The CARES Act Would Place Limits on Compensation

The CARES Act Would Place Limits on Compensation

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On the evening of March 25, 2020, the U.S. Senate passed H.R. 748, the CARES Act (Coronavirus Air, Relief, and Economic Security Act). Among helping folks with direct payments of cash and increase both the amount and length of time unemployment will be paid to folks out of work, the Act also provides the Secretary of the Treasury the authority to make loans and guarantee loans for certain businesses in distressed industries including air carriers and U.S. businesses that have not otherwise received adequate economic relief in the form of loans or loan guarantees under the Act.

Section 4004 places limitations on the compensation of certain employees of businesses that receive loans or loan guarantees under the Act. Specifically, the Act makes two separate limits for employees:

  1. General limit applies to officers and employees whose total compensation exceeded $450,000 in calendar year 2019 (except for pay pursuant to certain collective bargaining agreements in place prior to March 1, 2020).
    • Cannot receive total compensation which exceeds, during any 12 consecutive month period, the total compensation received in 2019.
    • Cannot receive severance pay or other benefits upon termination that exceeds twice the maximum total compensation received in 2019.
  2. Special limit applies to officers and employees whose total compensation exceeded $3 million in calendar year 2019.
    • Cannot receive total compensation during any 12 consecutive month period that exceeds the sum of:
      1. $3 million, and
      2. 50% of the excess over $3 million of the total compensation received in 2019

Total compensation includes salary, bonuses, awards of stock, and other financial benefits provided by a business.

UPDATE: These limits on compensation continue until 12 months after a company pays back any loan. During the time that a company has a loan with the federal government, it must also agree not to repurchase any of its equity securities listed on a national securities exchange (no share buybacks), except in accordance with a contractual obligation in place when the Act becomes effective, through 12 months after the company pays back the loan. Additionally, companies taking loans cannot pay dividends or make other capital distributions (no dividends) until 12 months after the loan is repaid. See Section 4003, Emergency Relief and Taxpayer Protections.

The House is expected to take up this Act today, March 26, 2020.

I was able to find the text of this Act on the website of the Tax Foundation. The text of the Act is not yet available on Congress’ website, Congress.gov. Here is the link to the text of the Act on which this post was based:

https://files.taxfoundation.org/20200325223111/FINAL-FINAL-CARES-ACT.pdf

Glass Lewis Changes Policy on Virtual Meetings

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Given the current COVID-19 crisis and the difficulty of having large, in-person meetings, many companies are considering or have decided to have their annual meeting be done this proxy season in a virtual format to help protect the health of everyone in attendance. Until Glass Lewis issued this update on March 19, 2020, its policy was to recommend Governance Committee members who approved a company’s virtual meeting.

However, recognizing the challenges presented by COVID-19, Glass Lewis issued an immediate update to its virtual meetings policy. Under Glass Lewis’ revised policy, Glass Lewis will review virtual meetings on a case-by-case basis. Glass Lewis will be noting whether a company indicates its intention to resume holding in-person or hybrid meetings under normal circumstances. This revised policy will be effective for shareholder meetings from March 1, 2020 through June 30, 2020.

Glass Lewis also offered an example of a company that handled switching to a virtual meeting format correctly, Starbucks Corporation. Starbucks issued an announcement about its change to a virtual meeting for its 2020 annual shareholders meeting on March 4, 2020, available at: https://www.sec.gov/Archives/edgar/data/829224/000119312520060980/d104351ddefa14a.htm

Note: Starbucks did not specifically indicate that it intended to return to its normal in-person meetings once the crisis is over.

I know several companies have been re-tooling their proxy statements to allow them to make their annual meeting a virtual meeting if necessary. To those companies, if they still have time, they may want to include a statement about their intent to return to an in-person meeting format once the COVID-19 crisis passes if a virtual meeting is used.

Glass Lewis’ announcement about the immediate change in its policy can be found in its blog post, Immediate Glass Lewis Guidelines Update on Virtual-Only Meetings due to COVID-19 (Coronavirus), available at: https://www.glasslewis.com/immediate-glass-lewis-guidelines-update-on-virtual-only-meetings-due-to-covid-19-coronavirus/

ISS, GL and CII Comment Letters on the SEC’s Proposed Amendments to Rules for Proxy Voting Advice

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Last November, the SEC issued a proposed interpretation and guidance on how it would apply the proxy rule exemptions to proxy advisors regarding their provision of proxy voting advice. The exemptions would still exist, but would require proxy advisors to meet certain new conditions. (see Exequity’s November 12, 2019 Client Alert, SEC Proposed Changes to Rues Impacting Proxy Advisors and Shareholder Proposals, for details).

ISS first sued the SEC to block the rule changes and the SEC agreed to what amounts to a stand-still arrangement on the lawsuit for 1 year. Now, the two largest proxy advisors, ISS and Glass Lewis, recently submitted comments letters to the SEC regarding the SEC’s proposals. Finally, the Council of Institutional Investors (CII) has also submitted a comment letter to the SEC on its proposal.

ISS’ comment letter is 89 pages and raises three main issues:

  • Definitional—ISS argues that the SEC lacks the authority to regulate proxy voting advice as if it were a solicitation.
  • Exemptive—ISS argues that the proposed amendment of exemptions would require a proxy advisor to give the subject of its voting advice the right to review and provide feedback, and if the subject company is not happy with the proxy advisors attempt to satisfy any deficiencies, could force the proxy advisor to include a hyperlink directing the recipient of the proxy advisor’s advice to the subject company’s views on such advice.
  • Litigation risk—ISS argues that the proposed guidance would require proxy advisors to provide granular disclosure concerning their proxy voting advice, which ISS alleges has no legal basis and was not authorized by Congress.

Glass Lewis’ comments focused on its belief that the proposed interpretation and guidance would not further the SEC’s stated objectives. Glass Lewis also points out that it believes the rushed process to develop this SEC proposal failed to provide adequate time to consider the legal issues its novel approach would raise and to understand fully and analyze the consequences—economic and otherwise—of the untested, unprecedented regulatory regime it would introduce.

CII’s letter also indicates that it is not a fan of the proposal. CII’s letter focused on claims by certain corporate representatives that there are pervasive factual inaccuracies in proxy advisors’ reports, claims that it believes the SEC relied on in taking this action. CII believes that the claims of pervasive errors are unfounded and misleading and do not provide a basis for the SEC’s rulemaking.

The comment letters of CII, ISS and Glass Lewis are available at:

ISS Issues Updated FAQs and Methodology Documents

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ISS has released updated versions of its FAQs and methodology documents for the 2020 proxy season.

Equity Compensation Plans Frequently Asked Questions

This updated set of FAQs was issued December 6, 2019 and is available at:
https://www.issgovernance.com/file/policy/latest/americas/US-Equity-Compensation-Plans-FAQ.pdf

Notable changes include:

  • ISS will include limited partnership units in Common Shares Outstanding for Shareholder Value Transfer (SVT) and burn rate calculations if they are equivalent to common stock on a 1:1 basis and can be exchanged into common stock at any time at no cost to the holder.
  • How ISS will evaluate an equity plan proposal seeking approval of one or more plan amendments—usually by using its Equity Plan Scorecard (EPSC) model.
  • Confirming that evergreen features are now an overriding factor that will cause ISS to recommend against an equity plan proposal.
  • Confirming that ISS changed some EPSC factor scores in the EPSC model, but kept the weights of the three pillars (plan cost, plan features, and grant practices) the same.
  • Included the 2020 Burn Rate Benchmarks for the S&P 500, Russell 3000 (non-S&P 500) and Non-Russell 3000 groups in the Appendix.

Compensation Policies Frequently Asked Questions

ISS released this updated set of FAQs on December 6, 2019, available at:
https://www.issgovernance.com/file/policy/latest/americas/US-Compensation-Policies-FAQ.pdf

Notable changes include:

  • Confirming that the Financial Performance Assessment (FPA) will rely on four ISS-defined EVA metrics (EVA Margin, EVA Spread, EVA Momentum vs. Sales, and EVA Momentum vs. Capital), but confirming that the GAAP metrics which previously were used in the FPA will still be reported on ISS Proxy Reports.
  • ISS will now report a 3-year Multiple of Median, but it will not be factored into the ISS Quantitative Pay-for-Performance (P4P) analysis.
  • With respect to disclosure around termination and severance payments, ISS wants companies to clearly describe the type of termination (e.g., termination without cause, resignation for good reason, termination with cause, etc.) and the provision(s) by which severance payments were made under any agreement to avoid confusion and enable shareholders to assess such payments.

Pay-for-Performance Mechanics, ISS’ Qualitative and Qualitative Approach

ISS released this updated document on December 11, 2019, available at:
https://www.issgovernance.com/file/policy/latest/americas/Pay-for-Performance-Mechanics.pdf

Provides some information on how EVA measures will be used in the FPA. Note that FPA only comes into account if a company’s initial quantitative P4P score level comes in at the low bordering medium or medium concern levels.

The other change of significance is that this document details the updated thresholds for the various concern levels under the Quantitative P4P tests. For example, High Concern under the Relative Degree of Alignment (RDA) test now starts at -60 whereas before it started at -50. This change should cause fewer companies to end up with a High Concern under the RDA test.

Peer Group Selection Methodology and Issuer Submission Process, Frequently Asked Questions

This updated set of FAQs was released December 6, 2019, and is available at: https://www.issgovernance.com/file/policy/latest/americas/US-Peer-Group-FAQ.pdf

No significant changes are noted in this set of FAQs.