One of the most interesting points we mentioned in our webcast today on Clawbacks and Litigation Over Executive Compensation was a bit of strategic advice that is contrary to the overwhelming trend in stock plan design over the last 15 years. Specifically, the court decisions in recent lawsuits over executive compensation, particularly those involving Code Section 162(m), were more favorable to companies that maintained a separate incentive plan for their non-employee directors – separate from the plan that covered everyone else.

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) the decision was not the result of valid business judgment. Some courts have held that the non-employee directors’ participation in the stock plan that is being challenged on 162(m) and disclosure grounds causes them to lack independence.

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 great sense from an administrative perspective, as there is no need for the company to maintain two plans, seek shareholder approval of two plans, file two Form S-8s, etc. However, in light of the litigation results, we recently have begun to reconsider that position.

If you missed our webcast today but would like to see the materials from it or listen to an archived audio, please email gcliff@winston.com or visit the eLunch page here, where we post the slides and audio recording. 

On June 21, 1942, the Japanese submarine I-25 surfaced near the mouth of the Columbia River in Oregon and fired 17 shells at nearby Fort Stevens in what was the only attack on a mainland American military installation during World War II. The only damage officially recorded was to a baseball field's backstop. The Fort Stevens gunners were refused permission to return fire, since it would have helped the Japanese locate their target more accurately. American aircraft on training flights spotted the submarine, which was subsequently attacked by a U.S. bomber, but escaped.