TheCorporateCounsel.net

October 6, 2011

More Compensation Lawsuits: This Time Relating to Section 162(m) Disclosures

From his “Melbinger’s Compensation Blog” on CompensationStandards.com, Mike Melbinger provides us with this news:

In all the “excitement” over the recent epidemic of lawsuits over say on pay, I want to be sure that companies and their advisers do not overlook another type of shareholder derivative lawsuit being filed based on executive compensation and company performance. Like the Shareholder Say on Pay suits, the merits of these suits are highly questionable. However, fighting them can cost firms significant time and money, to say nothing of the embarrassment and bad publicity stemming from a firm being sued over its compensation practices.

In a similar vein to the SOP lawsuits, we have seen a reappearance of shareholder derivative suits based on companies’ Code Section 162(m) disclosures in the proxy statement. The 162(m) lawsuits generally allege that the company’s proxy disclosures of the performance goals and/or its claims to follow a pay-for-performance philosophy are false and misleading. Paralleling the SOP suits, the 162(m) suits further allege that because the disclosures are inadequate, the compensation in question is non-deductible and, therefore, it constitutes corporate waste, unjust enrichment of the executives, and a breach of the directors’ duty of loyalty.

In April 2011, plaintiffs’ lawyers filed a shareholder derivative (“strike”) lawsuit (Abrams v. Wainscott) against AK Holdings alleging that its 2010 proxy statement contained false or misleading statements concerning compliance with Section 162(m)(here’s the complaint). AK Holdings’ 2010 proxy statement sought stockholders’ approval of its Long Term Performance Plan and its Stock Incentive Plan, both of which the proxy claimed provided compensation to executives that was tax-deductible under Section 162(m). The complaint alleges that, while the shareholders had approved these compensation plans, portions of the plans allowed too much discretion to increase compensation and thus did not in fact comply with the tax deductibility requirements of Section 162(m). The complaint also alleged that the company would have paid this compensation regardless of the result of the stockholder vote, an interesting allegation considering that the shareholder vote in fact approved the compensation package.

In July, the US District Court for the District of Delaware allowed a similar shareholder derivative suit, Hoch v. Alexander, to continue against the officers and directors of Qualcomm, alleging that they issued a false or misleading proxy statement regarding the 162(m) tax-deductible status of executives’ compensation (here’s the court order).

We’re only a few weeks away from our upcoming pair of say-on-pay conferences (one regarding disclosure and one regarding pay practices – both combined for one price) – so come join 2000 of your colleagues in San Francisco. Or join the thousands more watching live (or by archive) online – and receive a load of practical guidance and prepare for what is promising to be a challenging proxy season. Register now.

Front-Page Article: Perils of Peer Group Benchmarking

On Tuesday, the Washington Post ran this lengthy article criticizing peer group benchmarking on the front page, in the upper left corner. The piece is well worth a read.

With an election year upon us and the unemployed becoming more willing to be vocal about perceived inequalities, I imagine we are going to see much more media attention to the processes by which CEO pay is set. Although much progress have been made over the past decade in corporate governance generally – and CEO pay specifically – I believe we are still in the infancy of the governance reforms that ultimately need to be made. There still are way too many stories of excesses – and not just by “outliers.” And as we’ve been saying all along, the overreliance on peer group surveys is one of the biggest adjustments that boards need to make…

Say-on-Pay and Smaller Reporting Companies

Here’s some good stuff from Mark Borges that he recently blogged in his “Proxy Disclosure Blog” on CompensationStandards.com:

A member inquiry came into the CompensationStandards.com “Q&A Forum” last week seeking data on how many smaller reporting companies had complied with the Dodd-Frank Act shareholder advisory votes on executive compensation (the “Say on Pay” vote and the Frequency vote) this year.

As you know, in late January, the SEC postponed compliance with these two votes for SRCs until 2013. Nonetheless, there were a number of SRCs that had filed their proxy materials prior to this announcement that contained proposals for the two votes. And, in spite of the Commission’s relief, most of those companies (although not all) proceeded to conduct the votes at their annual meetings.

In addition, a handful of SRCs that filed their proxy materials after the SEC announcement included the shareholder advisory votes on a “voluntary” basis (query whether they are obligated to hold a vote next year (if their shareholders expressed a preference for annual “Say on Pay” votes, or can “pass” until 2013).

While I haven’t been scrupulously looking for and identifying SRCs when I look for companies that are conducting the Dodd-Frank Act votes, I do note such companies when I see them. So here’s an admittedly incomplete picture of the smaller reporting companies that have conducted (or are conducting) a “Say on Pay” vote and a Frequency vote this year.

Smaller reporting companies that filed their proxy materials before the SEC issued its final “Say on Pay” rules

I identified 49 SRCs that filed proxy materials containing the two shareholder advisory votes before the SEC issued its final “Say on Pay” rules. All of these companies that followed through and conducted a “Say on Pay” vote had the proposal approved. Apparently, five of these companies scrapped the vote after the SEC rules were issued, as they reported their annual meeting voting results but no Say-on-Pay (or Frequency vote) results.

As for the Frequency vote,

– 11 companies filed proxy materials recommending annual Say-on-Pay votes. Ten of these companies saw their shareholders express a preference for future Say-on-Pay votes to be held annually. One company saw its shareholders express a preference for future Say-on-Pay votes to be held biennially.

– Two companies filed proxy materials recommending biennial Say-on-Pay votes. Both saw their shareholders express a preference for future Say-on-Pay votes to be held biennially.

– 34 companies filed proxy materials recommending triennial Say-on-Pay votes. Twenty-seven of these companies saw their shareholders express a preference for future Say-on-Pay votes to be held triennially. Two company saw their shareholders express a preference for future Say-on-Pay votes to be held annually. And, as noted above, five companies appear to have not conducted the vote at all.

– Two companies filed proxy materials with no recommendation on future Say-on-Pay votes. One saw its shareholders express a preference for future Say-on-Pay votes to be held biennially and other saw its shareholders express a preference for future Say-on-Pay votes to be held triennially.

Smaller reporting companies that filed their proxy materials after the SEC issued its final “Say on Pay” rules

So far, I have identified 23 SRCs that have filed proxy materials containing the two shareholder advisory votes since the SEC issued its final “Say on Pay” rules. Once again, I haven’t been tracking this particular item all that closely, so the actual number of SRCs that have conducted or are conducting the votes on a “voluntary” basis is, in all probability, slightly higher than this figure. As with the earlier group, all of these companies have had their “Say on Pay” proposal approved.

As for the Frequency vote,

– Six companies filed proxy materials recommending annual Say-on-Pay votes. Five of these companies have seen their shareholders express a preference for future Say-on-Pay votes to be held annually. One company has not yet reported its voting results.

– One company has filed proxy materials recommending biennial Say-on-Pay votes. This company has not yet reported its voting results.

– 13 companies filed proxy materials recommending triennial Say-on-Pay votes. Ten of these companies have seen their shareholders express a preference for future Say-on-Pay votes to be held annually. Three companies have not yet reported their voting results.

– Three companies filed proxy materials with no recommendation on future Say-on-Pay votes. Two of these companies have seen their shareholders express a preference for future Say-on-Pay votes to be held triennially and one has seen its shareholders express a preference for future Say-on-Pay votes to be held annually.

Final Thoughts

What does this data mean? Well, at least 67 SRCs have conducted “Say on Pay” votes this year, which is less than 3% of all the proxy statements that have been filed so far with the two Dodd-Frank Act shareholder advisory votes. As you might expect from smaller companies, all of the “Say on Pay” votes were approved; most with 85% – 90% shareholder support. I’ve seen only a couple of instances where the vote was close.

Second, as you also might expect, for the most part, companies that recommended that future “Say on Pay” votes be held every two or three years saw their shareholders agree with the recommendation (95%). This is in contrast with non-SRCs, where the company and shareholders agreed on this point only about half the time.

So even while almost three-quarters of the companies that held “Say on Pay” votes this year will be holding their next vote in 2012, about 60% of the SRCs that conducted votes this year will be sitting out this item next year.

Finally, here’s another query to chew on: of the 37 companies where shareholders expressed a preference for triennial “Say on Pay” votes (consistent with the company’s recommendation), will their next “Say on Pay” vote be in 2014, or, consistent with the SEC’s vision for transitioning SRCs into compliance, will they be required to hold a vote in 2013 (essentially, mimicking the requirement that applied this year to all non-SRCs)?

– Broc Romanek