Could New 'Smaller Reporting Company' Rules Affect GC Compensation?
In June of this year, the Securities and Exchange Commission (SEC) voted to approve rule amendments (referred to in this article as the amendments) that specifically expand the definition of the so-called “smaller reporting company.”
September 07, 2018 at 11:26 AM
6 minute read
In June of this year, the Securities and Exchange Commission (SEC) voted to approve rule amendments (referred to in this article as the amendments) that specifically expand the definition of the so-called “smaller reporting company.” The amendments, that become effective this September, will result in 966 additional companies becoming eligible for smaller reporting company status. As a result, almost 1,000 companies can take advantage of scaled-down disclosures in their periodic reports and proxy statements, which includes opting out of executive compensation disclosures entirely. This article explores whether such an opportunity could affect executive compensation decisions altogether.
Let us begin by reviewing the amendments. The definition of smaller reporting company, prior to the amendments, comprises of companies with a public float of less than $75 million. As result of the Amendments, smaller reporting companies will include all companies with a public float of less than $250 million, as well as companies with annual revenues of less than $100 million for the previous year and either no public float or a public float of less than $700 million. Why the change to the definition? It primarily stems from the current administration's desire to open the capital markets. In addition, SEC Chairman Jay Clayton previously explained that “expanding the smaller reporting company definition recognizes that a one-size regulatory structure for public companies does not fit all.”
Under current securities rules, smaller reporting companies are eligible to provide scaled disclosure in periodic reports. For example, such companies only need to provide a two-year (as opposed to a three-year) management discussion and analysis comparison. These companies also do not need to provide risk factors in their filings. With respect to compensation, no discussion and analysis with regard to compensation decisions is required. Many have suggested that since the compensation disclosure rules were implemented over a decade ago, compensation decisions have been affected because companies are required to explain to shareholders their reasoning for all executive compensation decisions. By expanding the definition of smaller reporting company, more companies will be able to take advantage of the rules that permit companies to avoid disclosing the rationale for their executive compensation decisions and, consequently, elicit less public scrutiny of their executive compensation decisions.
Executive compensation disclosures are required by Item 402 under Regulation S-K which mandates that non-smaller reporting companies disclose: (1) who are their top five named executive officers (those most highly compensation); (2) three years of compensation information for such individuals; (3) a compensation discussion and analysis of how and why such compensation was paid to the named executive officers; (4) a detailed grants of plan-based awards table; (5) a detailed option exercises and stock vested table; (6) a detailed pension benefits table; (7) a detailed nonqualified deferred compensation table; (8) a comprehensive discussion of compensation policies and practices related to risk management of compensation; and (9) a pay ratio disclosure which is a requirement that companies disclose their CEO-to-median employee pay ratios. In contrast, smaller reporting companies are eligible to provide disclosure regarding (1) their top-three named executive officers (as opposed to five) and (2) only two years (rather than three years) of compensation information for such individuals. Moreover, such companies can completely disregard items (3) to (9) described above. There are, however, some smaller reporting companies that voluntarily provide information related to items (3) to (9) based on investor pressure.
Executive compensation disclosures are often regarded as burdensome to public companies; thus, it is predicted that the amendments will result in an increase in the number of companies that will choose to provide less compensation disclosure—in particular, it would not be unusual if such companies will refrain from providing the compensation discussion and analysis (commonly known as CD&A) as well as the pay ratio disclosures.
Interestingly, the amendments come at a time when executive compensation is increasing at noticeable rates. In 2017, larger companies, earning revenues in excess of $18 million, increased executive salaries by 17.6 percent on average from a year earlier. By comparison, the same companies increased nonexecutive employee salaries by only 0.3 percent on average. Recent SEC enforcement actions against companies for compensation disclosure missteps also highlight the sensitivity around the topic of compensation disclosure. Historically, the SEC has not brought many enforcement actions in this area, but has recently been targeting companies—and sometimes individuals at companies—for failing to properly disclose executive compensation. The SEC has recently fined public companies for failing to disclose certain expenses as executive perquisites. Companies are being asked to retain independent consultants to review and revise compensation policies and employee training around compensation disclosures. In addition, the SEC recently charged the former CEO of a public company for failing to disclose matters around personal loans. The SEC also alleged that the former CEO submitted expense reimbursements that were “unreasonable, personal in nature, and/or not supported by sufficient documentation.”
When the amendments come into effect in September, it is anticipated that fewer current public companies and fewer companies that undergo an initial public offering will provide fulsome executive compensation disclosure. This may lead to fewer opportunities for the SEC to bring enforcement actions in this area. Moreover, with fewer companies disclosing executive compensation in detail, there may also be a newfound opportunity for smaller reporting companies to protect executive compensation from the scrutiny of the investing public. In light of the uptick in executive compensation generally, this may be concerning to investors interested in ensuring that executive pay is commensurate with a respective company's performance. The 966 companies that will be faced with the decision of whether to continue to provide fulsome executive compensation disclosure will have to evaluate what executive compensation means to their investors and how to proceed under the new amendments.
Katayun I. Jaffari is a partner in Ballard Spahr's business and finance department and a member of the securities, executive compensation, life sciences/technology, energy/project finance and mergers & acquisitions practice groups. Contact her [email protected] or 215-864-8475.
Kimberly W. Klayman is an associate at the firm. She counsels publicly traded and privately held companies on mergers and acquisitions, securities offerings, regulatory compliance, corporate governance, corporate formation, contract review, and other business and financing matters. Contact her at [email protected] or 215-864-8792.
This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.
To view this content, please continue to their sites.
Not a Lexis Subscriber?
Subscribe Now
Not a Bloomberg Law Subscriber?
Subscribe Now
NOT FOR REPRINT
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
You Might Like
View AllHow Does She Do It All?: Tips and Insights for the Rising Female Attorney
7 minute readNavigating the Sandwich Generation: Women in Dual Caregiving Roles and the Power of Planning
6 minute readTime to Act: A Call for Accountability Amid a Crisis of Female Representation
8 minute readTrending Stories
- 1The Law Firm Disrupted: Playing the Talent Game to Win
- 2GlaxoSmithKline Settles Most Zantac Lawsuits for $2.2B
- 3Preparing Your Law Firm for 2025: Smart Ways to Embrace AI & Other Technologies
- 4BD Settles Thousands of Bard Hernia Mesh Lawsuits
- 5Partner Cuts: The Grim Reality of Post-Merger Integration
Who Got The Work
Lauren M. Rosenberg and Yonatan Even of Cravath, Swaine & Moore have stepped in to represent Israel-based Oddity Tech Ltd. in a pending securities class action. The case, filed Aug. 30 in New York Southern District Court by Pomerantz LLP and Holzer & Holzer, contends that the defendant made materially misleading statements regarding the capability of Oddity's AI technology and ongoing civil litigation, resulting in the artifical inflation of the market price of Oddity's securities. The case, assigned to U.S. District Judge Margaret M. Garnett, is 1:24-cv-06571, Hoare v. Oddity Tech Ltd. et al.
Who Got The Work
Eleanor M. Lackman of Mitchell Silberberg & Knupp has entered an appearance for Canon, the Japanese camera maker, and the Brooklyn Nets in a pending trademark infringement lawsuit. The case, filed Sept. 16 in California Central District Court by T-Rex Law on behalf of technology company Phinge Corporation, pursues claims against the defendants for their ongoing use of the 'Netaverse' mark. The suit contends that the defendants' use of the mark in connection with a virtual reality platform will likely create consumer confusion. The case, assigned to U.S. District Judge Consuelo B. Marshall, is 2:24-cv-07917, Phinge Corporation v. Yankees Entertainment and Sports Network, LLC et al.
Who Got The Work
Fox Rothschild partner Glenn S. Grindlinger has entered an appearance for Garage Management Company in a pending lawsuit over alleged wage-and-hour violations. The case was filed Aug. 31 in New York Southern District Court by the Abdul Hassan Law Group on behalf of a manual worker who contends that he was not properly compensated for overtime hours worked. The case, assigned to U.S. District Judge Analisa Torres, is 1:24-cv-06610, Bailey v. Garage Management Company LLC.
Who Got The Work
Veronica M. Keithley of Stoel Rives has entered an appearance for Husky Terminal and Stevedoring LLC in a pending environmental lawsuit. The suit, filed Aug. 12 in Washington Western District Court by Kampmeier & Knutsen on behalf of Communities for a Healthy Bay, seeks to declare that the defendant has violated the Clean Water Act by releasing stormwater discharges on Puget Sound and Commencement Bay. The case, assigned to U.S. District Judge Benjamin H. Settle, is 3:24-cv-05662, Communities for a Healthy Bay v. Husky Terminal and Stevedoring LLC.
Who Got The Work
Caroline Pignatelli of Cooley has entered an appearance for Cooley, partner Matt Hallinan, retired partner Michael Tu and a pair of Cooley associates in a pending fraud lawsuit related to the firm's representation of startup company Carbon IQ and founder Benjamin Cantey. The case, filed Sept. 26 in New Jersey District Court by the DalCortivo Law Offices on behalf of Gould Ventures and member Jason Gould, contends that the defendants deliberately or recklessly concealed critical information from the plaintiffs regarding fraud allegations against Cantey. Gould claims that he would not have accepted a position on Carbon IQ's board of directors or made a 2022 investment in the company if the fraud allegations had been disclosed. The case, assigned to U.S. District Judge Robert Kirsch, is 3:24-cv-09485, Gould Ventures, LLC et al v. Cooley, LLP et al.
Featured Firms
Law Offices of Gary Martin Hays & Associates, P.C.
(470) 294-1674
Law Offices of Mark E. Salomone
(857) 444-6468
Smith & Hassler
(713) 739-1250