Executive Compensation

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In the wake of President Obama’s signing into law the Defend Trade Secrets Act (“DTSA”) on May 11, 2016, companies will want to revisit their practices for protecting their trade secrets, especially in the employee/HR context.  The DTSA expands the body of trade secrets law, an area that has traditionally been the subject only of state law, by creating a federal civil cause of action for trade secret misappropriation.  The Act provides for injunctive relief and compensatory damages, and, if a trade secret is “willfully and maliciously misappropriated,” exemplary damages and attorney’s fees.  The legislation enables trade secret owners to protect their innovations by seeking redress in federal court, in the same way that owners of other forms of intellectual property, including copyrights, patents, and trademarks, can seek remedies in federal court for violations of their rights.
Continue Reading Implications of the Defend Trade Secrets Act for Employers

On March 28, 2016, on remand from the First Circuit, the United States District Court for the District of Massachusetts held that Sun Capital Fund III and Sun Capital Fund IV were jointly and severally liable for the multiemployer pension plan withdrawal liability of their bankrupt portfolio company, despite the fact that these funds were not parallel investment funds, generally had different investors and neither fund individually held an 80% or greater ownership interest in the portfolio company.  Under the Employee Retirement Income Security Act or “ERISA”, an entity such as a corporation or a partnership engaged in a trade or business may have liability for pension liabilities of other entities in the same “controlled group”.  Although the rules are complicated and technical, entities that are under 80% or more common control with each other will generally be considered to be in the same controlled group for these purposes.  In the Sun Capital case, the District Court concluded that the funds’ coordinated efforts in forming the limited liability corporation through which they held their respective investments resulted in the funds having formed an undocumented general partnership-in-fact that was engaged in a trade or business.   As the 100% owner of the LLC formed by the funds, such de facto partnership was found to be in the portfolio company’s controlled group and its partners, the two funds, were held to be joint and severally responsible for the withdrawal liability of the portfolio company under general partnership unlimited liability principles.
Continue Reading Most Recent Sun Capital Decision Expands Reach of Controlled Group Liability Under ERISA

The Pension Benefit Guaranty Corporation’s (the “PBGC”) widely reported[1] recent settlement agreement with The Renco Group, Inc. (“Renco”) illustrates the risks inherent in pursuing certain transactions where underfunded pensions are present.  Among the highlighted risks is the potential for the joint and several liability provisions of federal pension law[2] to enable the PBGC to reach for assets unrelated to a pension plan sponsor’s business, including personal assets of controlling persons, to satisfy underfunded pension claims.

Based on published reports, the Renco settlement, after a trial but before a decision was handed down by the Federal court in New York, is unusual in three respects.  First, the PBGC returned the plans at issue to Renco – that is, “restored”[3] the plans – rather than negotiating for Renco or an affiliate to make payments to improve the plans’ funded status.[4]  Second, the situation involves a rare instance in which the PBGC has pursued a litigation on the basis of a claim under Section 4069 of ERISA, the anti-evasion section of the pension termination provisions of ERISA.  Third, the PBGC used the controlled group joint and several liability provisions of ERISA to assert claims against entities that are not involved in the steel business but that are controlled by Renco and its controlling shareholder Ira Rennert.  While the PBGC has on many occasions used the controlled group liability provisions of ERISA to reach controlled group affiliates that are in separate lines of business from the plan sponsor, the facts in Renco are reminiscent of the PBGC’s lengthy fight with Carl Icahn beginning in the early 1990’s over responsibility for TWA’s underfunded pension obligations.[5]
Continue Reading PBGC-Renco Settlement Highlights Risk and Reach of ERISA’s Pension Underfunding Joint and Several Liability Provisions

The Delaware Court of Chancery’s recently published opinion in Amalgamated Bank v. Yahoo!, Inc.[1] (the “Opinion”) provides a reminder for  directors about the importance of process in satisfying fiduciary duties when evaluating and approving executive compensation packages.  In the Opinion, which deals with Amalgamated’s demand under Section 220 of the Delaware General Corporation Law to inspect certain books and records of Yahoo! in connection with the hiring and firing of its Chief Operating Officer, Vice Chancellor Laster discusses practices that should be routine in a board’s review of executive compensation proposals and highlights procedural pitfalls that have been noted in numerous Delaware law decisions dating back at least to the series of cases involving compensation practices at Disney beginning more than a decade ago.
Continue Reading Delaware Court of Chancery Offers Practical Lessons for Compensation Committees

It is well known that specified employees of publicly-traded companies must wait at least six months following a separation from service to receive payments of deferred compensation triggered by such separation.  The six-month delay requirement must be set forth in the plan establishing the right to the payment of deferred compensation on or before the date the applicable individual first becomes a specified employee.  Failure to do so, either as a matter of documentary or operational compliance, could result in the imposition of draconian penalty taxes and interest charges on the service provider under Section 409A of the Internal Revenue Code of 1986 (the “Code”).
Continue Reading Section 409A and the Six Month Delay – Don’t Forget Your Directors

After several years that seemed defined by turmoil and uncertainty, 2015 delivered some unexpected and much-needed clarity for corporate directors on issues such as proxy access, compensation disclosure, investor expectations regarding board composition, certain director and financial advisor conflicts of interest, and audit committee processes and related disclosure. The past year also saw corporations adopting…

On April 29, 2015 the Securities and Exchange Commission announced the issuance of proposed rules requiring issuers to disclose information that shows the relationship between executive compensation and the financial performance of the issuer. Our memorandum summarizes the proposed rules, highlights issues and suggests sample disclosure approaches.

Please click here to read our memorandum.

Based on the SEC’s Spring 2015 rulemaking agenda, issuers are getting additional breathing room on certain of the unfinalized executive compensation provisions under the Dodd-Frank Act.  While there is no indication as to the timing of final pay-versus-performance rules, no action on final rules for pay ratio and hedging disclosure and proposed rules for compensation…

On April 16, 2015, at 2:30 p.m. EST, Cleary Gottlieb partner Arthur H. Kohn will participate in The Conference Board‘s Governance Watch panel discussion, “Do ‘Golden Leash’ Board Arrangements Create Impermissible Conflicts of Interest?”

For additional information or to register for this webcast, click here.

As expected, 2014 proved to be a challenging year for boards.  The legal and economic environments continued to grow more complex, and directors faced increasing scrutiny from investors and governmental authorities in the forms of market reaction, shareholder activism, litigation and enforcement and regulatory activity.  We expect these trends to continue, and boards will need to remain extremely proactive in their oversight and involvement in 2015.
Continue Reading Selected Issues for Boards of Directors in 2015