Approving a remuneration policy and paying remuneration to senior officers while overruling the general meeting’s opposition
Last month, the State Attorney-General and the Israel Securities Authority published their positions with regard to the overruling mechanism.
The context relates to the requirement for public companies and private companies with publicly traded debentures (jointly: “Reporting Corporations”) to adopt and comply with a remuneration policy governing the terms of office and employment of their officers.
Amendment 20 prescribes that the remuneration policy must be formulated by the company’s board of directors according to the recommendations of the remuneration committee and must be approved by a special majority of the general meeting.
Amendment 20 also prescribes, for the first time, that Reporting Corporations are obligated to submit the terms of office and employment of CEOs who are neither directors nor controlling shareholders, to the general meeting for its approval by a special majority.[1] Amendment 20 also prescribes that terms of office and employment of other officers who are neither directors nor controlling shareholders,1 which deviate from the reporting corporation’s remuneration policy, are also subject to the general meeting’s approval by a special majority.
The amendment prescribes that if the general meeting does not approve the terms of office and employment by the requisite majority, the matter may be rediscussed by the remuneration committee and the board of directors, which may, based on detailed rationale, approve the remuneration policy or the terms of office and employment, notwithstanding the general meeting’s opposition.
The Overruling Mechanism is based on the belief that a company’s board of directors, inasmuch as it is entrusted with setting the company’s strategy and overseeing the company’s activities, is the correct and appropriate corporate body to approve the remuneration policy and the remuneration to senior officers. On the other hand, the general meeting is not a suitable body to hold complex discussions about remuneration, inter alia, because shareholders do not always possess the qualifications and expertise to reach such decisions. Furthermore, underpinning the Overruling Mechanism is the assumption that under normal circumstances, controlling shareholders or their appointed boards of directors have no incentive to pay officers’ remuneration that exceeds their expected contribution to the company.
The State Attorney-General’s position
The State Attorney-General’s position specifies the criteria that authorize remuneration committees and boards of directors to approve the CEO’s remuneration notwithstanding the general meeting’s opposition, and provides guidelines in this regard.
Special cases – the Overruling Mechanism is not the rule but rather the exception, which should be reserved solely for special cases. These special cases can be special circumstances pertaining to the CEO’s identity (e.g. when the candidate for office has exceptional qualifications; if the pool of potential candidates is limited due to the company’s unique sphere of business; if the incumbent CEO’s unique experience and expertise will make it difficult to find a replacement; or if the incumbent CEO provides unique and major contributions to the company, etc.). Special cases can also be special circumstances pertaining to the company (e.g. if the company is in the midst of a major business course of action that may be adversely affected by a turnover of managers; if the company is struggling through a sensitive period that requires managerial continuity that would not be possible without the requested change in remuneration; if exogenous events are affecting the company, which justify maintaining the company’s stability and avoiding a turnover of management staff). Special cases can also be special circumstances relating to the board of directors’ relative advantage over the general meeting in terms of safeguarding the company’s best interests (e.g. the board of directors is privy to non-public data, such as a competing offer received by the CEO, or negotiations that have not yet been reported and the CEO’s retention is essential in order to conclude the negotiations, etc.).
Rediscussion – the remuneration committee and the board of directors must focus both on the factual reasons justifying the proposed remuneration and on the rationale that justifies overruling the general meeting’s opposition. During the rediscussion, the remuneration committee and board of directors must take into account the information collected about the shareholders’ positions underlying their opposition, and they must re-examine, inter alia considerations, if any, that the shareholders failed to take into account when reaching their decision or considerations that they did take into account but without understanding their importance; the need to collect additional data or obtain new opinions after holding a dialogue with the shareholders; the degree of deviation (if any) from the remuneration policy; and previous use (if any) of the Overruling Mechanism.
Examination of the general meeting’s opposition – on the one hand, this is the main consideration that must be examined; on the other hand, the shareholders’ meeting is not an organized homogeneous body and they cast their votes without providing reasons. Therefore, this examination should include several aspects: the ratio of shareholders who voted against the resolution during the general meeting; the institutional bodies’ positions; the advisory bodies’ positions; material shareholders who voted against the resolution; position statements; other public shareholders’ positions; and information about external factors that do not necessarily consider the company’s best interests.
Detailed rationale – the remuneration committee and the board of directors must substantiate the rationale behind their determination that at issue is a special case. The greater the divergence from the general meeting’s position (based on information, if any, about the positions of shareholders who voted against) or from the remuneration policy, the more evident the justification must be for overruling the general meeting’s decision. The rationale must be detailed and include new reasons, beyond those that were presented to the general meeting before the vote.
The ISA staff’s position
The ISA staff’s position concurred with the State Attorney-General’s position, whereby Reporting Corporations shall file an immediate report about the remuneration committee’s and board of directors’ resolution to activate the overruling mechanism, and specified the information that must be included in the immediate report. The details that Reporting Corporations shall include in the immediate report are intended to ensure that the information concerning the resolution to overrule and the rationale for such, are properly disseminated, and in a manner enabling judicial review, if necessary.
In alignment with the State Attorney-General’s position, the ISA staff’s position also holds that an immediate report regarding the overruling shall contain details on the following matters:
Special case – if the overruling relates to terms of office and employment, the report shall specify the circumstances justifying its classification as a “special case.”
Examination of the shareholders’ opposing positions during the general meeting – the report shall include: the considerations of the opposing shareholders, if known (including by examining position statements), while stating whether they were brought to the attention of the remuneration committee and the board of directors; conversations, if any (including prior to the general meeting) between the company and shareholders or anyone on their behalf and any change made, if any, in the original terms; the ratio of shareholders who voted against the resolution during the general meeting.
The rationale of the remuneration committee and the board of directors – the rationale shall detail the decision-making process to overrule the general meeting’s opposition and refer to the various remuneration components. The rationale shall also relate to the reconsideration of the shareholders’ opposition (as stated above) and the weight given to their opposition. If the terms of employment deviate from the remuneration policy, the degree of deviation shall also be specified. If the remuneration policy itself was approved after activating the Overruling Mechanism, this must also be specified.
Comparative data – insofar as they constituted key factors for activating the Overruling Mechanism.
The identity of the directors who participated in the resolution to overrule – including the identity of the directors who voted against, if any. In this regard, it should be noted that the ISA staff is of the opinion that a resolution to overrule the general meeting could also have future repercussions for companies when the time comes for shareholders to approve the reappointment of directors.
Previous activation of the Overruling Mechanism – the immediate report shall state whether the company passed similar resolutions during the three years preceding the current resolution to overrule and specify their main points.
***
Barnea Jaffa Lande’s Capital Markets Department is at your service to answer any questions about implementing the positions and any other questions.
Adv. Hagit Ross a partner at the firm and co-heads the public companies practice.
[1] The terms of office of directors and controlling shareholders were already subject to the receipt of the general meeting’s approval prior to Amendment 20 to the Companies Law.