Earlier this month, in In re Investors Bancorp, Inc. Stockholders Litigation, the Delaware Court of Chancery reiterated its view that placing a meaningful limit on director equity awards to be granted under a stockholder approved equity plan allows the court to determine whether director equity awards are excessive under the more lenient business judgment rule. Continue Reading Another Reminder that Director Limits set forth in Equity Plans Allow Director Compensation to be Reviewed under the more Lenient Business Judgment Rule
On October 22, 2015, the U.S. Department of Justice Principal Deputy Assistant Attorney General Benjamin C. Mizer, who oversees DOJ’s Civil Division, spoke at the 16th Pharmaceutical Compliance Congress and Best Practices Forum in Washington, D.C. In addressing “current law enforcement efforts that may bear on what the future holds,” Mizer led off with the recent memo by Deputy Attorney General Sally Yates on individual accountability. Mizer’s remarks complement those by the Assistant Attorney General in charge of the Criminal Division, Leslie R. Caldwell, last month. For our previous discussions on the memo and Caldwell’s prior remarks click here and here.
Mizer emphasized a few points from the Yates memo, beginning with the one that has been most discussed: in order to qualify for cooperation credit, a corporation must identify all individuals involved in the wrongdoing and provide all relevant evidence implicating those individuals to the government. As Mizer bluntly stated, “this means no partial credit for cooperation that doesn’t include information about individuals.” He also stressed that the requirement applies to not only criminal but civil investigations, including False Claims Act investigations. Mizer called particular attention to the fact that “in order to qualify for the reduced multiples provision under the False Claims Act, the organization must voluntarily identify any culpable individuals and provide all material facts about those individuals.”
Mizer made two other points following on the Yates memo: both DOJ’s Criminal and Civil Divisions will focus on individuals from the outset of their investigations and DOJ criminal and civil attorneys “have been directed to cooperate to the fullest extent permitted by law at all stages of an investigation.” The latter is a point that Caldwell made early in her tenure overseeing the Criminal Division at the Taxpayers Against Fraud Education Fund Conference. It was at that September 2014 conference that Caldwell announced a new procedure whereby qui tam complaints would be shared by the Civil Division with the Criminal Division as soon as the cases were filed and that attorneys in the Frauds Section of the Criminal Division would immediately review them to determine whether a parallel criminal case should be brought.
The public debate about the Yates memo has centered on whether it really says anything new. In apparent recognition of this debate, Mizer said the memo was issued “to reinforce the department’s commitment” to pursuing not just corporations but the individuals who caused the misconduct to occur and that it shows the “renewed commitment” to pursuing not just corporations but the culpable individuals. Mizer may be foreshadowing that results of this Criminal/Civil Division cooperation are on the horizon.
On September 22, 2015, the U.S. Department of Justice’s Assistant Attorney General in charge of the Criminal Division, Leslie R. Caldwell, spoke at the Global Investigations Review Conference in New York, addressing the recent memo by Deputy Attorney Sally Yates on individual accountability. Her comments provided a straightforward approach to how the Yates memo could play out in practice.
As recently reported in our Health Law & Policy Matters blog, a central tenet of the Yates memo is that in order to qualify for cooperation credit, a corporation must identify all individuals involved in the wrongdoing and provide all relevant evidence implicating those individuals to the government. AAG Caldwell explained “This means that companies seeking cooperation credit must affirmatively work to identify and discover relevant information about culpable individuals through independent, thorough investigations. Companies cannot just disclose facts relating to general corporate misconduct and withhold facts about the responsible individuals. And internal investigations cannot end with a conclusion of corporate liability, while stopping short of identifying those who committed the criminal conduct.“
Expanding upon DAG Yates’ remarks last week at NYU Law School, AAG Caldwell stated “We recognize, however, that a company cannot provide what it does not have. And we understand that some investigations – despite their thoroughness – will not bear fruit. Where a company truly is unable to identify the culpable individuals following an appropriately tailored and thorough investigation, but provides the government with the relevant facts and otherwise assists us in obtaining evidence, the company will be eligible for cooperation credit. We will make efforts to credit, not penalize, diligent investigations. On the flip side, we will carefully scrutinize and test a company’s claims that it could not identify or uncover evidence regarding the culpable individuals, particularly if we are able to do so ourselves.” AAG Caldwell also explicitly recognized that DOJ can sometimes obtain evidence that a corporation cannot.
To the extent that practitioners read the Yates memo as erecting an impossible hurdle to cooperation credit, AGG Caldwell’s remarks indicate that each case will be evaluated on its facts. AAG Caldwell made at least one other point worth noting: the Yates memo does not change existing DOJ policy regarding the attorney client privilege and work product protection. Prosecutors will not be seeking corporate waiver of these protections.
As originally reported on our Privacy & Security Matters blog, Mintz Levin will sponsor a webinar on September 30 at 1:00 p.m. (ET) to address regulatory compliance and risk management aspects of cyber attacks and data breaches at financial institutions and their service providers.
This topic is especially timely in light of the OCIE’s 2015 Cybersecurity Examination Initiative, announced just this week. For more details about the key aspects of the OCIE initiative and our upcoming webinar, please check out this excellent post on the Privacy & Security Matters blog. To register for the webinar, click here.
By Heidi Lawson and Jacquelyn Burke
As was recently reported in the New York Times and elsewhere, the Justice Department issued new policies last week that place individual executives as the focus of their prosecution efforts, and encourage companies to cooperate in building a case against those individuals. The New York Times specifically noted that: (1) allegedly responsible individuals will be the focus of investigations at the outset; and (2) in settlement negotiations, companies will not be able to obtain credit for cooperating with the government unless they identify employees and turn over evidence against them. This announcement appears to be the start of a larger agenda hinted at by newly minted Attorney General Loretta Lynch, who has promised to focus on white-collar crime. The Times article can be found here.
Of course, the scope and impact of this initiative will become clearer as it is implemented. However, it should serve as a stark reminder to executives that their interests are not always aligned with those of their company, and that they should closely examine the insurance coverage dedicated to their defense and indemnity of government investigations and other lawsuits. Continue Reading What Questions Executives Should Be Asking About Their D&O Insurance Following The New DOJ Policies Issued Last Week
Corporate directors and officers (“D&O’s”) face significant personal exposure whenever their corporation is involved in a dispute or investigation. For this reason, prudent D&O’s avail themselves of all available legal protections, including charter provisions, insurance, and indemnification agreements.
Delaware law permits a corporation’s certificate of incorporation to include a provision eliminating the personal liability of a director for monetary damages for breach of the duty of care. 8 Del. C. § 102(b)(7). It also permits a corporation to indemnify a director or officer for liability arising from a breach of the duty of care. 8 Del. C. § 145(a) & (b). These provisions reflect the strong public policy favoring the indemnification of directors to ensure that highly qualified people will want to serve. But the director or officer who relies exclusively on these protections does herself a disservice. She should also demand a separate indemnification agreement between herself and the corporation.
Indemnification agreements offer several advantages over the indemnification provisions in organizational documents. Indemnification agreements may be more easily enforced by D&O’s because they are bilateral contracts reflecting bargained-for consideration in the form of an individual’s agreement to accept or continue service with the company.
Indemnification agreements also typically provide broader and more thorough protection of D&O’s indemnity rights than statutes and organizational documents. Indemnification agreements often include detailed procedures and time frames for determining when indemnified individuals are entitled to payment, and they clarify the types of claims and proceedings covered. A well-written indemnification agreement should include, for example:
A recent decision by Judge F. Dennis Saylor of the U.S. District Court for the District of Massachusetts, Butler v. Moore, C.A. No. 10-10207-FDS U.S. Dist. LEXIS 39416 (D. Mass. Mar. 26, 2015), offers an example of how fiduciary duties can continue to govern the conduct of participants in a closely held corporation or LLC under Massachusetts law, even where parties claim that those duties have been abrogated by contractual agreement. The decision offers a cautionary tale reminding shareholders and members in closely held companies of the fiduciary duties they owe to one another and to the company under Massachusetts law, and of the resulting requirement that they should be scrupulously fair and forthright, and carefully observe corporate formalities, in their dealings with one another.
Butler v. Moore will take an important place in the long line of Massachusetts decisions dealing with fiduciary duties in closely held entities. It offers a comprehensive overview of fiduciary duty law and carefully applies this law to a complex set of facts. In its breadth, depth, and human interest, it is comparable to previous landmark decisions in the field such as Demoulas v. Demoulas Super Markets, Inc., 424 Mass. 501, 677 N.E.2d 159 (1997). Judge Saylor’s opinion is particularly noteworthy for:
(1) its detailed findings chronicling how the individual defendants progressively siphoned assets and opportunities from Eastern Towers through “an extensive pattern of deceit, concealment, and manipulation”;
(2) its evaluation of the relationship between Eastern Towers, Inc. and Eastern Towers, LLC, holding that the two companies should be treated as a single entity in light of the failure to observe corporate formalities and their confused intermingling of operations and assets; and
(3) its close analysis of the intersection between the principals’ fiduciary duties and the Eastern Towers, LLC operating agreement, concluding that the operating agreement did not insulate the defendants from liability.
The decision presents a clear warning to entrepreneurs and leaders of start-up businesses that, where a company is closely held, negotiations with other shareholders or members concerning corporate governance and related party transactions must be carried out with transparency, full disclosure, and good faith, consonant with the fiduciary duties incumbent upon them as shareholders, members, and/or directors of closely held companies under Massachusetts law.
Section 162(m) of the Internal Revenue Code precludes the deduction by public companies for compensation paid to certain covered employees in excess of $1,000,000 in any taxable year. This limitation on deduction does not apply to performance-based compensation. Such performance-based compensation is deductible so long as the following requirements are met:
- the compensation is paid solely on account of the attainment of one or more pre-established, objective performance goals,
- the performance goals must be established by a compensation committee comprised solely two or more outside directors,
- the material terms of performance goals under which the compensation is to be paid must be disclosed to and approved by the shareholders, and
- prior to payment of the performance-based compensation, the compensation committee must certify in writing that the performance goals have been attained.
Under the existing regulations, compensation attributable to stock options or stock appreciation rights are deemed to satisfy the performance-goal so long as, among other requirements, the plan under which the option or right is granted states the maximum number of shares with respect to which the option or right may be granted to any employee during any specified period and that cap is preapproved by the public company shareholders.
On March 31, the IRS issued final regulations clarifying the satisfaction of the performance-goal and shareholder approval requirement with respect to stock options and stock appreciation rights. Specifically, the IRS clarified that the performance-goal requirement is satisfied if the plan states the maximum number of shares with respect to which options or rights may be granted during a specified period to any individual employee. Further, the IRS clarified that the plan will satisfy this per employee limitation even if the plan provides the aggregate maximum number of shares with respect to which any equity-based award may be granted to any individual employee, such as restricted stock units and restricted stock. The IRS noted that this is not meant to be a substantive change in the regulations but only a clarification regarding satisfaction of the per employee limitation requirement.
The final regulations clarifying the per employee limitation requirement apply to compensation attributable to stock options or stock appreciation rights granted on or after June 24, 2011.
The final regulations also clarified the applicability of the transition rules for compensation payable pursuant to a restricted stock unit by companies that become publicly held after the grant. Generally, when a company becomes publicly held, the compensation deduction limitation under Section 162(m) does not apply to any compensation paid pursuant to a plan existing during the period prior to the company becoming public, and the company may rely on this transition relief provision until the earliest of:
- the expiration of the plan,
- a material modification of the plan,
- the issuance of all employer stock that has been allocated under the plan, and
- the first meeting of the shareholders at which directors are to be elected that occurs after the close of the third calendar year following the calendar year in which the IPO occurs or, in the case of a company that did not have an IPO, the first calendar year following the calendar year in which the company becomes publicly held.
This transition relief applies to any compensation received pursuant to the exercise of a stock option or stock appreciation right, or vesting of restricted stock (even though the compensation from time based restricted stock grants would not generally be exempt as a performance-based grant after the transition period), granted under a plan that would be eligible for the transition relief so long as the grant is before any of the above events. Under the final regulations, the IRS clarified that restricted stock units are eligible for the transition relief only if the compensation attributable to the restricted stock unit is paid (i.e. the shares underlying the award are delivered) before the first to occur of the above events, not merely granted.
The final regulations regarding the transition relief provisions apply to remuneration resulting from a stock option, stock appreciation right, restricted stock or restricted stock unit that is granted on or after April 1, 2015.
While the IRS does not deem these regulations to be significant, they do provide needed clarification to compensation committees and practitioners tasked with ensuring that compensation payable under equity and bonus plans is deductible by the companies. Moreover, private companies that become public are now on notice that the transition relief is limited for restricted stock units that vest after the transition period has terminated.
On Monday, the Securities and Exchange Commission (the “SEC”) proposed rules requiring disclosure of companies’ policies with respect to hedging transactions, in order to implement Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The rules do not prohibit hedging transactions or require companies to adopt policies with respect to hedging, but would instead require companies to disclose whether any corporate hedging policies exist and whether they permit directors, officers or other employees who receive equity securities as part of their compensation, or otherwise hold equity securities of the issuer, whether directly or indirectly, to hedge or offset any declines in the market value of those equity securities.
Many companies already prohibit hedging transactions as part of their corporate governance policies, or at the least require pre-approval by a policy administrator before such transactions can be entered into. Hedging by company personnel is generally frowned upon as a means of reducing the economic risks of share ownership.
Currently, Item 402(b) of Regulation S-K requires certain disclosures related to hedging policies, but only with respect to named executive officers of an issuer. Furthermore, Item 402(b) does not apply to smaller reporting companies, emerging growth companies or registered investment companies.
The rules proposed on Monday would add new paragraph (i) to Item 407 of Regulation S-K, and would require companies to disclose, in annual meeting proxy and information statements, whether they permit employees and directors to hedge their companies’ securities. Unlike existing requirements, the rules would not exempt smaller reporting companies, emerging growth companies, or closed-end investment companies that have shares listed on a national securities exchange, and would instead apply to all companies subject to the federal proxy rules.
Congress, as part of the Dodd-Frank Act, mandated the proposed rules to provide shareholders with information regarding whether employees or directors are permitted to engage in transactions that “avoid the incentive alignment associated with equity ownership.” The proposed rules are the second of four sets of rules required to be adopted by the SEC under the Dodd-Frank Act relating to executive compensation, each of which is intended to provide investors with additional information about the governance practices of the companies in which they invest. The first set of these rules, pertaining to the ratio of the CEO’s compensation to that of a company’s median employee, have remained in proposal form since September 2013.
The SEC will collect public comments on the rule for 60 days following publication in the Federal Register. We’ll provide additional information as to the rules when they are finalized.
Investors that own more than 5% of a public company’s securities and file under the exempt category (which includes most venture capital firms and other similar investors) are required to file their beneficial ownership reports within 45 days after the close of the calendar year (i.e., on February 14). Investors have a few extra days to file this year, as Valentine’s Day falls on a Saturday, followed by a Monday holiday. Therefore Schedule 13Gs will be due on Tuesday, February 17, 2015.
Don’t Forget Those Filings for Newly Public Companies
Investors in companies that went public in 2014 who either acquired all of their securities prior to the IPO or, if they acquired shares after the IPO, all post-IPO acquisitions plus all other acquisitions of stock during the preceding 12 months did not exceed 2% of the company’s outstanding common stock, are deemed to be exempt investors and are required to file an initial Schedule 13G by February 17, 2015 to report their holdings as of December 31, 2014.
Need a primer on this reporting obligation? To learn more about the rules and the timing of filing Schedule 13Ds and Schedule 13Gs in other circumstances, click here for a detailed memorandum.