United States: Director And Executive Compensation Remains A Hot Topic For 2016

 A series of recent Delaware Chancery Court and Securities and Exchange Commission ("SEC") decisions—coupled with anticipated SEC action to finalize the three remaining Dodd-Frank Wall Street Reform and Consumer Protection Act compensation rules—emphasize that director and executive compensation remains a hot topic for 2016. As a result of the heightened scrutiny of board decisions involving director or executive compensation, directors should consider whether their corporate governance practices could be enhanced by stepped-up periodic review of compensation practices and enhanced board and committee action documentation. The SEC's expectation of reimbursement of even de minimis compensation amounts following financial restatements born from misconduct, even if the CEO or CFO is not found to have participated in the misconduct, suggests that companies should closely examine their clawback policy if they have one, or consider implementing one if they don't. This client alert highlights for boards and management recent and pending developments in this area.

Delaware Developments Concerning Director Compensation

In the last year, Delaware courts have issued several rulings that suggest heightened scrutiny of board decisions involving director or executive compensation. First, with respect to director compensation, in April 2015, the Chancery Court held in Calma v. Templeton (the "Citrix case") that stockholder approval of an omnibus equity incentive plan would not constitute ratification of non-employee director compensation in the absence of specific or meaningful limits in the plan on the amount of compensation that may be awarded to non-employee directors. As noted in our earlier client alert, Delaware courts may apply the heightened "entire fairness" standard in analyzing non-employee director compensation approved by directors pursuant to a stockholder-approved equity plan without specific or meaningful director compensation limits.

More recently, in October 2015, the Chancery Court reviewed the equity awards and cash retainers paid to Facebook, Inc.'s non-employee directors in Espinoza v. Zuckerberg, et al. The suing stockholder criticized the compensation that Facebook paid to its non-employee directors, which was approximately 46% higher than the director compensation paid by its peer group. The Court declined to view Mark Zuckerberg's approval of the compensation in a deposition and in an affidavit as formal stockholder ratification of the self-interested transaction. Last month, as part of the settlement to resolve the dispute, Facebook agreed to (i) improve its corporate governance practices by providing for an annual review of non-employee director compensation with the assistance of an independent compensation consultant, (ii) submit for stockholder approval the 2013 non-employee director award grants and Facebook's annual director compensation program (which includes a specific amount for annual equity grants and delineates annual retainer fees) and (iii) pay plaintiff's attorneys' fees to settle the lawsuit. Although it remains to be seen whether other companies will voluntarily submit director compensation practices for stockholder approval, at a minimum, companies should consider whether their corporate governance practices could be enhanced by stepped-up periodic review of director compensation practices.

Delaware Developments Concerning Executive Compensation

Last month, the Chancery Court determined that a stockholder may inspect Yahoo! Inc.'s books and records—including, potentially, any relevant emails1 from CEO Marissa Mayer and Yahoo's compensation committee members if such individuals chose to use a personal email account to conduct Yahoo business, in addition to any emails from their Yahoo corporate accounts—to investigate alleged excessive compensation to Yahoo's former COO, Henrique de Castro, assess the independence of the compensation committee and investigate the circumstances surrounding Mr. de Castro's departure. The Court focused on the record established by the stockholder on the basis of publicly available materials and information supplied by Yahoo, which indicated that Ms. Mayer "failed to provide material information to the Committee during the early stages of the hiring process...while seeking the Committee's blessing for a large compensation package that the Committee's compensation consultant regarded as 'generally more than the data supported.'" The Court was also troubled by the allegation that "Mayer provided inaccurate information to the Committee about the terms of the [offer letter when asking them to approve a change to the COO pay package], and that the Committee agreed to the change based on the inaccurate information Mayer provided." The Court also observed that Ms. Mayer made additional changes to the final offer letter that materially increased Mr. de Castro's potential compensation, and that such changes did not appear to have been approved by the Committee. Finally, the Court agreed with the stockholder that the circumstances surrounding Mr. de Castro's termination without cause raised significant issues, as it appeared that a for-cause alternative may have been available. The Court also criticized the directors for their apparent "tangential and episodic" involvement, and uncritical acceptance of Ms. Mayer's statements and lack of questions surrounding Ms. Mayer's decision to terminate Mr. de Castro's employment without cause, when the Court suggested that Mr. de Castro failed to perform at every point during his brief tenure at Yahoo.

Practical Considerations When Engaging in Director and Executive Compensation Transactions

While the Citrix case is currently pending, and Yahoo last week appealed the Court's order that it must show documents connected to the employment of Mr. de Castro to Yahoo's suing stockholder, from a practical perspective, when a plaintiff's claim survives a motion to dismiss or the plaintiff clears the hurdle for a Delaware statutory books and records demand, litigation costs tend to rise substantially and the plaintiff has substantial leverage to extract a favorable settlement, including payment of attorneys' fees. A common theme has emerged from the Citrix, Facebook and Yahoo decisions: Process is critical in making decisions that involve director and executive compensation. In the Yahoo case, Vice Chancellor Laster stated that "[a] board cannot mindlessly swallow information, particularly in the area of executive compensation." As we await resolution of the pending Citrix and Yahoo cases, we recommend that companies consider the following actions when making director and/or executive compensation decisions:

  • Boards and compensation committees should act reasonably and thoughtfully in setting director and executive compensation, using appropriate, rigorous and objective peer group data and outside advisers, including independent compensation consultants.
  • Boards and compensation committees should remain involved and engaged in the hiring and termination of executives and exercise their own business judgment in approving an executive compensation transaction.
  • Well-written minutes should document board and committee actions related to director and executive compensation. Board members and management should be cognizant that, under certain circumstances, their personal email accounts and other electronically stored documents may be subject to inspection or discovery, to the extent such accounts and documents relate to the issue at hand.
  • A company planning to seek stockholder approval of an equity compensation plan in which directors participate should consider including a meaningful or specific limit on non-employee director compensation. Although, according to the National Association of Stock Plan Professionals/Deloitte Consulting 2014 Domestic Stock Plan Administration Survey, 77% of respondents said their plans did not include a limit on grants to non-employee directors, in our experience, more companies are adding non-employee director equity compensation limits, particularly when stockholders will be voting on the equity plan for other reasons.
  • A company contemplating an increase to the compensation granted to non-employee directors should consider whether to obtain stockholder approval of specific amounts of or limits to director compensation, and if approval is not sought, provide a reasonable and thorough explanation for the change in director compensation in its proxy statement.

SEC Enforcement Actions under Section 304 of Sarbanes-Oxley Target Executive Compensation

Dodd-Frank was signed into law in 2010. More than six years later, guidance on several of the law's executive compensation provisions is still making its way through the regulatory pipeline, and regulations to guide companies in complying with another provision—the CEO pay ratio rule—have only recently been finalized. While we await final regulations (i) requiring pay versus performance disclosure, (ii) disclosure of hedging policies and (iii) adoption and disclosure of clawback policies, the SEC has continued to demonstrate its willingness to bring enforcement actions under Section 304 of the Sarbanes-Oxley Act of 2002 ("SOX") against CEOs and CFOs who fail to reimburse companies following an accounting restatement due to material noncompliance with the securities laws, even for de minimis amounts. Section 304 requires the CEO or CFO of any issuer required to prepare an accounting restatement due to material noncompliance with the securities laws as a result of misconduct to reimburse the issuer for (i) any bonus or incentive-based or equity-based compensation received by that person from the issuer during the 12-month periods following the false filings, and (ii) any profits realized from the sale of securities of the issuer during those 12-month periods.

Most recently, last month, the former CFO of Marrone Bio Innovations, Inc. ("MBI") settled an enforcement action brought by the SEC in connection with misstated revenues at MBI. Even though the SEC did not allege that the former CFO had personally participated in the misconduct giving rise to the misstatement, the CFO received bonuses tied to MBI's achievement of certain revenue targets during the periods following the filings containing the financial results that MBI had restated. In the settlement, the former CFO of MBI agreed to cease and desist from committing or causing any violations of Section 304 of SOX and reimburse $11,789 to MBI.

Also last month, the SEC announced an investigation that found Monsanto Company had violated accounting rules and misstated company earnings by improperly accounting for rebates. Monsanto agreed to pay an $80 million penalty and three accounting and sales executives agreed to pay penalties ranging from $30,000-$55,000. Notably, the SEC found no personal misconduct by Monsanto's CEO and former CFO, who reimbursed Monsanto $3,165,852 and $728,843, respectively, for bonuses and stock awards they received during the periods when the accounting violations were committed. Therefore, since the executives had reimbursed the company for the compensation, the SEC opted not to pursue a clawback action under Section 304 of SOX.

We expect the SEC to finalize rules related to pay versus performance, hedging and clawbacks in the near future. Until then, the SEC's enforcement actions against Marrone Bio Innovations and Monsanto indicate that the SEC will continue to closely monitor accounting restatements and use its power under Section 304 of SOX to pursue clawback actions against CEOs and CFOs who received compensation or profits that are subject to recoupment under SOX. Companies, and their CEOs and CFOs, may avoid clawbacks (and related adverse publicity) if CEOs and CFOs reimburse the company for compensation or profits received by them on the basis of financial results that are subsequently restated. The SEC's actions suggest that no clawback amount will be too small, and it will not matter if the CEO or CFO is found to have committed no personal misconduct in connection with the material misstatements.


1 The Court held that emails and other electronically stored documents are within the scope of "corporate books and records," and clarified that management and board members' emails would include emails from any personal accounts that management and board members may have used to conduct business on behalf of the company. For more information about the reach of a books and records inspection request in our increasingly digital age, see Francis G.X. Pileggi, Kevin F. Brady & Jill Agro, Inspecting Corporate "Books and Records" in a Digital World: The Role of Electronically Stored Information, 37 DEL. J. CORP. L. 163 (2012), available here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions