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The American Recovery and Reinvestment Act of 2009 (ARRA), widely described as the stimulus bill, was signed into law by President Obama on Feb. 17, 2009. ARRA significantly expands the executive compensation requirements previously imposed under the Emergency Economic Stabilization Act of 2008 (EESA), which established the Troubled Assets Relief Program (TARP).
ARRA's executive compensation restrictions apply to any entity that has received or will receive financial assistance under TARP (a "TARP recipient"), and generally will continue to apply for as long as any obligation arising from financial assistance provided under TARP remains outstanding (the "TARP assistance period"). The TARP assistance period does not include any period during which the federal government only holds warrants to purchase a TARP recipient's common stock.
Section 7001 of ARRA amends Section 111 of EESA in its entirety. Under EESA, Section 111 created different executive compensation restrictions depending on the nature of the assistance received by a TARP recipient and provided broad, general rules that were fleshed out in subsequent guidance issued by the Secretary of the Treasury and the secretary's delegates.
As amended by ARRA, Section 111 provides a more comprehensive, uniform set of rules for all TARP recipients. Yet more agency guidance is a certainty. ARRA left in place EESA's tax deductibility and excise tax provisions.
EESA's executive compensation requirements represent an amalgamation of EESA's prior executive compensation requirements, a number of the proposed executive compensation guidelines announced by the Treasury on Feb. 4, 2009 and a number of the expansive executive compensation requirements contained in the initial U.S. Senate version of the stimulus bill.
It remains to be seen what role or impact the Treasury guidelines will have now that ARRA has become law. For example, the $500,000 annual compensation limit under the Treasury guidelines was not included in ARRA. Treasury may impose that limit, or other limits, on future TARP recipients as a condition to the receipt of further TARP assistance using the ARRA restrictions as a baseline.
The revised executive compensation requirements are summarized as follows:
TARP recipients must implement and comply with the following executive compensation and corporate governance standards during the TARP assistance period:
Bonus, Retention Award, and Incentive Compensation Prohibition
During the TARP assistance period, TARP recipients are prohibited from paying or accruing any bonus, retention award, or incentive compensation. This bonus/incentive prohibition does not apply to the payment or accrual of long-term restricted stock that meets all these conditions:
The bonus/incentive prohibition applies to TARP recipients in four tiers based on the amount of financial assistance they receive under TARP:
In the case of all TARP recipients, the bonus/incentive prohibition does not prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before Feb. 11, 2009; the Treasury secretary or his designee are empowered to determine the validity of such employment contracts.
Board Compensation Committee
TARP recipients must establish a board compensation committee that:
If the TARP recipient's common or preferred stock is not registered under the Exchange Act, and the TARP recipient has received $25 million or less in financial assistance under TARP, these responsibilities are to be carried out by the TARP recipient's board of directors.
Luxury Expenditures Limitation Policy
Each TARP recipient's board of directors must have in place a company-wide policy regarding excessive or luxury expenditures, as identified by the Treasury secretary. The expenditures may relate to:
Nonbinding Shareholder Votes on Executive Compensation
Each TARP recipient must permit a separate shareholder vote to approve the TARP recipient's executive compensation, as disclosed in the TARP recipient's Compensation Discussion and Analysis, related compensation tables and other related material under the Securities and Exchange Commission's (SEC) compensation disclosure rules, in any proxy, or consent or authorization for an annual or other meeting of its shareholders during the TARP assistance period (a "say on pay vote"). The say on pay vote will not be binding on or overrule any decisions by the TARP recipient's board of directors, will not create or imply any additional fiduciary duty on the part of the board, and will not restrict or limit the ability of the TARP recipient's shareholders to make proposals for inclusion in proxy materials related to executive compensation.
The SEC is to issue any required final rules and regulations related to the say on pay vote requirement not later than one year after the date of enactment of ARRA.
Review of Prior Payments to Executives
The Treasury secretary is directed by Congress to review bonuses, retention awards, and other compensation paid to the senior executive officers and the next 20 most highly compensated employees of each entity receiving TARP assistance before the date of enactment of ARRA to determine whether any such payments were inconsistent with the purposes of the revised executive compensation requirements or TARP, or were otherwise contrary to the public interest. If the Treasury secretary makes such a determination, he is directed to seek to negotiate with the TARP recipient and the subject employee for appropriate reimbursements to the federal government with respect to compensation or bonuses.
Certification of Compliance with Revised Requirements
Each TARP recipient's chief executive officer and chief financial officer (or their equivalents) must provide a written certification of the TARP recipient's compliance with the requirements of revised Section 111 of EESA to the SEC in its annual filings required under the securities laws (or, in the case of a nonpublicly traded company, to the Treasury secretary).
There is an easier mechanism for TARP recipients to repay any assistance they have previously received under TARP and withdraw from TARP without replacing TARP funds.
There is no stated effective date for ARRA's executive compensation requirements. However, the Treasury secretary is directed to promulgate regulations to implement the revised executive compensation requirements.
Originally published by
Jones Day. Reposted with permission.
This article was written by
John R. Cornell,
Daniel C. Hagen,
Dennis B. Drapkin,
Rory D. Lyons,
Stephen P. Coolbaugh, attorneys with the national law firm Jones Day. This article originally appeared as a Jones Day Commentary.
This publication should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only.
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