DealLawyers.com Blog

Here’s news from Carol Bowie, Head of ISS Americas Research:

Some key developments this proxy season suggest that investor sensitivity is growing in regard to perceived windfalls accruing to executives in connection with change in control transactions. For one, this year’s majority supported shareholder proposals included four on the topic of equity vesting related to a CIC. Specifically, proposals at Gannett Co., Boston Properties, Valero Energy, and Dean Foods garnered support from 52.2 percent, 53.1 percent, 56.2 percent, and 60.6 percent of votes cast for and against, respectively, at their 2014 shareholder meetings.

That level of support is a first for this topic, and unprecedented since say-on-pay became the focus of investor concerns about compensation. Shareholder campaigns around the issue of CIC-related vesting, dating from 2010, have evolved from a focus on “double vs. single triggers” (i.e., requiring employment termination, rather than automatic vesting acceleration upon a CIC) to the current proposal language, which asks companies to permit only pro rata, rather than full, vesting of awards in connection with a transaction. The latest resolution has been submitted to a total of 22 companies so far this year, including the four cited above where it was backed by a majority of votes cast. Overall, the 20 proposals for which vote results are available at this writing have averaged 35.8 percent support this year.

At the same time, companies have been increasingly embracing the concept of “double-triggered” CIC related equity vesting–or at least providing an alternative to automatic full vesting as soon as a transaction occurs. ISS’ QuickScore data indicates that the proportion of S&P 500 companies adopting new equity plans that provide solely for automatic vesting declined from 48 to 28 percent from 2012 to 2014. While not as dramatic, the decline has also been significant at companies in the broader Russell 3000 index, where new plans with automatic vesting provisions slid from 55.5 to 42.9 percent over the same period. Instead, equity incentive plans are increasingly providing for the possibility of assumption or substitution of outstanding awards, with any accelerated vesting then linked to an executive’s subsequent employment termination.

While automatic vesting may be declining as “the norm,” many change-in-control transactions–all cash deals, for example–may nevertheless preclude the possibility of awards being assumed or substituted. Thus, investor focus appears to have gravitated to a campaign encouraging only pro rata vesting, based on time served by the executive, in order to avoid “windfall” compensation resulting from the change in control.

The issue remains in flux, but another vote result this year provides further evidence that–despite generally robust investor support for “say on golden parachute” proposals–sensitivity about CIC-related windfall pay remains high. At Time Warner Cable’s June 5, 2014, shareholder meeting, some 40 percent of votes cast opposed the company’s advisory vote on compensation, and compensation committee chair Peter R. Haje also received unusually high opposition–about 23 percent of votes cast for and against.

Given that TWC’s executive pay levels as of 2013 were aligned with company performance, the driver of that opposition is likely a decision made in anticipation of the company’s proposed acquisition by Comcast Inc., to accelerate, to early 2014, grants of long-term incentive shares that otherwise would not have been made to managers (including named executive officers) until 2015 and 2016. The “advance” awards also lacked any performance conditions. Vesting of this extra equity may fully accelerate upon a change in control with employment termination–that will likely enhance the golden parachute packages of many executives, including recently promoted CEO Robert P. Marcus, whose additional grants will contribute about $17 million of the $79 million in total benefits the company reported he could receive upon the merger. A pro rata vesting policy would, of course, curtail some of that and may be the message shareholders wanted to send.