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Corporate Alert: New SEC Online Tool,  New Exemptions from Exchange Act Registration, "Forthright Negotiator Principle" of Contract Interpretation, Board Meeting Formalities Are Requisite
January 2008
Authors: Edward B. Stevenson, Irwin A. Kishner

New SEC Online Tool Makes Executive Compensation Comparisons Quick and Easy

The Securities and Exchange Commission has unveiled a highly-anticipated online tool, the "Executive Pay Finder," that allows users to compare executive compensation figures from pooled data of 500 of the largest United States companies that have filed proxy statements with the SEC. Designed to improve the clarity of executive compensation disclosure by public filers, the database eliminates the need for investors and researchers to locate and study individual proxies and financial statements. Using the Executive Pay Finder, you can instantly compare total annual pay, as well as the components thereof, such as base salary, bonus payments, stock, options and corporate perks. Various search criteria allow you to sort by industry, size of corporation, or specific compensation data, with results in table, graph or Excel spreadsheet form.

If you want more in-depth information on particular companies' disclosure, the website provides links to proxy statements, footnotes and compensation discussion and analysis. The first 500 companies to be included in the database were chosen by the SEC both for providing all required compensation disclosure to the SEC upon effectiveness of the new executive compensation disclosure rules, and for being among the largest public companies in the United States. Although the companies remain liable for the accuracy of their periodic reporting disclosures, they are not liable for accuracy in the compilation of information by the SEC for the Executive Pay Finder. Therefore, researchers should verify all data with the appropriate public filings before making any investment decisions.

The tool is part of the SEC's XBRL program, which is anticipated to provide increased interactive data in the coming months and years, such as general financial data and mutual fund risk and return information.

You can find the Executive Pay Finder at
SEC Adopts New Exemptions from Exchange Act Registration for Employee Stock Options

On December 3, 2007, the Securities and Exchange Commission (the "SEC") adopted amendments to Rule 12h-1 under the Securities Exchange Act of 1934, as amended, to provide exemptions to registration under the Act for compensatory employee stock options. Pursuant to Section 12(g) of the Act, an issuer with 500 or more holders of record of a class of equity security and assets in excess of $10 million at the end of its most recent fiscal year is required to register that class of equity security under the Act, unless an exemption is available. The SEC considers stock options to be a class of equity security, and thus such options are subject to the reporting requirements of Section 12(g).

Effective December 7, 2007, compensatory employee stock options will be eligible for an exemption from reporting requirements under the amended Rule 12h-1. Under the new exemptions, private non-reporting issuers are exempt from registering compensatory employee stock options under Section 12(g) if (i) the issuer does not have a class of security issued under Section 12 of the Act and (ii) the issuer is not subject to the reporting requirements of Section 15(d) of the Act. Exemptions are also available for reporting issuers that have registered a class of security under Section 12 or are required to file reports under Section 15(d) of the Act provided such issuers meet certain conditions.

For both reporting and non-reporting issuers, the new exemptions will only be available if (i) the compensatory employee stock options are issued under a stock option plan established by the issuer and (ii) the stock options are held only by persons described in Rule 701(c) of the Securities Act of 1933, as amended (e.g., employees, directors, general partners, etc.)

Delaware Court Uses Merger Termination Context To Explain "Forthright Negotiator Principle" of Contract Interpretation

The Delaware Chancery Court, in United Rentals, Inc. v. RAM Holdings, Inc., et al., (Del. Ch. Ct. Dec. 21, 2007), recently declined to grant specific performance upon a breach of a merger agreement (forcing the consummation of the merger), and limited the non-breaching party's remedy to the "termination fee" set forth in the merger agreement. Focusing on the ambiguity of the termination fee provision and the parties' understanding of the provision at the time of contract execution, the Court refused to grant specific performance and, instead, limited the non-breaching party's remedy to the termination fee.

The parties in the case, United Rentals, Inc., RAM Holdings, Inc. and RAM Acquisition Corp. entered into a merger agreement in July of 2007. Soon thereafter, RAM notified United Rentals of its desire to renegotiate the terms of the merger or pay the termination fee. The termination fee provision allowed a party to terminate the agreement upon payment to the non-terminating party of $100 million. United Rentals then sued RAM in Chancery Court seeking specific performance of the merger.

According to the Court, although the merger agreement provided for specific performance in cases of breach, the provision was subject in all respects to the termination fee provision. The Court found this provision to be ambiguous in that it was not clear whether the termination fee was the sole remedy in the case of a breach or if specific performance was also available in such an instance.

By applying the "Forthright Negotiator Principle" to determine the parties' understanding of the deal at the time of execution, the Court found that the termination fee was the sole remedy in cases of breach. Under the Forthright Negotiator Principle, when analyzing ambiguous contract language, "Party A's" reasonable interpretation of the language will be binding on "Party B" if Party B knew or should have known of Party A's understanding and did not object to it during negotiations. Here, the Court determined that RAM believed its liability under the merger agreement was limited to the termination fee and United Rentals knew of and did nothing to counter that belief. Thus, under the Forthright Negotiator Principle, United Rentals was limited to the termination fee as its sole remedy upon RAM's breach.

Delaware Court Holds That Board Meeting Formalities Are Requisite

In Fogel v. U.S. Energy Systems, Inc., 2007 WL 4438978 (Del. Ch., Dec. 13, 2007), the Delaware Chancery Court held that the decision of a board of directors of a company to terminate the company's CEO was void because the formalities of a properly constituted board meeting were not observed and such action could not be ratified at a later date.

Delaware General Corporation Law does not provide specific requirements with respect to the formalities constituting a proper meeting of the board of directors. Section 141 of DGCL states that "[t]he vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors." The Court found that no formal notice of the board meeting in question was sent out and no vote took place. All of the directors but one informally gathered and came to a decision with respect to the CEO's termination. The Court concluded that "[s]uch a hasty, unhelpful gathering cannot satisfy section 141's conception of a meeting, the primary vehicle that drives corporate action."

This decision reinforced the importance of a board of directors satisfying the corporate formalities required by law and the corporation's organizational documents to prevent any action taken by the board of directors from being subject to a claim or challenge. The Fogel case illustrates that the formalities of a properly constituted board meeting must be strictly observed so the actions taken at the meeting will not be voidable.

For more information on these issues or other corporate matters, please contact:

Irwin Kishner at 212.592.1435 or
Edward Stevenson at 973.274.2025 or

Copyright © 2008 Herrick, Feinstein LLP. Corporate Alert is published by Herrick, Feinstein LLP for information purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.