On April 14, 2014, a divided panel of the U.S. Court of Appeals for the District of Columbia held in National Assoc. of Mfg., et al. v. SEC that the required disclosures pursuant to the SEC’s Conflict Minerals Rule violated the First Amendment’s prohibition against compelled speech, throwing that rule into uncertainty and possibly opening the door to constitutional challenges to similar disclosure rules.
The Conflict Minerals Rule requires companies and foreign private issuers in the U.S. to disclose their use of “conflict minerals” both to the SEC and on their websites. The Rule, which was adopted pursuant to Section 1502 of the Dodd-Frank Act as a response to the Congo War, defines “conflict minerals” as gold, tantalum, tin, and tungsten from the Democratic Republic of Congo (“DRC”) or an adjoining country, which directly or indirectly financed or benefited armed groups in those countries. The deadline for satisfying the Rule, which became effective in November 2012, is May 31, 2014. The National Association of Manufacturers, along with Business Roundtable and the U.S. Chamber of Commerce, challenged the Rule in the district court and then appealed to the Circuit Court. READ MORE
Executive compensation decisions are core functions of a board of directors and, absent unusual circumstances, are protected by the business judgment rule. As Delaware courts have repeatedly recognized, the size and structure of executive compensation are inherently matters of business judgment, and so, appropriately, directors have broad discretion in their executive compensation decisions. In light of the broad deference given to directors’ executive compensation decisions, courts rarely second-guess those decisions. That is particularly so when the board or committee setting executive compensation retains and relies on the advice of an independent compensation consultant.
Nevertheless, despite the high hurdle to challenging compensation packages, shareholder plaintiffs continue to aggressively challenge executive compensation decisions, in particular at companies that have performed poorly and received negative or low say-on-pay advisory votes. READ MORE
On September 18, 2013, the SEC voted to propose a new rule that would require public companies to disclose the ratio of compensation of its CEO to the median compensation of its employees.
The new rule, required under the Dodd-Frank Act, gives companies flexibility to determine the median annual total compensation of its employees in any way that best suits their particular circumstances when calculating the ratio. SEC Chair, Mary Jo White stated that the SEC is very interested in receiving comments to the proposed approach and the flexibility it provides.
SEC Commissioner Michael S. Piwowar, in a strongly worded statement, expressed his dissatisfaction with the proposed rule. Quoting from Charles Dickens’ A Tale of Two Cities – “it was the best of times, it was the worst of times” – Piwowar declared that the pay ratio disclosure proposal “represents what is worst about our current rulemaking agenda.” Piwowar’s concerns were twofold. First, that the pay ratio disclosure could harm investors. Piwowar expressed his concern that investors using pay ratios to compare companies risked being distracted from material investment information and mislead by the conclusions offered by the ratios. Additionally, he noted that investors may also be harmed if pressure to maintain a low pay ratio curtails expansion of business operations into regions with lower labor costs. Second, he was troubled by his observation that the pay ratio rule could have a negative effect on compensation, efficiency, and capital formation because the competitive impacts of the disclosure would disproportionally fall on U.S. companies with large workforces and global operations and could influence how companies structure their business, leading to inefficiencies, higher cost of capital and fewer jobs. READ MORE
Earlier this month, Orrick partner Rick Gallagher joined an interesting panel discussion on the latest trends in executive compensation litigation. The full transcript can be viewed here. Special thanks for Broc Romanek and CompensationStandards.com for organizing and hosting a terrific panel.
The plaintiffs’ bar has taken new aim at public companies’ annual meetings: filing lawsuits to enjoin annual shareholder approval of stock plan proposals and “Say-On-Pay” (“SOP”) votes, typically arguing that the proxy disclosures regarding these topics are inadequate. Dozens of cases have been filed this year to date. The Santa Clara Superior Court recently denied plaintiff’s attempt to delay Symantec’s SOP vote, finding no precedent for such an injunction. Yet new cases continue to come.
In Symantec, plaintiffs argued that proxy disclosures failed to provide enough information to allow shareholders to make an informed decision regarding executive compensation proposals. Plaintiffs argued that shareholders needed more detailed information, including an analysis conducted by the company’s compensation consultants and any compensation risk assessment undertaken by the company. Symantec v. Gordon, et al., Case No. 1-12-CV-231541 (Cal. Santa Clara County Superior Court). The Symantec Court disagreed.
The Symantec case suggests that judges will look to industry practices in evaluating the adequacy of disclosures on executive compensation. The court considered an expert opinion from a Stanford Professor (Robert Daines) surveying disclosures made by other companies in the industry. Professor Daines concluded that Symantec’s disclosures were at least as detailed as the industry standard. Lacking any factual support or legal precedent for such an injunction, the court denied the motion. READ MORE