New Executive Compensation Rules For Recipients Of TARP Funds - Which Parts Have Immediate Effect?

The expert attorneys at Verrill Dana, a premier law firm located in Portland, ME and with offices in Boston, MA, Hartford, CT and Washington D.C. have published the following article about the implications of the new compensation rules for recipients of TARP Funds.

The American Recovery and Reinvestment Act of 2009 ("ARRA"), signed into law by President Obama on February 17, 2009, subjects all companies that receive federal funding under the Troubled Assets Relief Program ("TARP") to new rules governing executive compensation practices. Generally, the relevant restrictions will apply for so long as the particular company continues to have any obligations arising from financial assistance provided under TARP. Virtually all TARP recipients will need to reexamine their executive compensation programs and practices as a result of these new requirements.

ARRA requires the U.S. Department of the Treasury to promulgate regulations to require TARP recipients to meet appropriate standards for executive compensation and corporate governance. Those rules will obviously affect the design of compensation changes that TARP recipients ultimately make. In some important respects, however, ARRA arguably has immediate effect. In particular:

* TARP recipients should seek specific legal advice before paying any form of severance bonus to any of the top 5 executive officers or any of the next 5 most highly-compensated employees. ARRA calls for a prohibition against "golden parachute" payments to such individuals, and defines "golden parachute payment" very broadly to include "any payment to a senior executive officer for departure from a company for any reason, except for payments for services performed or benefits accrued" (emphasis added). Contracts with Treasury under the Capital Purchase Program originally prohibited golden parachute arrangements exceeding three times the executive's base compensation. ARRA can be read to be self-executing. On February 4, 2009 (before ARRA), Treasury had published rules further restricting the amount to one times base compensation, but only for companies receiving "exceptional assistance" under TARP. ARRA's requirement of an outright prohibition could conceivably be given retroactive effect, but in the meantime many interpretational questions remain, such as: Will this restriction reach post-termination consulting or noncompetition payments? May TARP recipients devise restricted stock awards to take the place of severance payments?

* TARP recipients should seek specific legal advice before paying or accruing incentive compensation to its top earners. ARRA calls for a prohibition against accruing or paying any "bonus, retention award, or incentive compensation" to top-tier employees, other than in the form of long-term restricted stock grants valued at no more than one-third of the employee's annual compensation. In this case, the number of employees covered depends upon the amount of TARP funds provided to the company. If the company received less than $25 million, this restriction applies only to the single most highly-compensated employee. If the company received $25 million to $250 million, the restriction reaches at least the 5 most highly-compensated employees; if it received $250 million to $500 million, at least the top 5 executives plus the 10 next most highly-compensation employees; and if $500 million or more, at least the top 5 executives plus the 20 next most highly-compensated employees. Except in the under-$25 million category, ARRA gives Treasury authority to specify a greater number of covered employees. TARP recipients that pay bonuses in installments throughout the year may wish to examine whether to substitute long-term restricted stock grants - the one form of bonus compensation permitted to covered executives under this particular provision of ARRA.

* In structuring bonus compensation for 2009, TARP recipients should seek specific legal advice on whether the bonus should be made subject to a clawback provision. ARRA requires Treasury to provide for recovery of any bonus, retention award, or incentive compensation to any of its top 5 executives or any of the next 20 highest-paid employees if paid on the basis of "earnings, revenues, gains, or other criteria" that are later found to be "materially inaccurate." Because the scope and timing of these requirements is presently uncertain, TARP recipients should consider making the payments recoverable by contract where necessary or advisable to assure company compliance.

* Nonpublic TARP recipients should seek specific legal advice on whether to include a "say on pay" resolution at this year's annual meeting of shareholders. As has been well-publicized, the Securities and Exchange Commission published guidance to the effect that public companies that are TARP recipients must include "say on pay" proposals in any annual meeting proxy statement filed with the Commission after February 17, 2009. It is far from clear whether a say on pay requirement should be read to apply immediately to nonpublic companies, and despite numerous inquiries, neither Treasury nor any federal banking regulators have yet published advice on this question. In the absence of such guidance, nonpublic companies are left to guess about the scope of disclosures that they would be required to make to their shareholders. Nonpublic companies are not subject to the SEC rules referenced by ARRA, and the SEC staff has, understandably, disclaimed responsibility for or jurisdiction over the disclosure or governance practices of these nonpublic companies.

If you have any further questions, please contact Verrill Dana directly at 207-623-3889