considering certain independence factors before selecting advisers; and receiving funding from the company to engage them.

The compensation committee may select, or receive advice from, a compensation consultant, legal counsel or other adviser, other than in-house legal counsel, only after taking into consideration the following factors:

  • The provision of other services to the company by the person that employs the compensation consultant, legal counsel or other adviser;
  • The amount

Executive Compensation Strike Suits

Proxy statement disclosures regarding executive compensation may require special attention this year as the plaintiffs’ bar increasingly pursues strike suits alleging inadequate or misleading disclosure. At least 18 such suits were filed in various state courts last year seeking injunction of annual meeting shareholder votes on say-on-pay and votes to increase the authorized share reserve under equity compensation plans. The basis of the allegations is that the proxy statement does not provide all of the information needed for an informed shareholder vote.

Some of these suits have been settled for over $600,000 (despite many commentators asserting the suits are without merit) because the cost of settlement is perceived as less than the cost and consequences of postponing the annual meeting.

It is no coincidence that the suits attack the same types of disclosures that the SEC has long stated are often inadequate, namely compensation data for peer group companies. Commission guidance has consistently stated that when companies engage in “benchmarking,” they must provide meaningful insight into the basis for selecting the peer group of companies, and the relationship between actual compensation paid and the data used to benchmark the peer group. One of the drawbacks of the Commission’s “principles-based” approach to executive compensation disclosure is that each company must decide the material aspects of its benchmarking, which in turn leaves room for strike suits alleging insufficient disclosure.  …

ISS Issues 2013 Draft Policies for Comment

Institutional Shareholder Services Inc. ("ISS") issued its 2013 Draft Policies for review and comment.  These draft policies are intended to update ISS’ benchmark proxy voting guidelines.  The draft policies that have been provided for comment include the following topics:

All comments to the 2013 Draft Policies should be sent to ISS no later than October 31, 2012.…

SEC Files SOX Clawback Case Against Former CEO and CFO of Surgical Products Manufacturer

On Monday, April 2, 2012, the SEC announced that it has filed suit in federal court in Austin, Texas against Michael A. Baker, the former CEO of ArthroCare Corporation, and Michael Gluk, the former CFO, to recover bonus compensation and stock sale profits they received during an accounting fraud at the company. As the SEC pointed out in its press release, the two men "are not charged with personal misconduct, but they are still required under Section 304 of the Sarbanes-Oxley Act to reimburse ArthroCare for bonuses and stock profits that they received after the company filed fraudulent financial statements during 2006, 2007, and the first quarter of 2008."…

Federal Judge in Oregon Upholds Dismissal of “Say-on-Pay” Lawsuit Against Umpqua Board

In an Opinion and Order dated February 23, 2012, Judge Michael Mosman adopted the January 11, 2012 Findings and Recommendations of Magistrate Judge John Acosta to dismiss the derivative lawsuit against the Board of Directors of Umpqua Holdings Corporation ("Umpqua") for breach of fiduciary duty. Magistrate Judge Acosta recommendation to dismiss the say-on-pay" lawsuit was the first of its kind. Judge Mosman agreed that plaintiffs’ failure to make a presuit demand was not excused under the arguments they raised regarding the Board members’ exercise of the business judgment rule or their lack of independence or disinterest. Plaintiffs have until March 26, 2012 to amend their complaint.…

SEC Brings Case Against Indiana Manufacturer and Eight Executives and Accountants for Accounting Fraud at English Subsidiary

On Monday, January 30, 2012, the SEC filed two lawsuits in federal court in Indiana and commenced two administrative proceedings stemming from an accounting fraud scheme at the Thornton Precision Components ("TPC"), which is the Sheffield, England subsidiary of Symmetry Medical Inc. ("Symmetry"), an Indiana-based manufacturer of medical devices and aerospace products. According to the Commission, the accounting fraud at TPC "was so pervasive that it distorted the financial statements of the parent company." In those proceedings, the Commission settled charges with Symmetry and eight individuals, including the parent company’s CEO and the subsidiaries’ outside accountants.…

Federal Magistrate Judge in Oregon Recommends Dismissing “Say-on-Pay” Lawsuit Against Umpqua Board

On January 11, 2012, Magistrate Judge John Acosta recommended the dismissal of the derivative lawsuit against the Board of Directors of Umpqua Holdings Corporation ("Umpqua") for breach of fiduciary duty. The lawsuit was filed after the shareholders, in an advisory vote, rejected the Board-approved executive compensation program. The Magistrate Judge found that the plaintiffs failed to make a presuit demand as required for a derivative suit and were not excused from doing so under the arguments they raised regarding the Board members’ exercise of the business judgment rule or their lack of independence or disinterest. As Broc Romanek of theCorporateCounsel.Net Blog pointed out, "[t]his is the first federal court decision to dismiss such an action." Magistrate Judge Acosta has referred his Findings and Recommendations to District Judge Michael W. Mosman for review and final determination.…

The Top 10 Most Intriguing Federal Securities Litigation Stories in 2011 (Part 1 of 2)

Today and tomorrow, the Federal Securities Litigation Blog will take a break from discussing the most recent events and, with a larger-than-usual entry, examine the Top 10 securities litigation stories that were the most intriguing in 2011. Undoubtedly, others will be preparing similar lists and this is not intended to be a definitive or complete version. Instead, these are the stories that piqued my interest. Half of the list will be discussed today and the other half tomorrow.

Here’s a quick headline look at the bottom half of the Top 10:

10. The D.C. Circuit Vacates SEC Exchange Rule 14a-11 Regarding Shareholders’ Rights to Include Board Nominee on Proxy Materials.

9. The Jenkins Litigation: Settlement Negotiations in Clawback Case Collapse, But Are Ultimately Resolved.

8. The SEC’s Director of the Division of Enforcement Now Has Authority To Issue Witness Immunity Orders.

7. Where is That File? The SEC Addresses Issues Related to the Destruction of Documents and Discovery Issues Relating to their Notes.

6. The FCPA Sting Case: One Hung Jury, One On-Going Trial, A Conspiracy Count Dismissed and More to Come.

These five stories are discussed in greater detail after the jump.…

SEC Settles Clawback Case Against Former CSK Auto Executive at the Second Attempt

On Tuesday, November 15, 2011, the SEC announced that it had reached a settlement with Maynard L. Jenkins, the former chief executive officer of CSK Auto Corporation, who agreed to re-pay approximately $2.8 million of the over $4 million in bonus compensation and stock profits that he received while the company was committing accounting fraud. This settlement, which still most be approved by the Court, comes almost four months after the SEC rejected a previous settlement proposed by its own enforcement staff which would have recovered less than half of the amount sought in the Complaint (as previously discussed here).…

Settlement in Chesapeake Energy Derivative Action: CEO Keeps $75 Million Bonus, But Agrees to Buys Back $12 Million Art Collection

On Wednesday November 2, 2011, several media outlets reported on the details of the settlement in the shareholders derivative action filed against executives of Chesapeake Energy Corporation. The case, which was filed in state court in Oklahoma in April 2009, was on appeal after the claims were dismissed in February 2010. Under the terms of the settlement, CEO Aubrey McClendon, whose compensation in 2008 included a $75 million bonus (following a six-month period where the company’s share price fell from $74 to $16.17 a share), will buy back an art collection which he sold to the company for approximately $12 million in 2008.…

Recent Articles Discuss Two Trends in Securities Enforcement: Increasing Sentences in Insider Trading Cases and the Possible End of An Era in Backdated Options Cases

A pair of articles appeared this week that traced trends in particular areas of securities enforcement. The Wall Street Journal presented data showing an increase in the length of sentences in insider trading cases over the last eighteen years. A second article which appeared in Corporate Counsel suggested that the SEC’s settlement of a case involving back-dated options "may have symbolized the end of an era."…

Ohio Federal Judge Allows Say-on-Pay Lawsuit to Proceed

In a September 20, 2011 Opinion, Judge Timothy Black of the Southern District of Ohio ruled that a lawsuit brought against senior executives and directors of Cincinnati Bell, Inc. alleging a breach of fiduciary duty regarding compensation would be allowed to proceed. The lawsuit focuses on the "say-on-pay" provisions of the Dodd-Frank Act: specifically, attacking the Board’s decision to increase 2010 executive compensation in light of the nonbinding vote by 66% of the voting shareholders to reject that increase. Although the defendants argued that they are entitled to rely upon the business judgment rule in proceeding with the increase in compensation, the Court held that the issue of whether defendants properly exercised that judgment or, as plaintiff claimed, acted with deliberate intent to injure the company (or reckless disregard for the company) would be an issue based on the evidence (at trial or summary judgment) and not decided at the pleading stage.…

Justice Department Announces Settlement With CSK Auto: $20.9 Million Fine and a Non-Prosecution Agreement In Earnings Manipulation Case

On Friday, September 9, the Department of Justice announced that it had entered into a Non-Prosecution Agreement with CSK Auto Corporation, a retailer of automotive parts and accessories which used to be publicly traded, to settle a criminal investigation into alleged securities law violations stemming from a corporate earnings manipulation and double-billing scheme. Under the terms of the agreement, CSK Auto will pay a $20.9 million penalty. The resolution of this matter is the latest in a series of matters being handled by both DOJ and the SEC regarding the events at CSK Auto.…

SEC Settles Clawback Case With the Former CFO of Beazer Homes USA

On August 30, 2011, the SEC announced it had settled a case with James O’Leary, the former CFO of Beazer Homes USA under Section 304 of the Sarbanes-Oxley Act. Section 304’s "clawback" provision requires the reimbursement of compensation from executives under certain circumstances when their companies were in material non-compliance of financial reporting requirements due to misconduct. In Mr. O’Leary’s case, although he was not charged with any misconduct, he has agreed to reimburse $1.4 million he received after fraudulent financial statements were filed.…

Negotiations in SEC Clawback Case Collapse When Commission Rejects Settlement Proposal From Its Own Staff

The SEC’s Commissioners have rejected a proposed settlement to "claw back" a portion of the bonuses and stock sale profits a former CEO received during a period of accounting fraud. The SEC had previously described the case as the first clawback case under the Sarbanes-Oxley Act against an individual who was not alleged to have otherwise violated the securities laws. The negotiations failed when, according to a report in the Washington Post (available here), the SEC rejected the settlement proposed by its own enforcement staff which would have recovered less than half of the amount sought in the Complaint.…

Wall Street Reform Legislation Requires Public Companies to Revise Clawback Policies

President Obama, on July 21, 2010, signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). Although the Act focuses primarily on banking, the Act does contain a section that requires the Securities and Exchange Commission to publish rules that direct the national securities exchanges and associations to prohibit the listing of any security of an issuer that does not develop and implement an appropriate clawback policy.

The Act requires that the SEC rules require the clawback policy to provide that in the event that the issuer is required to restate its financial statements because of a material violation of any financial reporting requirements under the securities’ laws, the issuer will recover from any current or former executive officer who received incentive-based compensation (including stock options) during the 3-year period preceding the date on which the restatement is required, the amount in excess of what would have been paid to the executive officer under the issuer’s restated financial statements. In other words, public companies must recover the difference between the actual pay-out under the original financial statements and the amount payable under the restated financial statements. The Act also requires that companies disclose this clawback policy to shareholders.

The effective date of the Act is July 22, 2010; however, the clawback policy requirement is not fully effective until the SEC publishes its regulations. The SEC currently is suggesting it will publish these rules to be effective for the 2011 proxy season. As such, all public companies …