Monthly Archives: January 2015

Long-term Incentive Grant Practices for Executives

The following post comes to us from Frederic W. Cook & Co., Inc., and is based on a publication by James Park and Lanaye Dworak. The complete publication is available here. An additional publication authored by Mr. Park on the topic of executive compensation was discussed on the Forum here. Research from the Program on Corporate Governance on long-term incentive pay includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried, discussed on the Forum here.

The use of long-term incentives, the principal delivery vehicle of executive compensation, has long been sensitive to external influences. A steady source of this influence has come under the guise of legislative reform with mixed results. In 1950, after Congress gave stock options capital gains tax treatment, the use of stock options surged as employers sought to avoid ordinary income tax rates as high as 91%. Some forty years later, Congress added Section 162(m) to the tax code in an attempt to rein in excessive executive pay by limiting the deduction on compensation over $1 million to certain executives. Stock options qualified for a performance-based exemption leading to a spike in stock option grants to CEOs at S&P 500 companies.

Fast forward twenty years and the form and magnitude of long-term incentives continues to be a hot button populist issue. The 2010 Dodd Frank Act introduced U.S. publicly-traded companies to Say on Pay giving shareholders a direct channel to voice their support or opposition for a company’s pay practices. Another legislative addition to the litany of unintended consequences, Say on Pay has magnified the growing number of interested parties, increased the influence of proxy advisory groups such as Institutional Shareholder Services (ISS) and Glass Lewis, heightened sensitivity to federal regulators, and provoked the increased interaction of activist investors.


ABI Commission to Study the Reform of Chapter 11 Report

The following post comes to us from Donald S. Bernstein, Partner and head of the Insolvency and Restructuring Practice at Davis Polk & Wardwell LLP, and is based on a Davis Polk memorandum authored by Mr. Bernstein, Marshall S. Huebner, Damian S. Schaible, and Kevin J. Coco. The complete publication is available here.

On December 8, the American Bankruptcy Institute Commission to Study the Reform of Chapter 11 released its Final Report and Recommendations. The American Bankruptcy Institute organized the 23-member Commission in 2011 to study and address how financial markets, products and participants have evolved and, in some respects, outgrown the current chapter 11 framework, enacted in 1978. Since the 19th century, Congress has overhauled the corporate reorganization provisions of the federal bankruptcy law approximately every 40 years, and the 40th anniversary of the enactment of the 1978 Bankruptcy Code is just four years away. The Commission Report, which spans nearly 400 pages, recommends significant changes that seek to reconfigure our corporate insolvency system.


Using Spin-offs to Raise Cash, Reduce Debt and Recapitalize

The following post comes to us from Stephen I. Glover, Partner and Co-Chair of the Mergers & Acquisitions practice at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn M&A Report.

Spin-offs continue to be a prominent feature of the deal landscape; new transactions are announced on an almost weekly basis. For example, Barnes & Noble recently said that it plans to spin off its Nook business, eBay said that it would spin off PayPal, and Hewlett Packard announced that it would spin off its printer and computer business. A total of approximately 51 separation transactions have been announced so far this year. The tally was not quite as high in 2013, but still robust; approximately 42 transactions were announced.

When market analysts seek to explain this apparently never-ending stream of separation transactions, they reason that the stock market rewards pure-play companies focused on a single line of business with higher stock prices than conglomerates. They also observe that activists have added momentum to the transaction flow by encouraging companies that operate several lines of business to consider separation opportunities. In addition, they observe that separation transactions can result in improved management focus, enable the implementation of more efficient capital structures and compensation programs, and result in the creation of a new equity currency.


Delaware and the Transformation of Corporate Governance

Brian Cheffins is Professor of Corporate Law at the University of Cambridge. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The corporate governance arrangements of U.S. public companies have been transformed over the past four decades. Independent directors now dominate boards (at least numerically), activism by shareholders has become more prevalent and executive pay has become more lucrative and more performance-oriented. The changes have been accompanied by a new nomenclature—the term “corporate governance” only came into general usage in the 1970s. How and why did this transformation of corporate governance come about? Delaware and the Transformation of Corporate Governance, which is based on the 2014 Francis G. Pileggi lecture, addresses these questions by assessing Delaware’s impact on key corporate governance trends.


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