March 29, 2005

Severance Arrangements Under Fire after 9th Circuit Decision

Last week, in SEC v. Gemstar-TV Guide International, the 9th Circuit ruled en banc that severance payments – at least those in the 5x base salary range – are “extraordinary payments” under the meaning of Section 1103 of Sarbanes-Oxley. Notably, the concurring opinion proposes that it should be interpreted even more expansive.

The impact of this important decision on executive compensation practices should be felt soon, as compensation committees will want to consider this decision – together with the Section 304 clawback provision – to determine whether they have met their fiduciary obligations. For example, Art Meyers of Palmer & Dodge raises these questions that all compensation committees should now consider:

– Should companies avoid entering into severance arrangements after a restatement?

– Should compensation agreements provide for an automatic freeze if there is a

– Is this yet another reason why comp committees should hire consultants to determine in advance what similar performing peer group companies are doing?

– If a company agrees to limit its severance to 2.99x base salary plus bonus unless shareholder approval is obtained – as many institutional investors are now demanding – does that create a de facto “safe harbor” for purposes of 1103?

We will continue to post practice pointers on these questions on in our “Severance Arrangements” and “Clawback Provisions” Practice Areas. The 9th Circuit decision is available in the “Comp Litigation” Portal.

ISS Issues 52 FAQs on its Compensation Policies

To further help companies – and investors – understand how it intends to recommend votes on compensation issues, ISS issued these 52 FAQs last week.

Audit Fees Continue Their Upward Trend

According to an article in Friday’s WSJ, a survey comprising of most of the Dow 30 revealed a 40% increase in audit fees disclosed compared to the prior year. Part of that increase is because internal control costs are now included in the “audit fee” bucket rather than “audit-related,” but the overall trend of rising audit fees should come as no surprise.

My Podcasting Experiment

Probably because I love the microphone so much, I am dying to get in on the ground floor of “podcasting.” Heavily covered in the NY Times during the past month, podcasting is merely the posting of a series of audio files. Probably to make it seem more glamorous, the media likens podcasts to radio broadcasting.

Not anything of substance, here is my inaugural podcast. The ones to follow will be in the form of audio interviews with experts on hot and interesting topics – perhaps with occasional dalliances off-the-beaten path – wonder what Johnny Depp is doing?