August 1, 2012

Sleeper: New York Proposes Limiting Executive Compensation of State-Supported Entities

On’s “The Advisors’ Blog,” I’ve blogged a few times about these NY proposals that are a sleeper for many more companies than you would think. One of our members found it a bit challenging to try to explain in simple terms why this Executive Order and the promulgating agency regs are so problematic from the viewpoint of the corporate community – so she put together the Q&As below:

Q1. My company is incorporated in Delaware, and this is a New York Executive Order — so this does NOT apply to my company, right?

A1. Wrong. The Executive Order applies to service providers that receive NY state funds or NY state-authorized payments — regardless of where the companies are incorporated or headquartered.

Q2. But my company is public, and it does not provide health care or similar services — so this does NOT impact my company, right?

A2. Wrong. The problem with the Executive Order and the proposed regulations is that many terms are either undefined or ill-defined, and the scope is potentially broad enough to cover any entity — including public companies — that receive NY state funds to provide any services. For example, companies that provide technology services, energy services, consulting services or financial services to New York State could be impacted.

Q3. If this applies to my company, what does it mean?

A3. There are three major items that companies reviewing the Executive Order and proposed regulations are concerned about:

1. Limits on Executive Compensation: A service provider cannot use more than $199K of state funds or state-authorized payments to pay any employee in the company;

2. Limits on Administrative Expenses: A service provider must use at least 75% (increasing to 85% in 2015) of the state funds or state-authorized payments to provide program services — as opposed to administrative expenses such as compensation to staff that does not directly provide program services (including a CEO, CFO and controller), overhead expenses and office operating expenses; and

3. Disclosure Obligations: A service provider will be required to file certain reports but no specific information has been released yet about the contents of these disclosures.

Q4. You keep mentioning state funds and state-authorized payments – what do those terms mean?

A4. Wish we knew for sure. Like many of the provisions in the regulations, these terms are defined in a very convoluted manner. The definition of state funds refers to funds appropriated in the annual state budget – but excludes a limited subset of procurement contracts. State-authorized payments is very broadly defined, referring to any payments distributed upon approval by a NY state agency or a NY governmental unit (also excluding a limited subset of procurement contracts). As a practical matter, this would appear to pick up contract payments made by New York as a service customer to public companies for ordinary course business.

Q5. There must be some sort of an exemption for companies like mine, right?

A5. The rule applies to covered providers, and this definition has certain thresholds; if they are not met, then the company would be exempt from these provisions. An entity is a covered provider if it (1) receives state funds or state-authorized payments (as mentioned, not clearly defined) in an amount greater than $500K for at least 2 years and (2) at least 30 percent of the entity’s total annual in-state revenues (undefined) for the most recent calendar year were derived from state funds or state-authorized funds. Therefore, given these broad terms and ambiguities, it is difficult to conclude definitively that a company is not a covered provider.

Q6. Where can I learn more about this – and what can I do about it?

A6. Here is the (i) January 2012 Executive Order issued by Gov. Cuomo, (ii) draft regulation implementing the executive order (there were over a dozen nearly identical proposed regulations by the various NY state agencies) and (iii) a helpful Proskauer memo.

We are hoping that companies, as well as legal and business organizations, will share their concerns about these issues in Albany. Specifically, they should consider contacting Gov. Cuomo’s office to ask that the Executive Order be appropriately amended to clarify impacted entities (for e.g., it should not apply to public companies that are subject to SEC obligations, including Say on Pay votes). In addition, they should consider submitting a comment letter to the state agencies that have proposed these regulations. Even though over dozen state agencies have proposed implementing regulations, the proposals are virtually identical and therefore the same comment letter could be submitted to all the agencies. Also, even though the official comment period ends shortly, the Governor’s Office has indicated that the agencies will consider comments submitted after that time.

Surprise! US OTC Companies Could Become Subject to Canadian Reporting Obligations

As noted in this Stikeman Elliott blog, the Canadian Securities Administrators recently adopted “Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-the-Counter Markets.” Here is an excerpt from the blog:

The stated purpose of the Instrument is to discourage the manufacture and sale in the adopting jurisdictions of OTC quoted shell companies that can be used to facilitate abusive market practices. However, the Instrument will have the unintended but significant effect of subjecting major well-established issuers who have securities listed on exchanges outside of North America and that only trade OTC in the United States to Canadian public company reporting obligations. Significantly, these issuers may unknowingly become subject to Canadian public company reporting obligations, as it is common market practice for U.S. broker-dealers to apply to have a FINRA ticker symbol assigned to an issuer’s securities without the knowledge or involvement of the issuer.

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– Broc Romanek