Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The Dodd-Frank Act contains a number of provisions designed to improve the independence and operations of Compensation Committees.  But in doing so, has Congress made it more difficult – if not impossible – for a company’s regular outside law firm to assist its Comp Committee?

The Act provides that a Comp Committee may only select a compensation consultant, legal counsel, or other advisor after taking into consideration certain factors to be identified by the SEC, which affect the independence of such consultant, counsel or other advisor.

Those factors include:

  • the provision of other services to the company by the law firm;
  • the amount of fees received by the law firm from the company, as a percentage of its total revenues;
  • the law firm’s policies and procedures designed to prevent conflicts of interest;
  • any business or personal relationship between the lawyer advising the Comp Committee and any member of the Committee; and
  • any stock of the company owned by the lawyer.

Of course, these same factors apply to compensation consultants and other advisors, but these factors are probably less likely to apply to them than to a company’s regular outside law firm.

 The Act also makes clear that the Comp Committee is “directly responsible for the appointment, compensation, and oversight of the work of independent legal counsel and other advisers.”  While we believe this language was designed to ensure that the Comp Committee operates independently of Board of Directors control, it also informs the members of the Comp Committee that they will be required to take their responsibilities seriously.

In a separate section covering just compensation consultants, companies are required to disclose the following in their proxy statements for meetings occurring one year after the date of enactment of the Act (i.e., meetings taking place in August 2011 and thereafter):

  • whether the work of the consultant raised any conflict of interest and, if so,
  • how it was being addressed.

We wonder whether some court could apply a broad reading of this section and apply it to legal counsel as well.

All in all, Compensation Committees will have to think twice about using the company’s regular lawyers for assistance, and law firms will have to think twice about seeking such work.