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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"

Nasdaq reverses course on independence standardsApparently, corporate governance cannot be dictated by the stock exchanges.  As we had blogged about last year, Section 952 of Dodd-Frank required each national securities exchange to review its independence standards for directors who serve on an issuer’s compensation committee.  Each national securities exchange had to ensure that its independence definition considered relevant factors…

forum selection bylawsMore and more plaintiff lawyers are suing issuers outside of an issuer’s state of incorporation, which requires issuers to defend substantially identical claims in multiple forums at added expense with little to no benefit to the shareholders.  While plaintiff lawyers enjoy this lucrative source of revenue, the increasing amount of time and money expended on this multiforum shareholder litigation drives the need for a creative solution for issuers.  A 2010 Delaware court decision, provided such a solution by suggesting that Delaware corporations could amend their organizational documents to provide that Delaware courts are the exclusive jurisdiction for settling intracorporate disputes, including derivative claims.  Thus, dozens of issuers have adopted so called “forum selection” clauses in their bylaws.  Generally, these clauses are similar to Chevron’s:

Unless the Corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be a state or federal court located within the state of Delaware, in all cases subject to the court’s having personal jurisdiction over the indispensible parties named as defendants. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article VII.

And while the 2010 Delaware court decision suggested these clauses were permissible, it was not until earlier this year that a Delaware court specifically ruled that the forum selection clause adopted by Chevron was valid. Although the Delaware Supreme Court hasn’t ruled on the issue (the plaintiff dropped its appeal in the Chevron case), it is clear that Delaware corporations have the power to adopt these forum selection clauses.  What is not clear is
Continue Reading Do forum selection clauses in bylaws make sense for companies not incorporated in Delaware?

Protecting your board from shareholder lawsuits when you announce a dealFor a board of directors of a company, perhaps no decision is as important (and litigious) as the sale of the company in a change-of-control transaction. Shareholder lawsuits aimed at merger and acquisition (“M&A”) transactions (usually in the form of a putative shareholder class action or derivative suit) often allege that the directors of the acquisition target company breached their fiduciary duties in approving the transaction in question, and name the acquiring company and other defendants as aiders and abettors of the fiduciary violation. In support of their claim, the plaintiffs typically assert one, all, or a few of the following:

  • Transaction price is inadequate,
  • Directors failed to exercise due care to maximize the price being offered,
  • Transaction is coercive to shareholders because of so-called deal protection measures included in the agreements,
  • Public disclosures associated with the transaction are inadequate or misleading, and/or
  • Some or all of the directors have some form of conflict of interest.

The rationale for shareholder litigation generally stems from the idea that managerial agency costs are high, and that class actions and derivative suits are key shareholder monitoring mechanisms necessary to keep managers in line. On the other hand, representative litigation claims are often lawyer-driven, reflecting the agency costs that arise out of contingency fee suits that make the lawyer the real party in interest in these cases. In any event, the fact is that shareholder litigation in the United States has exploded in recent years. According to one study, in 2012, shareholders challenged 93 percent of M&A deals valued over $100 million and 96 percent of transactions valued over $500 million.

And while the deferential business judgment rule (i.e., the presumption that the directors’ actions were informed and taken in the good-faith belief that the actions were in the company’s best interests) generally enables directors to
Continue Reading Protect your Board from merger and acquisition lawsuits with these five critical considerations

SEC wants you to confessSEC Chair Mary Jo White has indicated that the SEC will require that, in certain cases, admissions be made as a condition of settling rather than permitting the defendant to “neither admit nor deny” the allegations in the complaint of its enforcement action.  The move marks a departure from the typical practice at the SEC and many other civil federal regulatory agencies of allowing defendants to settle cases without admitting or denying the charges.  The policy of allowing defendants to neither admit nor deny the allegations has been increasingly criticized for its inherent lack of transparency regarding both the alleged wrongdoing and the corresponding disgorgement and forfeiture penalties.

According to White, the new policy will apply only in select cases, such as those where there is egregious conduct and/or wide spread public interest. While the precise parameters of the new policy have not been specified, White did note that the new policy would be applied on a case by case basis and that for most cases currently settling, the old policy would still apply.

Debate about the old policy began about two years ago, when Judge Jed S. Rakoff rejected a $285 million settlement that the SEC negotiated with Citigroup, in part because the deal included “neither admit nor deny” language.  The SEC has appealed, and the case is pending before a panel of the U.S. Second Circuit Court of Appeals. Since then, a handful of other judges have voiced their discomfort with allowing defendants to pay fines without admitting liability.

In previously defending the old policy, the SEC has argued that most defendants would refuse to settle if they had to admit wrongdoing.  Essentially, companies and executives would rather fight in court than admit liability and face additional liability in parallel civil lawsuits, as well as the added difficulty of losing director and officer indemnification coverage which often pays the legal fees for corporate officers (a benefit which can be lost if
Continue Reading It was me! SEC to toss “neither admit nor deny” policy in certain cases

SEC wants you to confessSEC Chair Mary Jo White has indicated that the SEC will require that, in certain cases, admissions be made as a condition of settling rather than permitting the defendant to “neither admit nor deny” the allegations in the complaint of its enforcement action.  The move marks a departure from the typical practice at the SEC and many other civil federal regulatory agencies of allowing defendants to settle cases without admitting or denying the charges.  The policy of allowing defendants to neither admit nor deny the allegations has been increasingly criticized for its inherent lack of transparency regarding both the alleged wrongdoing and the corresponding disgorgement and forfeiture penalties.

According to White, the new policy will apply only in select cases, such as those where there is egregious conduct and/or wide spread public interest. While the precise parameters of the new policy have not been specified, White did note that the new policy would be applied on a case by case basis and that for most cases currently settling, the old policy would still apply.

Debate about the old policy began about two years ago, when Judge Jed S. Rakoff rejected a $285 million settlement that the SEC negotiated with Citigroup, in part because the deal included “neither admit nor deny” language.  The SEC has appealed, and the case is pending before a panel of the U.S. Second Circuit Court of Appeals. Since then, a handful of other judges have voiced their discomfort with allowing defendants to pay fines without admitting liability.

In previously defending the old policy, the SEC has argued that most defendants would refuse to settle if they had to admit wrongdoing.  Essentially, companies and executives would rather fight in court than admit liability and face additional liability in parallel civil lawsuits, as well as the added difficulty of losing director and officer indemnification coverage which often pays the legal fees for corporate officers (a benefit which can be lost if
Continue Reading It was me! SEC to toss "neither admit nor deny" policy in certain cases

Director Pay Practices

Since 2007, executive compensation practices of public companies have been at the forefront of activist shareholders’ and shareholder rights groups’ agendas. Mandatory say-on-pay proposals, enhanced executive compensation disclosure, compensation committee and compensation consultant independence rules are just a few of the recent significant changes to the laws and regulations applicable to public companies in the U.S. Moreover, as we reported in prior blogs, some countries have gone as far as making say-on-pay proposals binding on public companies. In fact, just this year, Switzerland amended its constitution to require binding shareholder say-on-pay votes and other executive compensation limitations for its public companies (also check out Broc Romanek’s blog for a collection of articles related to this topic). However, while public company executives have been in the crosshairs, little attention, if any, has been given to compensation of public company directors.

But that may change as a result of certain director pay practices highlighted by a recent NY Times Deal Book article by Steven Davidoff. The article focuses on two current proxy fights involving hedge funds attempting to get their proposed nominees elected to the boards of Hess Corporation and Agrium Inc. In the first case, the nominating hedge fund is proposing to pay a $30,000 bonus to any of its nominees who ultimately win a seat on the Hess board. Additionally, each such nominee would be eligible to earn a performance bonus based on share performance relative to its peer group. Based on the performance award formula, the maximum potential payout could be as much as $9 million if Hess outperforms its peer group by 300% over a three-year measuring period.

The second case is potentially even more lucrative for the director nominees. In addition to a $50,000 bonus each nominee would receive if elected,  they would also receive 2.6% of Jana Partners’ net profit based on the stock closing price on September 27, 2012. Director nominees not elected would still receive 1.8% of the net profit during that same period. Considering Jana’s total investment in Agrium is over $1 billion, the earning potential could be significant. However, based on the results of the Agrium annual meeting held on April 9, it appears that none of these Jana nominees were elected to the Agrium board this time around.

These arrangements pose some interesting questions from a corporate governance standpoint. Historically, directors
Continue Reading Will director compensation be the next target?

Independent ChairmanAre the CEO and the Chairman of the Board the same executive at your company?  While there can be very good reasons to have these positions held by the same person, the separation of these posts continues to be a hotly debated topic.  Since the early 1980s, much attention has been paid to corporate boards of directors and how their structures improve (or undermine) organizational performance. In the wake of the recent financial crisis, public corporations have come under scrutiny from activist shareholders, institutional investors, advisory firms and regulators alike.  So naturally, this is the source of the debate over the separation of the CEO and Chairman positions. 

According to the ISS Governance Exchange, in 2012, investors filed 49 independent chair proposals, with more than three-quarters coming to a vote, including three that received majority support.  As of February 1, 2013, this year’s volume of filings now exceeds last year’s total with 53 firms targeted by shareholders seeking a split of the top posts, with additional filings likely at companies meeting later in the year.  Notably, the record for such proposals was set in 2010, with a total of 66. 

Proponents of CEO and Chair independence base their view on the inherent system of checks and balances that the Board, and particularly the Board’s Chairman, is supposed to impose on management.  Essentially, a firm’s Board and Chairman of the Board serves to hire, fire, evaluate and compensate management (including the CEO) based on performance.  Clearly then, these proponents argue, a single CEO and Chairman cannot perform these tasks apart from his or her personal interests, making it more difficult for the Board to perform its critical functions, if and when the CEO is its Chairman.  Accordingly, separation of the Chairman and CEO roles, can lead to better management and oversight because an independent Chairman is able to ensure that the board is fully engaged with strategy and to evaluate how well that strategy is being implemented by management. Importantly, appointment of an independent Chairman can also signal to all stakeholders that the CEO is accountable to a unified Board with a visible leader. 

But while largely helpful from a corporate governance standpoint, one must note that the separation of CEO and Chair positions can impose several costs on a firm.  First, while appointing an outside Chairman can reduce the agency costs of controlling a CEO’s behavior, such an appointment introduces
Continue Reading Separating the positions of CEO and Chairman: The debate rages on

Resolutions by in-house counsel for 2013As we start 2013, I thought it would be fun to ask in-house counsel what their New Year’s resolutions were.  I wasn’t looking for the usual “go to the gym more/ lose weight/ get organized” type answers, but rather what corporate secretaries/ securities counsel would want to improve upon in 2013 in their professional lives.  I heard back from a variety of in-house counsel, some of whom wish to remain anonymous.  Many had similar types of goals for this year.  I want to thank Bob Lamm, Assistant General Counsel and Assistant Secretary at Pfizer Inc., and Stacey Geer, Senior Vice President and Associate General Counsel at Primerica, Inc., both of whom were especially helpful in coming up with this list.  Here are the top resolutions submitted by in-house counsel:

Refresh the board and committee self-evaluation process.  Now is a good time to refresh the board and committee self-evaluation process.  If your board and committees are like most, they may be “bored” with the process by now.  By asking the same questions every year, eventually the process becomes stale and the answers become predictable.  Rather than have the directors complete the same survey consider changing the questions, or better yet, having a third party facilitate the evaluation process.  Remember to set aside some time to discuss the evaluation because the discussion of the evaluation is the most important part of the process. 

Tweak your director orientation program.  A good director orientation program allows new board
Continue Reading Starting the New Year off right: In-house counsel disclose their New Year’s resolutions