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We are always pleased to share the insights of Attorney Michael Melbinger, Winston & Strawn LLP. The following commentary was published on June 20, 2019, on the Executive Compensation Blog and is highly informative but does not constitute legal advice. The executive benefits consulting professionals at Fulcrum Partners advise you to always consult your own tax, legal, and accounting advisers.
Interesting Battles Over Compensation Clawback Shareholder Proposals
Two large and well-known corporations with shareholder meetings coming up in the next week are facing contested stockholder proposals over compensation clawback policies. However, the circumstances and issues are very different.
Note: Alphabet Inc. is an American multinational conglomerate headquartered in Mountain View, California. It was created through a corporate restructuring of Google on October 2, 2015 and became the parent company of Google and several former Google subsidiaries.
Alphabet’s proxy statement includes Stockholder Proposal No. 15, Regarding a Clawback Policy. Apparently, Alphabet does not currently have a clawback policy in place, and a number of union pension funds are leading the charge to make them adopt a plain vanilla policy.
RESOLVED, that shareholders of Alphabet Inc. (Alphabet) urge the Leadership Development and Compensation Committee of the Board of Directors (the Committee) to adopt a clawback policy, or amend any existing clawback policy, to provide that the Committee will review, and determine whether to seek recovery of, incentive compensation paid, granted or awarded to a senior executive if, in the Committee’s judgment, (i) there has been misconduct resulting in a material violation of law or Alphabet’s policy that causes significant financial or reputational harm to Alphabet, including (but not limited to) a violation that involves creating a hostile work environment; and (B) the senior executive committed the misconduct or failed in his or her responsibility to manage or monitor conduct or risks.
“Recovery” is (a) clawback of compensation already paid and (b) forfeiture, recapture, reduction or cancellation of amounts awarded or granted over which Alphabet retains control. This change should operate prospectively and be implemented so as not to violate any contract, compensation plan, law or regulation.
A Different Clawback Issue at Mylan N.V.
Note: Mylan N.V. is a global generic and specialty pharmaceuticals company registered in the Netherlands, with principal executive offices in Hatfield, Hertfordshire, UK and a “Global Center” in Canonsburg, Pennsylvania, US.
The proposal filed at Mylan N.V. is more complicated and, to my mind, more interesting, as it presents the issue: Where does the buck stop, when it comes to alleged corporate wrongdoing? A stockholder proposal from the UAW Retiree Medical Benefits Trust, urging the compensation committee of Mylan N.V. to adopt the following specific compensation clawback policy:
RESOLVED, that shareholders of Mylan N.V. (Mylan) urge the Compensation Committee of the Board of Directors (the Committee) to amend Mylan’s clawback policy to provide that the Committee will (a) review, and determine whether to seek recoupment of, incentive compensation paid, granted or awarded to a senior executive if, in the Committee’s judgment, (i) there has been misconduct resulting in a material violation of law or Mylan policy that causes significant financial or reputational harm to Mylan, and (ii) the senior executive committed the misconduct or failed in his or her responsibility to manage or monitor conduct or risks; and (b) disclose the circumstances of any recoupment if (i) required by law or regulation or (ii) the Committee determines that disclosure is in the best interests of Mylan and its shareholders.
“Recoupment” is (a) recovery of compensation already paid and (b) forfeiture, recapture, reduction or cancellation of amounts awarded or granted over which Mylan retains control. These amendments should operate prospectively and be implemented in a way that does not violate any contract, compensation plan, law or regulation.
Mylan is one of the many companies getting sued in connection with the “opioid crisis” and the language of this proposal seems designed to allow/require a clawback from any and all executives, regardless of fault, in the event the company is found liable. I say “regardless of fault,” not just because I am a cynical curmudgeon, but because regulators, politicians, the media and plaintiffs’ lawyers will undoubtedly assert that executives surely must have failed to “manage or monitor conduct or risks” for something like this to have occurred. One might view this as a pre-emptive strike aimed at giving plaintiffs’ lawyers and the cooperative investment funds the ability to sue in the event the company is found liable in some manner and the board does not clawback an amount of compensation that the lawyers and funds deem sufficient, from the current and former executives.
This approach/result may or may not become a best practice. It is too soon to tell. However, in the most prominent clawback case in recent memory, the CEO of one of the world’s largest banks was made to bear the responsibility for not monitoring the conduct of low-level employees selling services to individual retail banking customers. And everyone seemed to have agreed with that result (although, if one were to ask 1,000 investors whether they wanted the CEOs of their portfolio companies to be busying themselves with the conduct of employees ten supervisory level removed, I believe that most would say “no”).
Thus, the compensation clawback standard seems to be “the buck stops here.” The CEO (and other senior executives—maybe board members too) are ultimately responsible for any misfeasance, malfeasance, or nonfeasance that occurs “on their watch.”
But back to the proposal. In its response, the company states that it “appreciates the UAW’s perspective and welcomes the opportunity to discuss the Shareholder Proposal with shareholders, and so the Board has decided to include the Shareholder Proposal for discussion” at the annual meeting of stockholders. The company also notes that:
Dutch counsel has advised that pursuant to Dutch legal requirements, including because the UAW did not hold at least three percent of Mylan’s issued share capital as of April 22, 2019, it would be contrary to Dutch law for the Company to allow the UAW to present the Shareholder Proposal for a vote at the AGM. Consistent with Dutch law and the Company’s Articles of Association, the Shareholder Proposal will not be voted on at the AGM. The Board encourages shareholders to attend the AGM to discuss the Shareholder Proposal so that the Board can consider their views and perspectives. Alternatively, shareholders may use the Company’s proxy card to express their views as discussed below.
Rather than include the shareholder proposal, the company added to its proxy statement a Discussion Item – Shareholder proposal relating to the Company’s clawback policy. The UAW and another union pension fund investor each filed a Separate – Notice of exempt solicitation submitted by non-management on Form PX14A6N, as part of the proxy voting process (see, filings by CTW Investments Group and the UAW Retiree Medical Benefits Trust).
The annual meeting is tomorrow, June 21, so stay tuned.
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