article is reprinted with permission from the
August 29, 1995
New York Law Journal.
© 1995 NLP IP Company.
The SEC's Proposed Disclosure Rules
By Joseph E. Bachelder.
TODAY'S COLUMN discusses new proxy statement disclosure rules proposed by the Securities and Exchange Commission. The proposals would permit, in some cases, relocation from the proxy statement to Form 10-K of certain of the compensation tables and other compensation and benefits information. The proposals also would require a new table disclosing compensation information relating to directors. Regarding other recent developments, note also is made of
* the long-awaited (and much-debated) adoption by the Financial Accounting Standards Board (FASB) of its new accounting standard relating to stock compensation accounting and
* recent difficulties facing Lee Iacocca in attempting to exercise stock options at Chrysler Corp., an example of pitfalls some executives may face in exercising stock options following termination of their employment (assuming a right to exercise continues beyond termination).
SEC Disclosure Proposals
Relocation of Executive Compensation Disclosures.
On Jun 27, the SEC announced proposed changes in its rules relating to proxy statement disclosure of executive and director compensation. 1
The proposals would permit, in certain circumstances, relocation from the proxy statement to Form 10-K of some of the compensation tables and reports, as well as the discussion of certain employment, termination and change-in-control arrangements. The proposals would apply to shareholder meetings involving the annual election of directors except in cases "involving approval of compensation or retirement plans or option grants." 2
The tables that would be affected are
(1) the stock option/SAR exercise and outstanding grants table;
(2) the long-term incentive plan awards table;
(3) the defined benefit pension plan table.
In addition, the following discussions and report would be affected:
(4) employment contracts, termination of employment and change-in-control arrangements;
(5) report on repricing of stock options/SARs.
Other compensation information, including the Summary Compensation Table and the stock option/SAR grants table, would not be eliminated from the proxy statement in any event.
In addition, the Compensation Committee Report would be unaffected.
The proposal leaves open whether shareholder meetings involving issues other than the approval of compensation or retirement plans or option grants should require inclusion in the proxy statement of all currently required compensation material. The SEC requests comments:
Comment is solicited on whether the items remaining in the proxy statement are the most pertinent ones for shareholders considering the election of directors, and whether the proposed streamlined disclosure should also apply to proxy statements involving the approval of compensation or retirement plans or option grants. Are there any other types of proxy solicitations or shareholder meetings for which any or all of such items should be included in the proxy statement? 3
The scope of comments solicited is very broad and even raises questions as to how serious the SEC is regarding adoption of the proposals in their current form. For example, the SEC asks:
Is it appropriate to retain the proxy statement disclosure requirement for the items proposed to be retained in the proxy statement.? 4
Finally, the discussion raises the question whether a company should be permitted to move the corporate performance graph to the annual report. One of the questions asked by the SEC is:
Should the company be given the choice of including the performance graph in the annual report to security holders delivered to investors, where it would be placed in the context of the company's financial statements, Management's Discussion and Analysis, and other matters relating to the company's performance, rather than in the proxy statement. 5
The SEC proposals in their current form could adversely affect analyses of what different companies are paying to their key executives. If some companies choose to relocate to Form 10-K the compensation tables and other information noted above while other companies leave all of the information in the proxy statement, the assembly of comparative data will be difficult. Also, from the standpoint of the shareholder, a request for a copy of the 10-K is less convenient than having all of the information available in the proxy statement that arrives in the mail.
Disclosure of Director Compensation.
The proposed amendments would create the following new table: 6
|Director Compensation for Last Fiscal
|Cash compensation||Security grants|
Under the proposals the company is given a choice as to its method of reporting annual retainer and meeting fees. On the one hand, it could report the actual retainer fee and the aggregate meeting fees in the respective columns noted above. Alternatively, the proposal indicates that the company could "describe" the "standard compensatory arrangements" for annual retainer fees and meeting fees. This latter method would not provide information in the chart as to the aggregate meeting fees although the SEC, in the final rules, might require a note as to the number of meetings for which the director received a fee during the reported year.
The discussion preceding the proposed regulations states that compensation of directors who are named executive officers and, hence, already are reported in the Summary Compensation Table, would be excluded from the Director Compensation Table. Comment, however, is requested by the SEC as to whether a note to the new table should provide description of such information as to directors who are included in the Summary Compensation Table. 7
The following compensatory and benefit arrangements would continue to be provided in narrative form:
* retirement and pension benefits;
* death and other insurance benefits;
* legacy and other charitable programs;
* other non-cash and non-stock benefits.
As under current rules, material terms of "non-standard" arrangements would be disclosed. With respect to consulting contracts and other non-standard arrangements for which amounts are presented in the new table, the material terms of these arrangements could be set forth either in a note to the table or in a narrative immediately following the table.
On June 19, the National Association of Corporate Directors (NACD) issued a report on director compensation including comments regarding the disclosure of directors' compensation to shareholders. 8 The SEC states, in a footnote to its release, that its proposals were not prepared as a response to the NACD report. 9
Any comments to the proposed amendments should be furnished to the SEC by Sept. 9. Based on the proposal and adoption schedule for the last set of amendments to the executive compensation disclosure rules, 10 it is very likely that these new rules (if adopted) will be effective for the 1996 proxy season. 10
For more than two years, this column has been reporting developments of the FASB's Stock-based Compensation Project. 11 In 1993 the FASB proposed that companies recognize stock option grants as a compensation expense resulting in a charge against earnings. 11
At the end of 1994, after extensive and widely reported criticism of its original proposal, the FASB decided it would not require companies to charge earnings but would require pro forma disclosure, in footnote form to the financial statements, of what the financial consequences would have been if stock option grants had been recognized as a charge against earnings.
On July 26, the FASB voted to adopt the latter approach and issue a new final accounting standard for stock options and other stock-based awards to employees. (A draft of the new accounting standard was circulated in May to certain parties but, as it had previously announced, the FASB did not issue a new Exposure Draft for general comment.) Issuance of the new standard is expected in September.
The new accounting standard will be effective for financial statements issued for fiscal years beginning after Dec. 15, 1995. The 1996 financial statements will be required to include pro forma disclosure of awards made in fiscal 1995 as well as fiscal 1996.
STock options generally permit post-employment exercises following certain types of terminations. The most frequent terminations permitting post-termination exercise are those resulting from death, disability or retirement. Many plans also permit post-employment exercise following a termination without cause. 12
The most common condition to the continuing right to exercise an option following termination appears to be the condition that the former employee not go to work for a competitor. In some cases, however, a stock option plan, or an agreement, will go beyond that in setting conditions for continuing exercisability.
A recent example of post-termination perils to the holder of stock options involves Lee Iacocca, who served as chief executive officer of Chrysler from 1979 to 1992. When he retired at the end of 1992, Iacocca held exercisable options for about 2 million shares and unexercisable options for about 1.2 million shares, with an aggregate value at that time (based on spread) of more than $35 million. 13
Earlier this year, Iacocca worked with investor Kirk Kerkorian in what turned out to be an unsuccessful effort to take over Chrysler. More recently (and after the failed takeover bid) Iacocca attempted to exercise options on 112,500 Chrysler shares, with a value (based on spread) of about $5.6 million.
On July 6 Chrysler's board of directors refused to allow Iacocca to exercise his options. Paragraph 8 of the Chrysler Corp. Stock Option Plan, the applicable plan, contains the following provision imposing post-termination conditions:
[The] exercise of any option after termination of employment shall be subject to satisfaction of the conditions precedent that the Option Holder neither, (a) takes other employment or renders services to others without the written consent of the Corporation, nor (b) conducts himself in a manner adversely affecting the Corporation.
The Chrysler board is reported to have pointed to a $41,667-per-month consulting arrangement with Kerkorian's Tracinda Corp. to which Chrysler had not consented, as well as to have asserted that Iacocca's involvement in the takeover bid was conduct that adversely affected Chrysler. 14 At the time of writing this column, the author was not aware of any settlement in this matter.
Both General Motors Corp. and Ford Motor Co. also have provisions in their stock option plans that extend post-termination restrictions on stock option exercises to actions going beyond competition. Paragraph 5(c) of the General Motors Amended 1987 Stock Incentive Plan (as amended as of May 22, 1992) contains the following provision:
[The] exercise of any option after termination of employment shall be subject to satisfaction of the conditions precedent that the employe refrain from engaging in any activity which, in the opinion of the Committee, is competitive with any activity of the Corporation or any subsidiary . . . and from otherwise acting, either prior to or after termination of employment, in any manner inimical or in any way contrary to the best interests of the Corporation and that the employe furnish to the Corporation such information with respect to the satisfaction of the foregoing condition precedent as the Committee shall reasonably request.
Paragraph 8(c) of the Ford Motor Co. 1990 Long-Term Incentive Plan (as amended as of Oct. 1, 1990), in addition to a no-compete clause applicable following termination, contains the following provision:
[All] rights of a Participant under any Plan Award shall cease on and as of the date on which it has been determined by the Committee that such Participant at any time (whether before or subsequent to termination of such Participant's employment) acted in a manner inimical to the best interests of the Company.
These three examples from one industry evidence the risks associated with post-termination stock option entitlements. In addition, stock option plans do not necessarily contain all the restrictions on a former executive's entitlements. The stock option grant itself must be examined before concluding what the post-termination conditions to exercise may be in a particular case.
1 SEC Release Nos. 33-7184; 34-35894.
2 60 Fed. Reg 35,634. In this connection, see Item 8 of Schedule 14A (Information Required in Proxy Statement) under the Securities Exchange Act of 1934.
6 Id. at 35,637.
7 Id. at 35,635.
8 "NACD Blue Ribbon Commission Report on Director Compensation," National Association of Corporate Directors (June 19, 1995).
9 60 Fed. Reg. 35,634.
10 These amendments were published as proposals in the Federal Register on Aug. 12, 1993 (58 Fed. Reg. 42,882), and became effective as of Nov. 29, 1993 (58 Fed. Reg. 63,010), in time for the 1994 proxy season.
11 See this column, New York Law Journal, March 29, 1993; June 30, 1993; June 30, 1994; Aug. 31, 1994; Nov. 29, 1994; and March 30, 1995.
12 Note that the extent of the post-employment periods over which continuing exercise is permitted vary and are beyond the scope of the column.
13 Chrysler Corp. proxy statement at 17 (April 9, 1993).
14 Robert L. Simison and Oscar Suris, "Chrysler Tells Iacocca It Won't Let Him Cash In His Options," The Wall Street Journal, A3 (July 7, 1995); Kurt Eichenwald, "Angry Chrysler Board Prevents Iacocca From Using Options," The New York Times, D1 (July 7, 1995).