A spin-off involves the separation of a company’s businesses through the creation of one or more separate, publicly traded companies. Spin-offs have been popular because many investors, boards and managers believe that certain businesses may command higher valuations if owned and managed separately, rather than as part of the same enterprise. An added benefit is that a spin-off can often be accomplished in a manner that is tax-free to both the existing public company (referred to as the parent) and its shareholders. Moreover, recently, robust debt markets have enabled companies to lock in low borrowing costs for the business being separated and monetize a portion of its value. For example, in connection with its $55 billion spin-off from Abbott Laboratories in 2012, AbbVie conducted a $14.7 billion bond offering, which at the time was the largest ever investment-grade corporate bond deal in the United States, at a weighted average interest rate of approximately two percent. Other notable recent spin-offs include ConocoPhillips’ spin-off of its refining and marketing business, Penn National Gaming’s spin-off of its real estate assets into the first-ever casino REIT, Sears Holding Corporation’s planned spin-off of Lands’ End, FMC’s planned spin-off of its minerals division, Rayonier’s planned spin-off of its performance fibers division, Simon Property’s spin-off of its strip center business and smaller enclosed malls into a REIT, and Darden’s planned spin-off of Red Lobster. There were 201 spin-offs announced in 2013 and 176 in 2012, with an aggregate value of $33 billion and $41 billion, respectively.
Posts Tagged ‘Jeremy Goldstein’
The past year in executive compensation has been marked by two continuing trends: (1) a continuing refinement of conceptions of so-called “best practices” advocated by certain shareholders and responses to those refinements by compensation committees, most notably in the context of the nonbinding, advisory “say-on-pay” vote required by the Dodd-Frank Act (“Dodd-Frank”) and (2) an increased desire by corporations to engage with shareholders to convince them of the appropriateness of their responses and the corporation’s compensation arrangements generally. Against this backdrop, the key challenge for compensation committee members has been to continue to approve compensation programs that directors believe are right for their corporations while maintaining a sufficient understanding of these emerging shareholder views and communicating the appropriateness of their arrangements to avoid attacks that could undermine directors’ abilities to act in their company’s best interest.
For many public companies, the new year marks the beginning of compensation season. As in years past, we have set forth below some of our thoughts on what to expect from the current compensation environment. Unlike previous years, the upcoming proxy season is not marked by new legislative or regulatory developments. And, as described in our memorandum of November 26, 2013, discussed previously on this Forum, here, the Institutional Shareholder Services (ISS) voting policies regarding compensation matters have remained largely unchanged. The most significant development this proxy season is the continuation of a single trend: increasing levels of shareholder engagement.
With the proxy season just getting underway, we thought it might be useful to summarize some initial observations to aid those in the midst of the season’s challenges.
Results. According to Institutional Shareholder Services’ (ISS) 2013 Say on Pay Snapshot released April 8, 2013, ISS has recommended against 10 percent of issuers so far this proxy season. While ISS’s study represents a relatively small sample size (473 companies), a “no” recommendation from ISS against 10 percent of companies represents a decrease in “no” recommendations of over 20 percent from last year (12.2 percent).
Reasons for Failure. The single largest reason that companies have received “no” recommendations from ISS continues to be a so-called pay-for-performance disconnect. In addition, ISS has recommended against an increased number of companies on the basis of a so-called lack of compensation committee communications and effectiveness. A lack of effectiveness often arises where ISS has determined that the company has not provided disclosure about actions it has taken in light of a low say on pay vote for the previous year.
The Delaware Supreme Court upheld a Chancery Court determination that a board did not commit waste by consciously deciding to pay bonuses that were non-deductible under Section 162(m) of the Internal Revenue Code (Freedman v. Adams, Del. Supr., __ A.2d __, No. 230, 2012, Berger J. (Jan 14, 2013)). Unlike claims of gross negligence, claims of waste are not subject to exculpation or indemnification by the company and therefore have the potential for personal liability of directors.
The original suit was brought in 2008 by a shareholder of XTO Energy (later acquired by ExxonMobil) as a derivative claim. The suit alleged that XTO’s board committed waste by failing to adopt a plan that could have made $130 million in bonus payments to senior executives tax deductible. The board was aware that, under a plan that qualifies for the “performance based compensation” exception of Section 162(m), the company could have deducted its bonus payments, but, as the company disclosed in its annual proxy statement, the board did not believe that its compensation decisions should be constrained by such a plan. The Chancery Court held that the shareholder failed to state a claim. The Supreme Court agreed, holding that the decision to sacrifice some tax savings in order to retain flexibility in compensation decisions is a classic exercise of business judgment.
In recent months, several public companies have been subjected to lawsuits by plaintiffs alleging inadequacy of executive compensation disclosure for purposes of the non-binding advisory shareholder vote on executive compensation (“say-on-pay”) required by the Dodd-Frank Act. In some cases, the complaints regarding say-on-pay disclosure have accompanied complaints regarding disclosure of amendments to equity compensation plans requiring shareholder approval. These new lawsuits follow earlier and largely unsuccessful fiduciary duty challenges brought against directors of companies that failed their say-on-pay votes; however, in contrast to the earlier cases, these new suits are actions brought as soon as companies file their proxies and seek to enjoin the shareholder vote from taking place.
Institutional Shareholder Services has released its 2013 Corporate Governance Policy Updates, which represent a more moderate approach than the proposals it released for comment in October. These changes, which will generally apply for the 2013 proxy season, continue the trend of narrowing director discretion in matters traditionally considered to be within directors’ authority. In addition, ISS’ expansion into social policy matters appears often to be at odds with shareholder and corporate interests and is far more likely to benefit special interest groups. It should be noted, though, that ISS took into account many of the comments it received and in some cases moved from a one-size-fits-all approach to a more appropriate case-by-case analysis. Although it is important that boards of directors be cognizant of ISS voting policies, it is essential that, in their decision-making, directors carefully consider the best interests of the corporations they serve and not merely defer to shareholder advocacy groups.
The following are our observations on the second year of mandatory “say on pay” votes for U.S. public companies under Dodd-Frank thus far this proxy season.
Results of Vote. As of June 25, 2012, of the companies that have reported results for 2012, 54 have failed their say on pay votes. This is an increase from 2011 and there remain a number of companies left to report. Four companies have failed two years in a row. 396 companies in the S&P 500 have reported say on pay results as of June 22, 2012, of which 384 received majority shareholder support (97%). Similar to last year, the mean level of shareholder approval is 89% and the median level of shareholder approval is 95%.
Influence of ISS. The recommendation of ISS continues to have a measurable impact on voting results. ISS has recommended against say on pay proposals at approximately 14% of the S&P 500 companies as of June 22, 2012. Of companies receiving unfavorable vote recommendations from ISS, 21% of those that had reported results as of June 22, 2012 failed to receive majority support. Companies receiving negative ISS recommendations that have nonetheless received majority support have generally done so with considerably lower margins than those receiving a favorable ISS recommendation. According to a recent study by Pay Governance, a negative ISS recommendation results in an average shareholder support level of 65% versus 95% for those receiving a positive ISS recommendation (for S&P 500 companies, the difference in support levels based on such recommendations is 59% versus 94%). According to the same study, this is a 10% increase over last year’s correlation. During the approximately two years of mandatory say on pay proposals under Dodd-Frank, only one company that received a positive ISS recommendation failed to receive majority shareholder support. The median change in voting results following a year-over-year change in ISS recommendation is approximately 27%.
In a decision reaffirming directors’ authority to determine executive compensation, the United States District Court for the District of Oregon has ruled that a suit against bank directors arising out of a negative “say on pay” vote should be dismissed. The court determined that plaintiffs failed to raise a reasonable doubt that the challenged compensation was a reasonable exercise of the board’s business judgment. This is the first federal court decision to dismiss such an action, a number of which have been filed in state and federal courts across the country in the wake of the Dodd-Frank Act. Plumbers Local No. 137 Pension Fund v. Davis, Civ. No. 03:11-633-AC (Jan. 11, 2012).
At issue in Davis was a decision by the compensation committee of Umpqua Holdings Corporation to pay increased compensation to certain executive officers for 2010 — a year in which the bank’s performance had improved and met predetermined compensation targets, but total shareholder return was allegedly negative. In a subsequent advisory “say on pay” vote, a majority of the shares voted disapproved of the 2010 compensation. Plaintiffs claimed that it was unreasonable for the Umpqua board of directors to increase compensation and that the shareholder vote rejecting the compensation package was prima facie evidence that the board’s action was not in the corporation’s or shareholders’ best interest.
With proxy season approaching, public companies must consider their strategy for the second year of the mandatory say on pay advisory vote.
Even companies that passed last year’s vote with flying colors should prepare for the upcoming season with a fresh perspective, as the second season of say on pay will present new challenges. Some investors may have applied more relaxed standards to companies last year in recognition of the fact that mandatory say on pay was new. In addition, shareholders and proxy advisory firms may focus on a company’s response to the first mandatory say on pay vote, which was not an issue last year. Indeed, in its recently released 2012 draft policy changes, Institutional Shareholder Services (ISS) asked whether its voting recommendations should take into account a company’s response to receiving a majority but less than 70% support for its prior year’s say on pay vote. Further, an important factor in whether a company received a positive recommendation from the proxy advisory firms was the results of the total shareholder return (TSR) analysis described below and, accordingly, a change in performance can adversely affect the vote, even where compensation practices have not changed. Finally, ISS recently proposed revisions to its voting policies that may impact say on pay recommendations in the upcoming season.