Author Archives: Broc Romanek

It will be interesting to see if Equilar’s new ‘pay ratio’ survey proves accurate after the proxy season – the survey predicts that companies will disclose a ratio of 140:1 on average. Here’s the intro from the blog by Cooley’s Cydney Posner about the survey results (see this related WSJ article):

Equilar has just released the results of an anonymous survey of public companies, with 356 respondents, which asked these companies to indicate the CEO-employee pay ratios they anticipated reporting in their 2018 proxy statements. As you would expect, there was a lot of variation among companies based on industry, market cap, revenue, workforce size and geography. In addition, because the rule provided significant flexibility in how companies could identify the median employee and in how they calculate his or her total annual compensation, variations in company methodology likely had a significant impact on the results.

These variations in the data underscore the soundness of the SEC’s view, expressed at the time it adopted the pay-ratio rule, that the rule was “designed to allow shareholders to better understand and assess a particular [company’s] compensation practices and pay ratio disclosures rather than to facilitate a comparison of this information from one [company] to another”; “the primary benefit” of the pay-ratio disclosure, according to the SEC, was to provide shareholders with a “company-specific metric” that can be used to evaluate CEO compensation within the context of that company.

Tomorrow’s Webcast: “Conflict Minerals – Tackling Your Next Form SD”

Tune in tomorrow for the webcast – “Conflict Minerals: Tackling Your Next Form SD” – to hear our own Dave Lynn of Jenner & Block, Ropes & Gray’s Michael Littenberg, Elm Sustainability Partners’ Lawrence Heim and Deloitte’s Christine Robinson discuss what you should now be considering as you prepare your Form SD for 2018.

By the way, check out Lawrence’s new book – “Killing Sustainability” – which attacks old myths, unrealistic expectations and flawed valuation methodologies related to corporate sustainability/CSR. The book lays out a pragmatic foundation from which readers can develop a credible approach to demonstrating financial contributions of CSR programs…

SEC Approves NYSE Change: Facilitate Listing Without an IPO

Here’s the intro from this blog by Steve Quinlivan:

The SEC has approved a rule change to the NYSE listing standards to facilitate the listing of an issuer without conduction an IPO. According to the NYSE, the rule change is necessary to compete for listings that might otherwise by listed on NASDAQ.

As revised, the NYSE will, on a case by case basis, exercise discretion to list companies whose stock is not previously registered under the Exchange Act, when the company is listed upon effectiveness of a registration statement registering only the resale of shares sold by the company in earlier private placements.

– Broc Romanek

Here’s commentary from Lynn Turner:

There’s a serious issue brewing at the PCAOB – and SEC – regarding auditor independence. This summary report issued by the PCAOB a few months ago about inspections conducted over 2016 year-end audits states on pages 14-15 that independence issues were found. That apparently caused the PCAOB to delay issuing inspection reports. Inspection reports for the Big 4 were issued in the August-November time-frame during the prior year. For 2017, only one report – about Deloitte – has been issued so far. This also highlights the periodic lack of transparency & timeliness of the PCAOB inspection process.

Fight Over Independence Disclosures

It’s my understanding that PCAOB inspectors found independence violations by the audit firms that were not reported to either investors or audit committees. This would mean these violations were not reported in writing as required by PCAOB Rule 3526, as noted in the PCAOB’s summary report. As an investor & audit committee member, I find this misleading disclosure to be troubling. Footnote 30 of the report (pg. 14) states: “PCAOB Rule 3520, Auditor Independence, requires auditors to satisfy all independence criteria applicable to an engagement, including the criteria in PCAOB rules and the criteria in the rules and regulations of the SEC.”

The Big 4 firms have prepared a white paper – collectively – that they submitted as a group to the PCAOB and its inspection group. The firms are apparently arguing they should not have to make the necessary disclosures – and despite the violations, can still publicly tell investors they are independent. I understand that white paper hasn’t been made public.

The firms argue that if they engage in a violation, they should be able to somehow “fix” the problem. But that is clearly not how the auditor independence rules work. The SEC has stated that the independence rules are prophylactic – so as to ensure investors can have trust & confidence in the audit. Yet, apparently in the instances found by inspectors, the auditors failed to notify the proper people (audit committee, PCAOB, SEC, investors) about the problems. Similar issues were found by regulators in the Netherlands a number of years ago, who found that one could not rely on the auditors to put in place “safeguards” for their independence, as the auditors put in place self-serving “remedies” in some cases.

The Use of Indemnification Clauses

The PCAOB’s summary report also notes that auditors continue to put indemnification clauses in their audit engagement contracts – despite the fact the AICPA has a clearly stated rule, as does the SEC, that indemnification clauses are not permitted for public company audits. In the recent Colonial Bank case, the judge ruled that PWC had improperly included an indemnification clause in one of its engagement letters and was therefore not independent.

The SEC also brought an enforcement case against an auditor in Florida for including an indemnification clause in the audit engagement letter (the auditor’s second enforcement action within a few years). It appears some auditors believe they can “slip one by” if no one notices these. In fact, to the PCAOB’s credit, they have been citing auditors for violations of the professional standards and GAAS for indemnification clauses for a number of years. This raises the question of why doesn’t the PCAOB take enforcement actions instead of just writing up the deficiencies in inspection reports. Clearly, the latter action is not having the necessary impact.

The SEC’s independence rules (Regulation 210.2-03) have a provision to exempt an audit firm if an inadvertent violation occurs, The exemption applies provided the person or persons on the audit: (1) were not aware of the circumstances giving rise to the violation, (2) the firm had adequate internal controls for independence in place, (3) violation was promptly corrected, (4) the firm had a training program in place, and (5) had an enforcement mechanism in place. But the SEC’s rules don’t permit an exemption if at the time of the violation, the auditor knew – or should have known – they were violating the rules. Here’s a lawsuit involving such an example.

The SEC & PCAOB rules are very clear. The auditor must follow the independence rules throughout the audit year. The firms are required to have training programs in place to require this. These rules are not new to anyone – and any professional knows they are serious and to be followed. In fact, GAAS states that a violation of independence is a violation of one of the ten primary “Generally Accepted Auditing Standards” – and that such a violation cannot be corrected through other auditing procedures.

Will the States Be Brought In?

It will interesting to learn if the PCAOB has involved the “National Association of State Boards of Accountancy” in these discussions as the State Boards each have independence rules which are built around compliance with the rules of the SEC, PCAOB and AICPA. If you can’t trust an auditor to follow the laws & regulations, what can you trust them for? Particularly if they engage in covering up their violations.

Transcript: “Handling the Proxy Season – The In-House Perspective”

We have posted the transcript for our recent popular webcast: “Handling the Proxy Season – The In-House Perspective.”

– Broc Romanek

We’re excited to announce that we have just posted the registration information for our popular conferences – “Pay Ratio & Proxy Disclosure Conference” & “Say-on-Pay Workshop: 15th Annual Executive Compensation Conference” – to be held September 25-26 in San Diego and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days.

Early Bird Rates – Act by April 13th: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by April 13th to take advantage of the 20% discount.

More on Voting: When Is An Investor “Passive”?

A while back, Liz blogged about investors who break from their normal approach of voting with ISS to support management. Does voting with management make those investors more “passive”? Not necessarily. Here’s an excerpt from “Proxy Insight’s” follow-up article (pg. 7) by Aon Governance’s Karla Bos:

Certainly, at the investment firms I worked for, overriding our voting policy was anything but a passive act. With the value placed on thoughtful and thorough decision-making and the constant spotlight on our voting decisions, the override process was intentionally designed to take some measure of time and effort. It took an active voting process to engage with issuers, hold internal discussions and debates, ensure no conflicts were present, and document our rationale for voting differently than we typically might have.

Furthermore, like the ISS auto-voters, many of our overrides resulted in decisions to vote with management. Similar to the ISS voting policy, many of our stated voting policies addressed potential governance concerns, so they were written to lay out the voting action we would take in those cases. Therefore it is not surprising that our overrides often occurred where we ultimately deemed the company’s practice acceptable and appropriate based on the particular facts and circumstances.

This is a good reminder that even some so-called “passive” investors are actively engaged…

Our February Eminders is Posted!

We have posted the February issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!

– Broc Romanek

It’s Halloween all over again! In this article, Carl Hagberg of the “Shareholder Service Optimizer” scares us. Here’s the intro:

One of our fellow Inspectors of Election left a message to say that a client just learned that protestors at their upcoming shareholder meeting would be coming dressed as ZOMBIES. “Have you ever heard of costumes at shareholder meetings? Any ideas on what to do?” he asked.

“Guess what? Coming to shareholder meetings in costumes is a very old tradition!” Check out this article for a photo of old-time gadfly Wilma Soss dressed as Molly Pitcher – and as a “Cleaning Lady” following the TV Game Show scandals – and one year, she came to the General Motors meeting in a wheelchair, wrapped head-to-toe in fake-blood-smeared bandages to dramatize a steering-defect scandal.

For some reason, this reminded me of “Scabby the Rat,” who pays a visit to businesses all over the country when the unions are on strike. Like me, Scabby’s a Chicago native, but he gets around. Even has his own Facebook page.

Don’t forget to tune into our upcoming webcast: “Conduct of the Annual Meeting“…

The NYSE’s Annual Corporate Governance Letter

The NYSE has sent its “annual corporate governance letter,” highlighting considerations for NYSE-listed issuers as the proxy season approaches. The reminders include one about advance notice of dividend or stock distribution announcements to take effect February 1st…

Broc Tales: The Next Nine

Reg FD-style! Here are the second nine stories that have run in my new “Broc Tales Blog”:

1. The Inconvenient Truth
2. Is This One More Like “Psycho” or “Rear Window”?
3. The Curiously Challenging Distinction of Private Guidance Reaffirmations & Going to Jail
4. The Low-Level Employee on a Mission From God
5. Low-Level Employee As Spokesperson
6. The Director Spokesperson: A Bad Idea?
7. Who Should Be Taking You to the Dance?
8. The Most Confusing Part of FD In All the World
9. Training Your FD Dragon

Check ’em out. If you like them, that’s great – insert your email address when you click the “Subscribe” link if you want these precious tales pushed out to you…

– Broc Romanek

When I first heard that ISS was launching “Corporate Due Diligence Profiles,” my kneejerk reaction was that they were just rebranding the governance rating product that they have renamed a number of times over the years (eg. CGQ, GRId, QuickScore). But “Corporate Profile Products” is much more than a numerical rating applied to your governance profile. This blog by Davis Polk’s Ning Chiu explains – here’s an excerpt:

We understand from ISS that the product was designed to meet investor demands in reviewing companies for possible shareholder engagement and seeking more insight on individual directors. While the overall data is not new, as the report aggregates information primarily from prior ISS reports and QualityScore into new formats, companies will likely want to be aware of they are being perceived by investors.

Companies may be interested in particular in the 50+ page sample report (you need to fill in a form to receive the report), which shows:

– Historical vote recommendations by ISS on all annual meeting matters and vote results.
– A simple director skills matrix chart based on company disclosure, which interestingly highlights the director skills disclosed by another board where the director sits that is not disclosed in the company’s proxy statement. Companies may want to review how other companies’ describe the skills and qualifications of their directors.
– The QualityScore analysis measuring a company’s governance and compensation practices against the peer group selected by the company, and the industry peer group. Red flags note deviations from “best practices.” Companies may not always be aware of the QualityScore standards. Recent QualityScore updates reflect that for board diversity, as one example, a company must have three women directors serving on its board to qualify for meeting best practices. Two women on a ten-member board would earn a company a red flag. On tenure, a red flag would highlight a company with more than a third of board members who have served over nine years.
– A page devoted to each director, including that director’s election history at other companies where the director serves, as well as the TSR of those companies over the length of the director’s tenure.

Life as a Proxy Designer

In this 14-minute podcast, Labrador’s Molly Doran discusses her exciting career, including:

1. How did you wind up getting into the regulated communication industry?
2. What do you tell people that you do when you first meet them?
3. What are the hot topics that you’re grabbling with now?
4. What are the hardest parts of your job?
5. How is it working with the French?
6. What are the best parts of your job?
7. What advice would you give to someone new in your field?
8. What types of changes do you see coming in the near term for proxy design?

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email. Here’s some of the newer entries:

– Wanna Earn Big $$$? Change Your Company’s Name
– Q&A With Keith Higgins
– FCPA: Is a Follow-On Lawsuit an End-Run Around?
– Auditor Liability: Auditors May Now Be Forced to Look for Fraud
– Revenue Recognition: Lessons from “Early Adopter” Comments
– Disgorgement: Tax Reform’s Impact on Deductibility

– Broc Romanek

Eighteen law firms put together this “white paper with 19 FAQs” about how a government shutdown would impact the capital markets. It came out just as it was announced that the government shutdown was short-lived. But it’s good stuff to know for the next shutdown.

If the SEC was to be shut down, here’s a poll about how much you would care:

Please take a moment to participate anonymously in these surveys: “Quick Survey on Whistleblower Policies & Procedures” – and “Quick Survey on Blackout Periods.”

Tomorrow’s Webcast: “Alan Dye on the Latest Section 16 Developments”

Tune in tomorrow for the Section16.net webcast – “Alan Dye on the Latest Section 16 Developments” – to hear Alan Dye of Section16.net and Hogan Lovells discuss the most recent updates on Section 16, including new SEC Staff interpretations and Section 16(b) litigation.

Tomorrow’s Webcast: “How to Handle Post-Deal Activism”

Tune in tomorrow for the DealLawyers.com webcast – “How to Handle Post Deal Activism” – to hear Paul Weiss’ Ross Fieldston, Vinson & Elkins’ Shaun Mathew, Morrow Sodali’s Mike Verrechia and Innisfree’s Scott Winter discuss the legal & other issues surrounding activism following a deal’s announcement. This post-deal activism happens frequently. But it’s poorly understood – and the failure to respond to it effectively can have a devastating effect on the chances to successfully complete the transaction.

– Broc Romanek

If you’re relatively new to being in-house – or you want to gain that perspective – take advantage of our new “In-House Accelerator“! This online – and offline – training program is free for members of TheCorporateCounsel.net. In addition to the “In-House Accelerator” paperback (paperback consists of 216 FAQs; here’s the “Table of Contents“), there is a series of podcasts & other comprehensive materials covering these four areas:

1. Corporate Governance
2. Proxy Season
3. ’34 Act Reporting
4. Other

Tomorrow’s Webcast: “Pat McGurn’s Forecast for 2018 Proxy Season”

Tune in tomorrow for the webcast – “Pat McGurn’s Forecast for 2018 Proxy Season” – when Davis Polk’s Ning Chiu and Gunster’s Bob Lamm join Pat McGurn of ISS to recap what transpired during the 2017 proxy season and what to expect for 2018. Please print out this “Course Materials” deck in advance.

Tomorrow’s Webcast: “Tax Reform – What’s the Final Word?”

Tune in tomorrow for the CompensationStandards.com webcast – “Tax Reform: What’s the Final Word?” – to hear Winston & Strawn’s Mike Melbinger, Choate Hall’s Art Meyers and PricewaterhouseCoopers’ Ken Stoler talk about how the new tax legislation will impact executive pay arrangements. Please print out this “Course Materials” deck (45 pages!) in advance.

– Broc Romanek

Congrats to the SEC! Since 2013, it’s moved up from 4th worst mid-size agency to work at – up to 5th best! Here’s the 2017 workplace survey results.

Recently, the SEC delivered its annual report on credit rating agencies to Congress…

SEC’s Investor Bulletin: How to Comment on Rule Proposals

Recently, the SEC issued this investor bulletin explaining how to submit comments on proposed rules. Also see our own checklist on this topic…

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email. Here’s some of the newer entries:

– Why You Ain’t Getting a Board Seat
– Revenue Recognition: Pre-Clearing With Corp Fin Before IPOing
– SEC Investigations: “Are We Covered?”
– HSR: Watch Out for Those Comp Awards!
– Private Funds: ’40 Act Exemptions
– Reg A+ Offerings: Frequently Asked Questions

– Broc Romanek

I was excited to see this Bloomberg article about how a company accidentally ignored a comment letter from Corp Fin because the emails from the Staff went into a spam folder at the company. The reason for my excitement is this: when I started in Corp Fin in the late ’80s – back before widespread use of computers – we had to call counsel to dictate our comments over the phone!

This “pre-computer days” process had these steps from the perspective of a front-line Corp Fin examiner:

1. Since Edgar wasn’t mandatory yet, paper copies of SEC filings were delivered – and if selected for review, they would be placed in a wooden box out in the hallway that was assigned to you.

2. You would review the filing and write out your draft comments by hand.

3. Your reviewer would read your draft comments and literally cross out – or add – comments. No points off for bad handwriting! Tough love for the reviewer.

4. You would call the person whose name was on the transmittal letter. Since there no voicemail back then, you might need to try calling a bunch of times. Or you would reach a secretary and they would try to call you back a bunch of times (but you weren’t around since you were taking a nap down in the SEC’s library). Serious phone tag.

5. Dictating the comments over the phone could take as long as an hour – depending on how many comments there were (remember that you were reading the bad handwriting of the accountants on the Staff too – their comments were combined with the legal comments, just like today) and how clear your diction was (if not clear, you would need to repeat yourself multiple times).

6. Rinse, wash, repeat for each round of comments. The good ole days…but at least companies couldn’t lose their comments in a spam folder!

So the question remains, how does “disclosure controls” fit into all of this…

SEC’s Chief Accountant: Annual AICPA Speeches

As noted in these memos posted in our “Conference Notes” Practice Area, the SEC has posted its annual slew of speeches (see the December 4th stuff) – a total of 8 – made by members of its Chief Accountant’s office at the big AICPA Annual Conference. The PCAOB made speeches too. We’ve posted memos about the speeches in our “Conference Notes” Practice Area…

Poll: What’s a Better Excuse for Ignoring Corp Fin Comments?

Please participate in this anonymous poll about fabricated excuses for blowing off a Corp Fin comment letter:

– Broc Romanek

Tune in tomorrow for the CompensationStandards.com webcast – “The Latest: Your Upcoming Pay Ratio, Tax Reform & Proxy Disclosures” – to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of CompensationStandards.com and Jenner & Block and Ron Mueller of Gibson Dunn discuss all the latest guidance about how to overhaul your upcoming disclosures in response to tax reform, pay ratio and say-on-pay – including the latest SEC positions, as well as how to handle the most difficult ongoing issues that many of us face.

And I just calendared another tax reform webcast for next week on CompensationStandards.com: “Tax Reform: What’s the Final Word?“

Director Discretionary Awards Tested by Entire Fairness Standard

Here’s the intro to this blog by Steve Quinlivan:

The Delaware Supreme Court found in In re Investors Bancorp Stockholders Litigation that director equity grants based on director discretion are subject to an entire fairness standard of review. According to the Court, “when stockholders have approved an equity incentive plan that gives the directors discretion to grant themselves awards within general parameters, and a stockholder properly alleges that the directors inequitably exercised that discretion, then the ratification defense is unavailable to dismiss the suit, and the directors will be required to prove the fairness of the awards to the corporation.”

Accordingly, the Delaware Supreme Court reversed the Court of Chancery’s decision which found that the stockholder ratification defense applied because the plan provided for “specific limits on the compensation of” the non-employee and executive members of the Board. The Court of Chancery had reasoned that the stockholders’ approval of the plan reflected their ratification of all of the specific awards later approved by the Board. Hence, the Court of Chancery found that the director grants should be subject to the business judgement standard of review.

Tax Reform: The Initial 162(m) Disclosures

In his blog, Steve Quinlivan listed these recent Section 162(m) disclosures:

The cash bonuses paid and equity-based awards granted to executive officers under the MIP are intended to be fully deductible under section 162(m). In addition, the Company has adopted a policy that equity-based awards granted to its executive officers should generally be made pursuant to plans that are intended to satisfy the requirements of section 162(m). However, the Compensation Committee retains discretion and flexibility in developing appropriate compensation programs and establishing compensation levels and, to the extent consistent with the Company’s compensation philosophy, may approve compensation that is not fully deductible. Also, legislation recently signed into law would expand somewhat the number of individuals covered by section 162(m) and eliminate the exception for performance-based compensation effective for our 2018 tax year.

****

The Compensation Committee believes that the use of a strict formula-based program for annual awards could have inadvertent consequences such as encouraging the NEOs to focus on the achievement of one specific metric to the detriment of other metrics. In addition, tying compensation to a strict formula would not allow for adjustments based on issues beyond the control of the NEOs. The Compensation Committee recognizes that each NEO other than the CEO (each, a “Senior Executive”) may be most able to directly influence the business unit for which he or she is responsible and therefore believes it is appropriate to use negative discretion to adjust annual awards for each such Senior Executive to take into account the achievement of objectives that are directly tied to the growth and development of their respective business unit. Furthermore, with respect to our overall executive compensation program, the use of discretion provides the Compensation Committee with the flexibility to compensate our NEOs for truly exceptional performance without paying more than is necessary to incent and retain them while structuring awards to be potentially deductible as performance-based compensation under Section 162(m) of the Code, when appropriate. However, as discussed below under “Tax Considerations,” while the tax law included an exception to the $1 million limit on deductibility for “performance-based” compensation under Section 162(m) of the Code when the Compensation Committee made its fiscal year 2017 compensation decisions, this exception was repealed.

At the beginning of fiscal year 2017, the Compensation Committee approved a maximum KEIP award amount for each NEO, other than Mr. Sethi, who became an NEO at the end of fiscal year 2017. The maximum award that each NEO is eligible to receive, however, is not an expectation of the actual bonus that will be paid to him or her, but a cap on the range ($0 to the maximum amount) that an individual may be paid while maintaining the tax deductibility of the bonus as “performance-based” compensation for purposes of Section 162(m) of the Code. See “Tax Considerations” below for a brief discussion of the “performance-based” compensation exception under Section 162(m) of the Code and its repeal. As described above in our “Compensation Philosophy,” the Compensation Committee has historically exercised negative discretion to pay significantly less than the maximum amount available to the NEOs under the KEIP award pool based on its evaluation of the achievement of business unit, Company-wide and individual performance measures for such NEOs, as described above in this CD&A.

In evaluating compensation program alternatives, the Compensation Committee considered the potential impact on the Company of Section 162(m) of the Code. Section 162(m) limited to $1 million the amount that a publicly traded corporation, such as the Company, may deduct for compensation paid in any year to its chief executive officer and certain other named executive officers (“covered employees”). At the time the Compensation Committee made its compensation decisions, the tax law provided that compensation which qualified as “performance-based” was excluded from the $1 million per covered employee limit if, among other requirements, the compensation was payable only upon attainment of pre-established, objective performance goals under a plan approved by our stockholders. However, this exception was repealed in the tax reform legislation signed into law on December 22, 2017. As a result, it is uncertain whether compensation that the Compensation Committee intended to structure as performance-based compensation under Section 162(m) will be deductible.

As a general matter, in making its previous NEO compensation decisions, the Compensation Committee endeavored to maximize deductibility of compensation under Section 162(m) to the extent practicable while maintaining competitive compensation. The Compensation Committee, however, believes that it is important for it to retain maximum flexibility in designing compensation programs that are in the best interests of the Company and its stockholders.

****

Salaries are deductible, except for the portion of the CEO’s salary in excess of $1 million. The Compensation Committee designs the ACIP and equity awards, including RSUs that have a financial performance threshold, to comply with the requirements for tax deductibility under Internal Revenue Code Section 162(m) (Section 162(m)), to the extent practicable. The Compensation Committee considers tax reform enacted under the Internal Revenue Code on an annual basis when designing the compensation programs.

To maximize tax deductibility, amounts earned under the ACIP are designed to qualify as performance-based compensation under Section 162(m). This design provides that if certain financial objectives are met, our executive officers may receive up to 2x their target amounts, subject to the Compensation Committee’s negative discretion to pay any amount less than the maximum.

RSUs generally vest in equal annual installments over three years. The RSUs also include a requirement that the Company must meet an adjusted GAAP operating income target (over a 6-month period) in order for them to vest, which is intended to qualify the RSUs for tax deductibility under Section 162(m).

****

Section 162(m) of the Internal Revenue Code generally places a $1 million limit on the amount of compensation a company can deduct in any one year for certain executive officers. While the Compensation Committee considers the deductibility of awards as one factor in determining executive compensation, the Compensation Committee also looks at other factors in making its decisions, as noted above, and retains the flexibility to award compensation that it determines to be consistent with the goals of our executive compensation program even if the awards are not deductible by Apple for tax purposes.

The 2017 annual cash incentive opportunities and performance-based RSU awards granted to our executive officers were designed in a manner intended to be exempt from the deduction limitation of Section 162(m) because they are paid based on the achievement of pre-determined performance goals established by the Compensation Committee pursuant to our shareholder-approved equity incentive plan. In addition, the portion of Mr. Cook’s 2011 RSU Award subject to performance criteria with measurement periods that begin after the June 21, 2013 modification was designed in a manner intended to be exempt from the deduction limitation of Section 162(m).

Base salary and RSU awards with only time-based vesting requirements, which represent a portion of the equity awards granted to our executive officers, are not exempt from Section 162(m), and therefore will not be deductible to the extent the $1 million limit of Section 162(m) is exceeded.

The exemption from Section 162(m)’s deduction limit for performance-based compensation has been repealed, effective for taxable years beginning after December 31, 2017, such that compensation paid to our covered executive officers in excess of $1 million will not be deductible unless it qualifies for transition relief applicable to certain arrangements in place as of November 2, 2017.

Despite the Compensation Committee’s efforts to structure the executive team annual cash incentives and performance-based RSUs in a manner intended to be exempt from Section 162(m) and therefore not subject to its deduction limits, because of ambiguities and uncertainties as to the application and interpretation of Section 162(m) and the regulations issued thereunder, including the uncertain scope of the transition relief under the legislation repealing Section 162(m)’s exemption from the deduction limit, no assurance can be given that compensation intended to satisfy the requirements for exemption from Section 162(m) in fact will. Further, the Compensation Committee reserves the right to modify compensation that was initially intended to be exempt from Section 162(m) if it determines that such modifications are consistent with Apple’s business needs.

– Broc Romanek