Institutional investor organization urges SEC to require disclosure
The debate about so-called “golden leash” arrangements has picked up again. The Council of Institutional Investors (“CII”), an influential association of institutional investors, recently wrote a letter to the U.S. Securities and Exchange Commission (“SEC”) expressing its concerns regarding the transparency of compensation paid in “golden leash” arrangements.
As discussed in our previous post, “golden leash” arrangements arise when a shareholder activist privately offers to compensate its nominee directors in connection with such nominees’ service as a director of a target corporation. In January, 2014, Institutional Shareholder Services Inc. provided its views on by-laws designed to prohibit “golden leash” arrangements but did not specifically express any concerns about the appropriateness of such compensation for nominee directors provided the arrangements are disclosed (see our post).
In its letter to the SEC dated March 31, 2014, CII asserted that the current U.S. “disclosure rules that apply to contested proxy solicitations fail to sufficiently address compensation arrangements between a nominating group and a board nominee”.
Specifically, CII highlighted that there is no specific requirement under the current U.S. securities rules for the disclosure of (i) compensatory arrangements between a board nominee and the nominating shareholder, or (ii) conflicts of interest presented by compensatory arrangements between a nominee and a nominating shareholder. To resolve this, CII requested that the SEC consider issuing interpretive guidance or amendments to the U.S. proxy rules to require shareholder contestants in a proxy contest to disclose, at a minimum:
- the existence of any compensatory arrangements between a board nominee and a nominating shareholder relating to the nominee’s candidacy or board service;
- the specific components of any compensatory arrangements between a board nominee and a nominating shareholder relating to the nominee’s candidacy or board service, including: (i) any cash compensation, including salary, non-equity incentive and bonus to be paid to the nominee; (ii) any equity compensation to be paid to the nominee; (iii) any terms of the compensation, including performance criteria, payout formulas, any peer group companies used, measurement periods and vesting provisions; and (iv) the range of total compensation that may be paid under various performance scenarios;
- the goals and objectives of such compensation arrangements, including whether the arrangements relate to the nominee’s willingness to be a nominee for the board or for his or her service on the board once elected;
- any indemnification and similar arrangements between the nominee and the nominating shareholder;
- disclosure regarding any conflicts of interest presented by such compensation arrangements; and
- any other material features of the compensation arrangements.
CII’s request for more disclosure related to third party compensatory arrangements for board nominees appears to be, at least in part, an attempt to bring such disclosure in line with that ordinarily required of U.S. publicly traded companies with respect to compensation, including director pay.
CII’s requested amendments to the U.S. proxy rules appear to go further than what’s currently required in Ontario. For example, although under Ontario securities laws there is a requirement to “briefly” describe any arrangement or understanding between nominee directors and a third party (and to name such third party), Canadian regulators have not otherwise taken a definitive position in this debate. We wouldn’t be surprised if CII encourages Canadian regulators to look more closely at this issue — it has previously offered its views on the Canadian Securities Administrators’ Review of Proxy Voting Administrators.