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Executive Compensation and Federal Preemption of Delaware Law: Proposed Governance Provisions in the Draft Bailout Bill (Part 2)

By J. Robert Brown

 

Yesterday, we noted talk about the inclusion in the bailout bill of corporate governance provisions.  We attributed the sentiment to the utter failure of state law to impose meaningful regulations with respect to executive compensation and the resulting impetus for federal preemption.  The preemption process has moved close to reality. 

The working draft of the House bailout bill has some significant corporate governance provisions. The provisions would apply to companies "seeking to sell assets through the program." Specifically, those companies would be required, for two years, to limit compensation to exclude incentives for executive officers to take risks that the Secretary deems to be inappropriate or excessive during such participation; to permit recovery of incentive compensation once it is proven that the financial statements were false or inaccurate; and to prohibt the payment of severance compensation during the period.

For companies where the Secretary makes a direct purchase, they must provide an advisory vote on executive compensation and must provide access to the proxy statement for 3% shareholders. In addition, the ban on severance remains in effect. These requirements remain as long as the Secretary retains an equity position. The precise language is below.

The provisions are, therefore, temporary.  The most significant is the direct interference in the calculation of executive compensation and the imposition of access.  With financial institutions providing access, it will be hard for the SEC to avoid adopting the same requirement.  Moreover, the access provided in the draft is broader than what the SEC considered back in 2007.  Rather than address whether shareholders can insert in the proxy statement a bylaw that would provide for access, the draft statute provides direct access for 3% shareholders.  In other words, by failing to adopt the access proposal that it had under consideration, a very limited version of access, the result will likely be some federal mandate for even broader access for shareholders. 

9. EXECUTIVE COMPENSATION AND CORPORATE GOVERNANCE.

(a) IN GENERAL.?The Secretary shall require that all financial institutions seeking to sell assets through the program under this Act meet appropriate standards for executive compensation and corporate governance in order to be eligible.

(b) CRITERIA FOR STANDARDS.?The standards under this section shall include with respect to any financial institution participating in the program under this Act, and effective for the two years after entry by the financial institution into such participation?

(1) limits on compensation to exclude incentives for executive officers to take risks that the Secretary deems to be inappropriate or excessive during such participation;

(2) a provision for the recovery by the financial institution of any bonus or other incentive compensation paid to a senior executive officer based on statements of earnings, gains, or other criteria that are later proven to be false or inaccurate; and (3) a prohibition on the financial institution paying severance compensation to its senior executive officers during such period.

(c) ADDITIONAL STANDARD FOR DIRECT PURCHASES.?The standards prescribed by the Secretary under this section shall include additional standards with respect to financial institutions in which the Secretary makes a direct purchase from an individual financial institution. Such standards shall be effective for the duration of the holding by the Secretary of such equity position, and shall include?

(1) a requirement that the financial institution permit any shareholder or group of shareholders holding, in the aggregate, equity securities of the institution representing three percent or more of the equity securities of the financial institution, access to the proxy solicitation and shareholder vote for any election of the board of directors of the institution for the purposes of nominating and electing a designated individual to the board of directors of the institution;

(2) a requirement that the financial institution afford all shareholders the opportunity to cast a non-binding vote, in any annual proxy solicitation and shareholder vote, on the executive compensation to be provide to the executive officers of the financial institution; and

(3) a prohibition on the institution paying severance compensation to its senior executive officers during any period in which the Secretary continues to hold an equity position in the financial institution.

(d) SEVERANCE COMPENSATION.?For purposes of this section, the term ??severance compensation?? means any compensation that is awarded to a senior executive officer on the basis of the termination of such executive officer?s service with the financial institution, other than a pension plan or a retirement plan in which the executive officer?s rights were fully vested prior to the entry of such financial institution into participation in the program under this Act.

Full post as published by The Race to the Bottom on September 23, 2008 (boomark / email).