Chapter 17 - § 17.10 • EXECUTIVE COMPENSATION

• Jurisdiction: Colorado

§ 17.10 • EXECUTIVE COMPENSATION

Disclosure of executive compensation issues is a very sensitive combination of topics. Regulation S-K and Item 402 require fairly specific disclosure of executive compensation; executives, on the other hand, do not want to see their compensation publicly advertised. In addition to being governed by federal securities law and the disclosure requirements, corporate activities — especially compensation — are also subject to state corporation law. In 2006, the SEC adopted new rules governing the disclosure of executive compensation and the preparation of a "compensation discussion and analysis" to be included in various 1934 Act reports.²²⁹ In 2010 the SEC adopted new rules that were intended to enhance the executive compensation disclosure required in various 1934 Act reports. Additionally the Dodd-Frank Act added new procedural and disclosure requirements.²³⁰ Changes in executive compensation must be promptly reported under Item 5.02 of Form 8-K.

Stock option plans are a very useful executive compensation tool; they are complex disclosures, however, and clearly invoke state corporate law restrictions. In Byrne v. Lord,²³¹ Pace American Corporation's new board of directors put an option plan into place during the summer of 1994 to encourage performance in light of "monumental problems" facing Pace and its insurance company subsidiary. Options were granted at prices the plaintiff shareholders alleged were "below market." In reviewing the plan, the Delaware court held that "an option compensation plan must meet the requirements of a two-pronged test":

1) First, the plan must involve "an identifiable benefit to the corporation" and "[t]o that end . . . must contain conditions, or the circumstances must be such that the corporation can reasonably expect to obtain that benefit." "[T]he key factor in this determination is not whether the corporation can quantify the benefit, but whether the plan itself contains safeguards or circumstances to ensure that the corporation receives the benefit for which it bargained." By way of example, the court noted that if the options are granted to retain the services of key employees, the plan must provide conditions to ensure that the option holders continue to be employees to the date the options are exercised.
2) Second, "the value of the options must bear a reasonable relationship to the value of the benefit passing to the corporation." The court noted that with respect to this consideration,

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