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Congratulations to Morgan Lewis partner Handy Hevener, who has been honored with a Lifetime Achievement Award by the New York Law Journal as part of its 2020 New York Legal Awards. The Lifetime Achievement Award is given to lawyers who have made a significant impact on the legal community throughout their career. Handy has made significant contributions throughout her 42 years of practice, particularly in relation to critical payroll tax, fringe benefit, executive compensation, and contingent workforce issues. Handy and the other winners are set to be recognized at an October 27 ceremony in New York.

Due to the economic and financial upheaval caused by the coronavirus (COVID-19) pandemic, many employees are asking their employers if they are able to cancel their deferral elections and/or receive accelerated payments from their nonqualified deferred compensation plan accounts to help offset financial difficulties they may be facing.

Generally, Internal Revenue Code Section 409A and the regulations promulgated thereunder do not allow for the alteration or cancellation of deferral elections or the acceleration of payments under plans subject to Section 409A. However, Section 409A does allow for the cancellation of a deferral election and/or acceleration of payments if an employee experiences an “unforeseeable emergency” within the meaning of Section 409A.

Our employee benefits and executive compensation practice is available to help employers evaluate and troubleshoot potential issues arising from the changing work environment and economic situation caused by the COVID-19 pandemic. This guidance reviews the employee benefits and executive compensation issues that we have been assisting clients with in the last few days.

Please contact the authors or your Morgan Lewis contacts if you have questions related to employee benefits and executive compensation in the midst of coronavirus COVID-19. For updated, comprehensive information about COVID-19, please see our resource page.

While the economy continues to enjoy steady growth, financial experts warn that an economic slowdown is likely in the not too distant future. Preemptive action may cushion an otherwise bumpy financial ride. Therefore, it’s time again to plan for an economic downturn. We have compiled several suggestions for executive compensation planning for a downturn.

  1. Align Incentive Compensation with an Economic Downturn Strategic Plan. Consider whether performance metrics should be updated to align with the company’s strategic approach to addressing a downturn. For example, companies can review their incentive compensation programs to minimize executive risk-taking, emphasize nonfinancial measures, and underscore near-term successes and sustainability.
  2. Minimize the Need for Discretion in Performance-Based Awards. When setting performance goals for incentive compensation, think about how an economic downturn will affect the company’s ability to meet the performance goals. Setting performance metrics with a view toward appropriate achievability in a variable economy may minimize the use of discretion later.
  3. Cap Payouts. Capping payouts under performance-based plans may alleviate unintended consequences, such as shareholder reaction to a payment substantially above target during a financial downturn. This can be an issue, for example, where one metric exceeds the maximum while another fails to hit the threshold.

Join Morgan Lewis this month for these programs on employee benefits and executive compensation:

We’d also encourage you to attend the firm’s Global Public Company Academy series:

Visit the Morgan Lewis events page for more of our latest programs.

Join Morgan Lewis this month for these programs on employee benefits and executive compensation:

We’d also encourage you to attend the firm’s Global Public Company Academy series.

Visit the Morgan Lewis events page for more of our latest programs.

In a case of first impression, the Delaware Court of Chancery has held that the entire fairness standard of review applies to compensation decisions made with respect to controlled companies, absent implementation of specified protections.

On September 20, 2019, Vice Chancellor Joseph Slights of the Delaware Court of Chancery denied a motion by Tesla, Inc. (Tesla) to dismiss a shareholder lawsuit (Tornetta v. Musk et al., case number 2018-0408) challenging the approval of a 10-year incentive-based compensation plan for Tesla’s Chief Executive Officer Elon Musk (the Award). The Award, which was approved by an independent compensation committee of Tesla’s Board of Directors and thereafter ratified by a majority of the minority of Tesla’s stockholders, provides Musk with the opportunity to earn performance-based stock options that, if fully realized, would be valued at approximately $55 billion.[1] A minority stockholder filed both direct and derivative claims against Musk and the Tesla board, alleging that the Award is excessive and is the product of breaches of fiduciary duty. In response to the derivative suit, Tesla filed a motion to dismiss, which required Vice Chancellor Slights to address the “gating question that frequently dictates…a breach of duty claim: under which standard of review will the court adjudicate the claim?” Determining that the “entire fairness” standard—rather than the business judgment rule—should be applied absent implementation of the “dual protections” of Kahn v. M & F Worldwide Corp., 88 A.3d 635, 642 (Del. 2014) (M&FW), the court refused to dismiss the complaint, in a ruling that marks a major shift in Delaware case law.

The Basics

Representations and warranties insurance (R&W Insurance) protects a party from financial losses resulting from inaccuracies in the representations and warranties made about a target company or business in connection with certain corporate transactions such as mergers and acquisitions. R&W Insurance policies are made up of both buy-side (most common) and sell-side policies.

In a traditional buy-side R&W Insurance policy, the buyer is the insured and the objective is to provide coverage against financial loss suffered as a result of a breach of the seller’s representations and warranties. The parties’ exposure in the case of a breach of the representations and warranties is limited to a relatively low amount referred to as the retention amount. In most R&W Insurance policies, the retention amount is generally equal to between 1–3% of the enterprise value of the transaction. The R&W Insurance policy protects against any exposure in excess of the retention amount and up to a negotiated limit.

Private companies grant stock options to their employees as a way to retain and motivate them and to reward their employees for the company’s success. Included below are five common mistakes we have come across.

Congratulations to Steven P. Johnson on his election to the Morgan Lewis partnership in our employee benefits and executive compensation practice! Effective October 1, 2019, Steve, who is resident in Washington, DC, will join 29 other newly elected partners from 12 offices and nine practices. For information about all of the firm’s newly elected partners, please see Morgan Lewis Elects 30 New Partners.