As this blog has been discussing, the past four years have seen an explosion in litigation against corporations, boards and officers over executive compensation matters, including claims over:
- Failed shareholder say on pay votes,
- Failure to qualify for 162(m) deductibility,
- Code Section 162(m) disclosures,
- Say on parachute pay disclosures,
- Stock plan approval, and
- Clawbacks under SOX §304.
As I explained in NASPP meetings last month, a Delaware court decision from the last week of June, Seinfeld v. Slager, when added to some decisions before it, suggests that companies should seriously consider spinning-off a directors stock incentive plan from, or amending, the company’s regular omnibus stock plan to protect officers, directors and the company against the costs and headaches of shareholder derivative litigation over executive compensation.
In Seinfeld v. Slager, the plaintiffs sued Republic Services, Inc., each member of its board of directors, and three officers, making five serious claims based on Republic’s compensation decisions:
- The payments made to the departing CEO were for past services, not required by contract and, therefore, were a waste of corporate assets.
- The directors’ approval of certain payments was wasteful because they were not tax-deductible under Code Sec. 162(m).
- The defendant directors breached their duty of loyalty and wasted corporate assets by awarding stock with time-based vesting instead of performance-based vesting.
- The defendant directors improperly awarded employee bonuses because the requirements of the bonus scheme under which the bonuses were awarded were not met.
- The defendant directors paid themselves excessive compensation.
The Court dismissed the first four claims because of the plaintiffs’ failure to file a “demand” with the Company’s board of directors, reaffirming numerous earlier decisions on compensation for past services and corporate waste. However, the Court allowed plaintiffs to proceed with the fifth claim because the directors had not been disinterested.
A condition precedent to filing a shareholder derivative suit is to file a demand with the company's board of directors that it investigate and/or bring legal action to remedy the alleged wrong against the company. However, this "demand" is excused if (a) a majority of the board was "interested" in the allegedly wrong decision or lacked independence, or (b) decision was not the result of valid business judgment.
Since the SEC changed the "disinterested director" requirements in 1996, the conventional wisdom has been to provide for stock awards to non-employee directors from the same stock incentive plan that the company uses to provide awards to everyone else. This makes sense from an administrative perspective, as there is no need for the company to maintain two plan documents, seek shareholder approval of two plans, create two Prospectuses, file two Form S-8s, etc. However, in light of the recent litigation results, it may be appropriate to reconsider that position.
We don’t expect plaintiffs to go on and win these cases, but the single plan structure seems to allow the shareholder/plaintiffs to survive a motion to dismiss, which is when the defense costs begin to mount.
On August 8, 2011, 30 American troops (including up to 25 Navy SEALs), seven Afghan soldiers and an Afghan interpreter died in the crash of a CH-47 Chinook helicopter, transporting U.S. service members to the scene of an ongoing engagement between NATO and insurgent forces in the Tangi Valley in Afghanistan. The 38 KIA was the largest loss of life suffered by foreign forces in a single incident in 10 years of war.