Pay Ratio in Haiku
Illustration by Tyler Letkeman

As reported by Broc Romanek in his recent blog post, the SEC recently posted five new CDIs related to the CEO pay ratio rules contained in Item 402(u) of Regulation S-K. In order to provide a very brief summary in a fun way, I’ve composed five haikus addressing the substance of each of the newly released interpretations. Enjoy!

 

 

 

 

 

Question 128C.01

A “CACM”
That reasonably reflects pay
Can be utilized

Question 128C.02

Hourly pay rates
Can we use to calculate?
No! These will not work

Question 128C.03

To calculate it
You must use recent data
90-day limit

Question128C.04

Furloughed employees?
You must include them too, but
Use annualized pay

Question 128C.05

What about ICs?
Ignore classification
If you set their pay

Photo by Patricia J. Lovelace © All rights reserved
Photo by Patricia J. Lovelace © All rights reserved

This week, the SEC published a series of new Compliance and Disclosure Interpretations (“CDIs”) related to the newly revised Regulation A, which became effective on June 19, 2015. While many of the new CDIs addressed procedural and interpretational issues under the new rules, there was an important development that could make Regulation A that much more useful for companies.

The positive news comes in the form of the SEC staff’s response to Question 182.07 which asks whether issuers would be able to use Regulation A in connection with merger or acquisition transactions that meet the criteria for Regulation A in lieu of registering the offering on an S-4 registration statement. Based on the SEC’s final adopting release, it did not appear that Regulation A would be available for use in these types of business combination transactions. However, the interpretation published yesterday clarifies that issuers may, in fact, use Regulation A in connection with mergers and acquisitions. The one exception is that Regulation A would not be available for business acquisition shelf transactions that are conducted on a delayed basis.

This is a very positive development for issuers that want to issue equity in connection with acquisitions of other companies, but do not wish to become a public reporting company under the Exchange Act. Previously, these issuers had very few Continue Reading More Positive Regulation A News

Director fiduciary dutiesA recent case out of the Delaware Court of Chancery could result in heightened scrutiny of equity award grants to non-employee directors. Although this decision was rendered at the procedural stage of the case and the merits of the claims have yet to be fully analyzed, this case potentially affects directors of Delaware companies and those advising them on compensation-related matters.

In this case, a stockholder of Citrix, Inc. (“Citrix”) brought a derivative lawsuit against the Citrix board of directors alleging a number of things, including breach of fiduciary duty by the board of directors in awarding significant equity compensation awards. Specifically, the plaintiff alleged that restricted stock units (“RSUs”) granted to non-employee directors (who constituted eight of the nine Citrix board members) under the Citrix equity incentive plan, were excessive.

Because the non-employee directors who received the RSU grants in question constituted eight of the nine members of the Citrix board of directors, the plaintiff was successfully able to rebut the business judgement rule presumption and the defendants bear the burden of proving to the court’s satisfaction that the RSU grants were the product of both fair dealing and fair price (i.e., the “entire fairness” standard of review).

The defendants argued that Continue Reading Chancery Court Holds Board to Heightened Fiduciary Duty Standard in Connection with Equity Awards

Is the SEC making a wrong turn by regulating corporate governance?
Photo by doncarlo

In the wake of the recent financial crisis, the Dodd-Frank Act created the SEC Investor Advisory Committee with the stated purpose of advising the SEC on (i) regulatory priorities of the SEC; (ii) issues relating to the regulation of securities products, trading strategies, and fee structures, and the effectiveness of disclosure; (iii) initiatives to protect investor interest; and (iv) initiatives to promote investor confidence and the integrity of the securities marketplace. In other words, the committee is to advise on matters historically within the purview of federal securities laws. While this is fine and good, there is some indication that the SEC may again be considering the use of disclosure rules to indirectly regulate matters that are not federal securities law matters (see, e.g., conflict mineral rules, Iran-related disclosure rules, CEO pay ratio disclosure rules, etc.).

The new potential area of regulation for the SEC may be internal corporate affairs. The committee’s agenda for the October 9, 2014 meeting of the SEC Investor Advisory Committee will include a discussion of Continue Reading Wrong turn?: Is the SEC looking to further expand its regulatory jurisdiction through the disclosure process?

Should you incorporate in Delaware or Florida?There is an attraction for companies to incorporate in Delaware, likely due to the abundance of well-known publicly traded corporations that have chosen to incorporate there. However, it is not necessarily true that the Delaware General Corporation Law (“DGCL”) is better than corporate laws of other states; it is just more developed due to the abundance of case law interpreting it. This usually provides for greater certainty, which is often looked upon favorably by not only directors and management, but investors as well. On the other hand, it is generally more expensive to incorporate and maintain a Delaware corporation. Unless your company has a physical presence in Delaware, you’ll need to pay for a registered agent who is physically located in the state and who can accept service of process on behalf of your company. Delaware also imposes a franchise tax based on a corporation’s capitalization, which is generally higher than similar fees and taxes imposed by other states (for example, Florida’s annual report fee, the only corporate fee that is required to be paid to the state each year to maintain corporate status, is only $150). 

Thus, while there may be good reasons for incorporating or reincorporating in Delaware (e.g., because a private equity investor requires it as a condition for investment), the costs of using a Delaware corporation are probably not justified Continue Reading Delaware vs Florida: Where should you incorporate?

Fee shifting bylaws moved to back burner
Photo by Sharon Drummond

In a case of first impression, the Delaware Supreme Court held that provisions contained in a nonstock corporation’s bylaws, requiring a plaintiff stockholder to reimburse the corporation’s legal expenses if the plaintiff loses on a claim it has brought against the corporation, are facially valid if adopted properly and for a proper purpose (i.e., not for the purpose of deterring meritorious litigation). The court reached its conclusion in its May 8, 2014 decision based on the following factors and analysis: 

  • the Delaware General Corporation Law (“DGCL”) and other Delaware statutes did not forbid the enactment of fee-shifting bylaws;
  • the fee-shifting bylaw related to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees because it related to the allocation of risk in connection with intra-corporation litigation (DGCL § 109(b)); 
  • a provision for fee-shifting was not required to be included in the charter and could therefore be adopted in the bylaws (DGCL § 102(a)); and 
  • because the Delaware Supreme Court has held that bylaws are treated as contracts among a corporation’s stockholders, it was permissible to modify the American attorney’s fees rule (i.e., that each party in litigation bears its own costs and expenses) by adopting a fee-shifting bylaw. 

Because of the statutory basis of the court’s decision, the holding was presumed to also apply to ordinary stock corporations. Thus, a fee-shifting bylaw would likely allow Delaware corporations to require the loser of an intra-corporate lawsuit to pay the corporation’s attorney expenses. 

In response to the Delaware Supreme Court’s ruling, the Delaware State Bar Association (with significant plaintiff’s attorney membership) was considering a proposed amendment to the DGCL would amend Section 102(b)(6) and add a new Section 331 to clarify that these costs cannot be borne by stockholders of stock corporations. The proposed legislation was expected to be presented to the Delaware General Assembly before the end of the current session and, if passed, would have become effective on August 1, 2014. 

However, in a recent development, Continue Reading Fee-shifting bylaw proposal moved to the back burner pending further investigation

Golden leashes
Photo by Don Urban

The compensation disclosure rules contained in Regulation S-K are intended to provide meaningful disclosure regarding an issuer’s executive and director compensation practices such that the investing public is provided with full and fair disclosure of material information on which to base informed investment and voting decisions. However, as we pointed out in a blog from last year, not all compensation is covered by these rules, including compensation paid to directors by third parties (e.g., by a private fund or activist investors). These arrangements are commonly known as “golden leashes.”  The two examples I discussed previously related to proxy fights involving Hess Corporation and Agrium, Inc. In each case, hedge funds had proposed to pay bonuses to the director nominees if they were ultimately elected to the board of directors in their respective proxy contests. Additionally, in the Agrium, Inc. case, the director nominees would have received 2.6% of the hedge fund’s net profit based on the increase in the issuer’s stock price from a prior measurement date. The amounts at issue could have been significant considering this particular hedge fund’s investment in Agrium, Inc. exceeded $1 billion, but none of the nominees were ultimately elected to the Agrium, Inc. board.

Considering the large personal gains these director nominees could potentially realize under these types of arrangements, it could pose a problem from a corporate governance standpoint as it is a long-standing principal of corporate law that directors are not permitted to use their position of trust and confidence to further their private interests. Recognizing this potential problem, the Council of Institutional Investors (“CII”), a nonprofit association of pension funds, other employee benefit funds, endowments and foundations with combined assets that exceed $3 trillion, recently wrote the SEC asking for a review of existing proxy rules “for ways to ensure complete information is provided to investors about such arrangements.”

In its letter, the CII points out that existing disclosure rules do not “specifically require disclosure of compensatory arrangements between a board nominee and the group that nominated such nominee.” The CII believes that disclosure related to these types of third party director compensation arrangements are material to investors due to the potential Continue Reading Institutional investor organization asks the SEC to require disclosure of "golden leashes"

Golden leashes
Photo by Don Urban

The compensation disclosure rules contained in Regulation S-K are intended to provide meaningful disclosure regarding an issuer’s executive and director compensation practices such that the investing public is provided with full and fair disclosure of material information on which to base informed investment and voting decisions. However, as we pointed out in a blog from last year, not all compensation is covered by these rules, including compensation paid to directors by third parties (e.g., by a private fund or activist investors). These arrangements are commonly known as “golden leashes.”  The two examples I discussed previously related to proxy fights involving Hess Corporation and Agrium, Inc. In each case, hedge funds had proposed to pay bonuses to the director nominees if they were ultimately elected to the board of directors in their respective proxy contests. Additionally, in the Agrium, Inc. case, the director nominees would have received 2.6% of the hedge fund’s net profit based on the increase in the issuer’s stock price from a prior measurement date. The amounts at issue could have been significant considering this particular hedge fund’s investment in Agrium, Inc. exceeded $1 billion, but none of the nominees were ultimately elected to the Agrium, Inc. board.

Considering the large personal gains these director nominees could potentially realize under these types of arrangements, it could pose a problem from a corporate governance standpoint as it is a long-standing principal of corporate law that directors are not permitted to use their position of trust and confidence to further their private interests. Recognizing this potential problem, the Council of Institutional Investors (“CII”), a nonprofit association of pension funds, other employee benefit funds, endowments and foundations with combined assets that exceed $3 trillion, recently wrote the SEC asking for a review of existing proxy rules “for ways to ensure complete information is provided to investors about such arrangements.”

In its letter, the CII points out that existing disclosure rules do not “specifically require disclosure of compensatory arrangements between a board nominee and the group that nominated such nominee.” The CII believes that disclosure related to these types of third party director compensation arrangements are material to investors due to the potential Continue Reading Institutional investor organization asks the SEC to require disclosure of "golden leashes"

Golden leashes
Photo by Don Urban

The compensation disclosure rules contained in Regulation S-K are intended to provide meaningful disclosure regarding an issuer’s executive and director compensation practices such that the investing public is provided with full and fair disclosure of material information on which to base informed investment and voting decisions. However, as we pointed out in a blog from last year, not all compensation is covered by these rules, including compensation paid to directors by third parties (e.g., by a private fund or activist investors). These arrangements are commonly known as “golden leashes.”  The two examples I discussed previously related to proxy fights involving Hess Corporation and Agrium, Inc. In each case, hedge funds had proposed to pay bonuses to the director nominees if they were ultimately elected to the board of directors in their respective proxy contests. Additionally, in the Agrium, Inc. case, the director nominees would have received 2.6% of the hedge fund’s net profit based on the increase in the issuer’s stock price from a prior measurement date. The amounts at issue could have been significant considering this particular hedge fund’s investment in Agrium, Inc. exceeded $1 billion, but none of the nominees were ultimately elected to the Agrium, Inc. board.

Considering the large personal gains these director nominees could potentially realize under these types of arrangements, it could pose a problem from a corporate governance standpoint as it is a long-standing principal of corporate law that directors are not permitted to use their position of trust and confidence to further their private interests. Recognizing this potential problem, the Council of Institutional Investors (“CII”), a nonprofit association of pension funds, other employee benefit funds, endowments and foundations with combined assets that exceed $3 trillion, recently wrote the SEC asking for a review of existing proxy rules “for ways to ensure complete information is provided to investors about such arrangements.”

In its letter, the CII points out that existing disclosure rules do not “specifically require disclosure of compensatory arrangements between a board nominee and the group that nominated such nominee.” The CII believes that disclosure related to these types of third party director compensation arrangements are material to investors due to the potential Continue Reading Institutional investor organization asks the SEC to require disclosure of “golden leashes”

Section 108 of the Jump Start Our Business Startups Actrequired the

Study states more studies required - similar to a punt?
Photo by Duke University Archives

SEC to undertake a study of the disclosure requirements of Regulation S-K. Specifically, the statute mandated that the SEC shall:

conduct a review of its Regulation S-K to—

  1. comprehensively analyze the current registration requirements of such regulation; and
  2. determine how such requirements can be updated to modernize and simplify the registration process and reduce the costs and other burdens associated with these requirements for issuers who are emerging growth companies.

In addition, the JOBS Act required that the SEC report to Congress its specific recommendations on how to streamline the registration process in order to make it more efficient and less burdensome for prospective issuers who qualify as emerging growth companies.

That report was released not too long ago on December 20, 2013. However, it seems like the Commission elected to punt on the second part of the legislative mandate (i.e., to provide specifics), at least for now. Unfortunately, as is so often the case with governmental studies, the primary recommendation by the SEC Staff was to conduct further studies and investigations.  While disclosure reform is complex (and may be politically charged), further studies is not what investors or the capital markets need.  Too much money is spent on preparing duplicative and meaningless disclosures.

The report describes in great detail the history and evolution of the disclosure requirements contained in Regulation S-K – the primary source of disclosure requirements for registration statements and periodic reports filed by public companies with the SEC. All of this is well and good for government regulation historians and SEC buffs, but it provides nothing of real value to companies that are or may become subject to these rules and requirements. However, the report provides no real useful guidance to Congress (which may be the point if the SEC would rather control the reform process itself rather than have Congress control the process). Presumably, Congress had included this section in the JOBS Act for a specific purpose: Continue Reading 4th and 108, SEC elects to punt on Regulation S-K disclosure reform