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January 4, 2008

Chancellor Chandler Elaborates On Special Committee Waiver Ruling

Travis Laster notes: You might recall Chancellor Chandler’s November 30th opinion in Ryan v. Gifford, in which the Chancellor ordered production of communications between a special committee created to investigate option backdating and its counsel. The Chancellor provided two bases for his ruling: first, a traditional “good cause” analysis under Garner v. Wolfinbarger, and second, a more novel analysis in which the special committee was found to have waived privilege by presenting its report orally to the full board, including directors who were the subject of the investigation.

The company (but notably, not the committee or its counsel) sought interlocutory review of the waiver analysis in the November 30th decision. In a new opinion (posted in our “Options Backdating” Practice Area on CompensationStandards.com), the Chancellor denied the application, noting that the company did not challenge the Garner analysis and thus any appeal would be futile.

More importantly, the Chancellor’s new opinion goes into much greater detail regarding the various factors that caused him to find a waiver from the presentation to the full board. These included (i) the lack of Special Committee authority to take action independently of the full board, (ii) the broad scope of the investigation combined with the absence of any written report presenting the committee’s findings, (iii) the fact that directors who were the subject of the investigation had their personal counsel present to hear the report, (iv) the willingness of the company to refer to the committee’s work in public filings and communications with regulatory authorities, and (v) the extensive reliance by the individual defendants on the exculpatory effects of the committee investigation, including in a subsequently withdrawn summary judgment brief.

The Chancellor also takes pains to confirm the narrow scope of his ruling: “[I]t is worthwhile to repeat that the relevant factual circumstances here include the receipt of purportedly privileged information by the director defendants in their individual capacities from the Special Committee. The decision would not apply to a situation (unlike that presented in this case) in which board members are found to be acting in their fiduciary capacity, where their personal lawyers are
not present, and where the board members do not use the privileged information to exculpate themselves. Similarly, the decision would not affect the privileges of a Special Litigation Committee formed under Zapata, or any other kind of committee that (unlike the Special Committee here) has the power to take action without approval of other board members.”

The Chancellor’s ruling thus does much to limit the potentially broad sweep of his earlier and much briefer opinion. Future special committees can still expect to see plaintiffs make waiver arguments based on Ryan, but it should be far easier for counsel to navigate around the waiver problem based on the additional analysis that the Chancellor has now provided.

SEC Staffer Added to Executive Compensation Disclosure Webconference

I’m excited to announce that Mike Reedich, a key member of the SEC’s Division of Corporation Finance’s Executive Compensation Review Team has joined the panel for the first of two webcasts for our upcoming program: “The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!

Since all memberships are on a calendar-year basis, you will need to renew your CompensationStandards.com membership to catch Mike, Dave Lynn, Mark Borges, Ron Mueller and Alan Dye on January 23rd and 31st.

Reaction: The Corporate Library Reports on Compensation Consultants

Here are some thoughts from an anonymous member about Dave’s blog on a study from The Corporate Library finding that companies using compensation consultants tend to pay higher CEO compensation, and such compensation levels do not necessarily relate to increased shareholder returns:

“I cannot help but comment on the The Corporate Library report that you blogged about. I am very concerned about anyone relying on or using the results of The Corporate Library Report. The methodology is so flawed that I seriously question the validity of the report. It also demonstrates a complete lack of understanding of executive compensation practices. For example:

– It combines STIs and cash long-term incentive plans and then measures them as a percentage of base salary, with no reference to the peer groupings. The results could simply be a function of which companies have cash LTIPs in addition to STI plans, the mix of compensation elements at those companies, as well as the revenue sizes of the companies that each consultancy has as clients.
– It tries to measure long-term incentives by vehicle (e.g., stock options separately from performance plans), when the mix of LTI vehicles varies widely from company to company
– It ignores restricted stock grants and performance shares, significant elements of executive pay.
– It ignores the types of clients that the consultancy firms have. For example, some consultancy firms have a higher concentration of high-tech company clients, which generally focus on stock options (e.g., Compensia, Radford).
– It ignores the fact that many companies use 162(m) bonus pools in the Grants of Plan-Based Awards table which distorts what is actually attributable to the incentive plans
– It doesn’t look at total pay
– While detailing the average target value of all performance-related equity awards and average maximum value as a percent of target for nonequity compensation for companies using consulting firms, the Report does not indicate those percentages for companies not disclosing they used compensation consulting firms. Thus, the numbers provide no comparison on which to make a judgment on the effect of compensation consulting firms on this issue.
– It does not acknowledge an obvious finding which is there is not a correlation of higher CEO pay to multi-service firms. In fact, the data appears to support a different conclusion, i.e., higher CEO pay is associated with boutique executive compensation consulting firms. This seems to indicate that independence is not an issue at multi-service firms.
– Finally, we disagree that compensation firms have very different methods of designing executive compensation practices. Our experience is that other factors are much more relevant, including the company’s pay objectives, business strategy, competitive market for talent, life cycle, and culture, than the consulting firm or individual practitioners at those consulting firms.”

– Broc Romanek