Exec Comp Lessons: Emphasis to Shareholders Can Make a Fact Material

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Louisiana Municipal Police Employees Retirement System (“LAMPERS”), et al v. Bergstein, et al (Simon Properties Inc.).

Quick summary.  In 2013 the Delaware Chancery Court issued an executive compensation ruling that has been criticized as a less than thoughtful windfall for the plaintiff shareholders.  In reality, it is a clear case of a company being too cute by far for little good reason. In this case, Simon Properties Group, Inc. (“SPG”), a publicly traded real estate investment trust (“REIT”) took a plan that had been approved by shareholders and made a CEO award valued at $120 million.  While seemingly high, that award amounted to compensation of only about 20 basis points for the 28X return the shareholders received during the tenure of the CEO. Most shareholders would gladly pay that kind of compensation for that kind of return.  But to make the award, SPG’s board amended a plan which had been approved by shareholders as a “performance” only plan to permit vesting on the basis of time served only—without regard to any performance metrics. SPG’s motion to dismiss claimed NYSE issued SPG specific guidance that shareholder approval to amend the plan was not required.  The court denied SPG’s motion.  

The facts are really pretty simple: SPG had adopted a shareholder approved incentive plan requiring executive performance to meet board approved performance targets in order for stock awards to vest.  The plan was amended by the board in 2011 to permit awards to be earned by service vesting—i.e., continued employment for a number of years—the amendment was not approved by shareholders.  The CEO was then granted an award valued at $120 million that vested in increments after six, seven and eight years of continued employment, without regard to the performance metrics upon which previous awards had to vest.  After a flood of public criticism, including a scathing New York Times article (which said something to the effect that the CEO’s current pay package of $7 million a year ought to be enough for him to show up cheerily at work every day), and despite SPG’s strong support for its action, SPG’s executive pay failed the nonbinding say on pay shareholder vote with 74% disapproval.

The shareholder derivative action was then filed alleging the board’s breach of duty to the shareholders in approving the award without shareholder approval.  Plaintiffs asserted shareholder approval was required by Internal Revenue Code Section 162(m) and NYSE listing rules.  The defendants basically countered that a company is not required to minimize its tax payments (which the Delaware courts confirm) and that Section 162(m) did not even apply to the Company because of its REIT status. As for NYSE, it is true NYSE rules generally require shareholder approval of stock plans and “material” amendments.  However, pursuant to the customary manner in which companies receive guidance from NYSE as to its listing rules, SPG had received an email from NYSE concurring with the conclusion of SPG’s counsel that amendments to vesting provisions, including one that changes vesting from performance based to service based, was not “material.”

Focusing mostly on NYSE, the court permitted the heart of the plaintiffs’ claim to proceed.  In these types of hearings, the standard is whether there is basically no chance the plaintiff can win based on what is pleaded.  So, in making its ruling, the court was not saying plaintiffs could win, only that it was not inconceivable the plaintiff could show the change was material and that the informal email exchange did not bind the shareholders from claiming they were entitled to vote under NYSE’s rules.

The words of Chancellor Strine (now elevated to the Delaware Supreme Court) are revealing.  At one point Chancellor Strine doubted that SPG adequately explained the magnitude of what was contemplated in seeking an answer from NYSE’s counsel.  Further, Chancellor Strine doubted that Mr. Carey (NYSE’s counsel) gave the matter much thought, and therefore doubted the binding effect such response had on NYSE and plaintiff shareholders:

“[The inquiry from Simon’s counsel to NYSE] didn’t go like this.

’Dear Mr. Carey: In 1998, the stockholders adopted this,’ and then to give focus on what this is and what it’s not. ‘It was a broad-based plan, but Section 3.3 of this is really what’s at stake. In that plan, the stockholders authorized a certain number of performance-based units be given out under the following language. We would like to add language which would essentially make it not simply a performance-based thing. We note, contextually, that since that time, we have put out public disclosures about the plan emphasizing our pay-for-performance philosophy. We note that this would change our pay-for-performance philosophy because we believe there are exigent business circumstances to keep our CEO on board and we need to pay him more on a nonperformance basis. The board of directors has decided in its business judgment that it would like to award him $120 million worth of units that will vest on a schedule if he meets the minimal level for continued employment during that year and, in fact, shows up to work. We consider the change of these units from performance-based units to units that would simply be awarded in a manner akin to salary to be an immaterial change not requiring a vote. Would you please let us know whether you agree that this is an immaterial change and does not require a vote.’


Continuing, Chancellor Strine ventured the following:


“My sense is Mr. Carey just might not have been — this is not even a full business day they took. Because, again, I’m not assuming — when was this, March? I’m not assuming if they — if he was going to Ft. Lauderdale for the weekend or whatever he was doing, I’m not assuming that the high-stakes manner in which this was presented — I just don’t think he killed a weekend on it. It doesn’t have any of the kind of, ‘Aw, shucks, I better be careful’ kind of thing.”


The judge is pointing out that when a fact is made to be pivotal in communicating with shareholders—in this case performance vesting—then by the nature of the company’s own communication, the performance feature had become material. Little, out of context arguments in isolation concluding such a change is not material as an absolute are less relevant. The judge was also clearly articulating that size matters.  While, as SPG essentially articulated, 20 basis points is a pittance in relative terms, from the standpoint of shareholders, $120 million is a big deal and could well be material to them. When you combine these two observations—that a fact can be made material by its prominence in communication to shareholders, and that the amount involved is material—there are at least two very heavy factors to suggest the matter is in fact material.


Chancellor Strine also deeply doubted the manner in which the NYSE email was considered and its binding effect.  The case settled with noticeable pain to the defendants—the awards were cancelled and presumably the plaintiffs’ counsel were paid handsomely.  This suggests Chancellor Strine was right—the informal opinion expressed by NYSE did not preclude the shareholders from enforcing their right to vote—if the NYSE rules were and are such that an informal ruling like this can bind the shareholders, the defendants never would have settled.


So there was a lot going on in this case—what comfort can one take from an informal stock exchange ruling, what is material and does the nature of how a program is sold to shareholders change the very nature of what is material?  But in this case it is likely the Board could have no doubt used the plan and its performance requirements to deliver the same amount of pay to the CEO—it was a pittance of what the shareholders received.  Someone misjudged the optics badly and turned a very doable task into one that simply reeked to anyone who breaks down how it was attempted.


Contact us if you would like a copy of the bench transcript. For another detailed discussion of the case, see Harvard Law School’s analysis.

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