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1 ISRAEL SECURITIES AUTHORITY Disclosure pertaining to authorization of benefits to senior corporate officers Ruling in accordance with section 36A (b) of the Securities Law 1968 Explanatory Notes During the last years compensation mechanism for senior corporate offices (within the meaning of the term under the Companies Law 1999, (henceforth - Companies Law)) such as principal shareholders in corporations and others who have personal interest in authorizing agreements with them - became both varied and complex. In addition to their pay, senior corporate officers (henceforth – senior officers) receive supplementary compensations, such as: bonuses, share based payments, management fees, advisory fees, social benefits and allocations, car maintenance, telephone expenses etc. Compensation of senior officers has been on the public agenda, recently, and had encouraged the raising of questions pertaining to the authorization process taking place within corporate institutions - its transparency and the influence of benefits on the state of corporate affairs, as well as questions regarding discretion, efficiency and equitability of the compensation process itself. In order to make an educated decision, the entities in charge of authorizing compensations of senior officers are required to carry out in-depth examination of the aforesaid compensation and its components. Hence, all entities involved in compensations' authorization (including internal corporate structures) must have full and accurate details pertaining to compensations brought up for authorization, at the time of approving it. Information pertaining to the salary and benefits of senior officers and its authorization process is perceived as important, since it provides testimony regarding the use of corporate resources and supplies investors with information on financial data included in financial statements, as well as information pertaining to a decision making processes within a corporation - considerations taken into account in extending benefits and the connection between the aforesaid considerations, corporation's financial situation and the senior officer's contribution. Hence, a corporation has to make a full disclosure regarding the aforesaid information, including the publication of an immediate report on the matter. In light of the aforesaid, the ISA had decided to publish a ruling pertaining to details that have to be provided in the immediate report regarding benefits to senior officers, (and if there was an agreement requiring the authorization of a general meeting – convocation of the meeting in the report). 2 ISRAEL SECURITIES AUTHORITY This ruling does not create a new reporting requirement, but stipulates the way of presenting the details, where there is a reporting requirement pertaining to agreements with senior officers, according to the law. The company's obligation to submit an immediate report regarding the very agreement signed with a principal shareholder, controlling shareholder, director and other office holders, is stipulated under the Securities Law Regulations and it states the following: 1. Securities Law Regulations (Transaction between a Company and Controlling Shareholder therein) 2001, (henceforth – Controlling Shareholders Regulations) provide for reporting obligations pertaining to agreements with controlling shareholder or his relative related to the terms of his tenure and employment. 2. Regulation 36B of the securities Law (Immediate and Periodic Reports) 1970, (hence – Reporting Regulations) provides for reporting obligations where a general meeting was convened.1 3. Regulation 37(a)(7) of the Reporting Regulations stipulates reporting requirements pertaining to a transaction between a company and its principal shareholder that is not according to market conditions. 4. Regulation 37A(3) of the Reporting Regulations stipulates reporting requirements pertaining to irregular transactions between a company and its corporate officer, or between the company and its corporate officer who has a personal interest in it. 5. Securities Law Regulations (Private Offering of Securities in a Listed Company) 2000, provides for reporting requirements pertaining to a private offer in a listed company. The Ruling stipulates that reporting corporations shall provide all the details, pertaining to the compensation of senior officers, which contribute to the understanding of the agreement signed with said officers, in the companies' immediate reports. These details should provide information regarding the scope of job, length of tenure, qualitative and quantitative components of the senior officers' pay, as well as disclosure pertaining to the compensation based on the performance of the corporation, its adherence to the goals and retirement compensation of said office holders. These explanatory notes will provide explanation of the correlation between the proposed mechanism and the contribution of the benefit's recipient to the corporation, and how it reflects his professional performance, for which he is supposed to be rewarded. 1 Since the approval of the terms of recompense for a director is subject to approval by the general meeting, the aforesaid regulation provides for disclosure obligations pertaining to the terms of recompense and tenure of a director. 3 ISRAEL SECURITIES AUTHORITY For example: is a new senior office entitled to compensation for transactions and profits created by the company prior to his taking the job? Another example: a company appointed a new CEO, who will be entitled to the annual bonus, at a fixed rate from the company's net profits, if the net profit in the said year is 5% higher by comparison to the profit generated in the previous year. During a three year period, prior to the appointment of the new CEO, the company's net profit rose by 7% annually, and it is expected that during the said year the net profit will also rise by 7%, providing the volume and character of the companies present activities will continue (without any particular activities being initiated by the new CEO). Thus, the CEO will, in fact, receive a grant which is not a reward for his contribution to generation of profits, but a kind of "automatic" bonus ingrained in the existing situation, and the company has to disclose this information. A disclosure shall also be provided regarding whether one-time results (such as a substantial sale that creates a one-time profit or loss) affect the size of benefits. In case a senior officer is entitled to compensation based on one-time events, whose occurrence is reasonably expected at the time of authorizing benefits, the information should be disclosed and its implications explained – at the time of authorization. As part of this requirement, where a corporation delays disclosure pertaining to the aforesaid one-time event, due to a possible prevention of a successful completion of the deal (in accordance with section 36(b) of the Reporting Regulations), the corporation will also be entitled to delay providing information related to the event and its influence of the benefits of the senior officers in so far as this disclosure might prevent the successful completion of the aforesaid deal, providing the contract with a senior officer does not require the authorization of the general meeting. The arguments behind the decision to authorize the benefit shall also be published, as well as information regarding other benefits paid to a senior officer by other companies in the group, disclosure pertaining to sums for which the senior officer is entitled in accordance with the benefit system approved for him on the basis of the last annual report and the data of the preceding year, as well as information regarding changes that occurred in the terms of employment and tenure of senior officers. Along with the present ruling, the ISA plenum had recently approved amendments to Reporting Regulations, which if approved by the Knesset, will incorporate annual review of all contracts with senior officers within a given corporation – into the annual financial statements (along the lines stipulated under the present ruling), as well as require an annual retrospective of benefits paid to senior corporate officers during a reporting year. The ISA would also like to emphasize the application of provisions under section 278 of the Companies Law, which stipulate that at the time of benefit approval by the auditing committee or by the board of directors, a director who has a personal interest in the approval of the aforesaid benefit shall refrain from participation or voting in the aforesaid meeting. Where a majority of directors have a personal interest in the approval of the said 4 ISRAEL SECURITIES AUTHORITY decision, the director will be permitted to participate in the discussion and voting, in accordance with section 278 (b) the Companies Law, and the contract will be brought up for approval before the general meeting in accordance with provisions under section 278 (c) of the Companies Law. To dispel any doubt we would like to clarify that, the current ruling is meant to provide a closed and comprehensive list of all details related to the approval of benefits for senior officers, which have to be included in the immediate reports submitted by corporations; any other information which is not detailed under the current ruling, but might be useful to a reasonable investor, must also be included in the immediate reports submitted by corporations. We would also like to clarify that the requirement to include information, according to this ruling, as part of the summons for a general meeting where the benefit requires the approval of the general meeting, does not exempt a corporation from the reporting requirements where a contract comes under the definition of irregular event and exceeds the corporation's businesses as defined under section 36 of the Periodic and Immediate Reports Regulations. DISCLOSURE PERTAINING TO AUTHORIZATION OF BENEFITS FOR SENIOR CORPORATE OFFICERS Regulation in accordance with section 36A (b) of the Securities Law 1968 1 Definitions: "Immediate Report" – within the meaning thereof under the Securities Law (Periodic and Immediate Reports) Regulations, 1970 (henceforth – new regulations) "Office Holder" - within the meaning thereof under the Companies Law, 1999 "Principal Shareholder" - within the meaning thereof under the Securities Law, 1968 ("the Law") "Senior Officer" – office holder, principal shareholder and any other person who has a personal interest in approving a contract with him "Pay" – including accompanying benefits, such as car maintenance, telephone, social benefits, allocations for compensation related to termination of employment, as well as any other income provided to the employee as component of his pay "Control" – as defined under the Law 5 ISRAEL SECURITIES AUTHORITY "Benefits" – including an obligation to provide benefits, either directly or indirectly, and including money or any other thing equivalent to money, pay, grant, management fee, consulting fee, rent fee, commission, interest, payment based on shares, retirement fee that is not related to pension payments, bonuses and any other thing excluding dividends. "Share Based Payment" - within the meaning thereof under accounting rules, under Securities Law (Preparation of Annual Financial Statements) Regulations, 1993 (henceforth - Financial Statements Regulations). Disclosure required under this ruling shall be provided where a corporation comes under the reporting requirement according to the law pertaining to contracts it signs, such as report according to Regulation 36B, 37(a)(7) or 37A(3) of reporting regulations, report regarding a transaction with controlling shareholder according to Securities Law (Transaction between a Company and Controlling Shareholder therein) Regulations 2001, (henceforth – Controlling Shareholder Regulations), or report regarding a private offer of securities according to Securities Law (Private Offering of Securities in a Listed Company) Regulations 2000, (henceforth - Private Offering Regulations) 2 An immediate report pertaining to a company's contract with a senior officer related to terms of employment or provision of services agreement (including extension or amendment of the existing agreement) in a corporation or in a company under its control, shall include every detail significant to the understanding of the aforesaid contract and its implications for the corporation, including: 1. Date of contract with the senior officer and the dates related to provision of benefits, the scope of job and the terms of tenure's termination. 2. Terms of contract – substantive and quantitative description of all components comprising the benefit shall be depicted, including the terms conditioning the aforesaid benefit: A Benefit based on performance of corporation and attainment of goals 1 2 If the benefit is based on the performance of a corporation and its attainment of the preset goals, all or in part, the compensation mechanism should be depicted in detail (including the goals and measurements used to define benefits). If the benefit is calculated according to a formula based on financial statements data (for example – a certain percentage from EBITDA or net income), the formula - including all its components should be provided, the sum for which the senior officer is entitled on the basis of the formula - shall also be provided, it should be based on the data 6 ISRAEL SECURITIES AUTHORITY 3 4 provided in the last annual statement and in the statement of the preceding year, except if a company is of opinion that the aforesaid data does not reflect future pay. Also, disclosure should be provided regarding whether one-time results (such as a substantial sale that creates a one-time profit or loss) affect the size of the benefit. In case a senior officer is entitled to compensation based on a one-time event, whose occurrence is reasonably expected at the time of authorizing benefits, the information should be disclosed and its implications explained – at the time of authorization. Where a corporation delays disclosure pertaining to the aforesaid one-time event, due to a possible prevention of a successful completion of the deal (in accordance with section 36(b) of the Reporting Regulations), the corporation will also be entitled to delay providing information related to the event and its influence of the benefits of the senior officers in so far as this disclosure might prevent the successful completion of the aforesaid deal, providing the contract with a senior officer does not require the authorization of the general meeting. Also, disclosure should be made as to whether future performance, rooted in future acquisitions of companies' and\or activities, will be included in the bases of calculating senior officer's benefit. B Securities based benefits: if a senior officer received securities (including shares based payment), full disclosure pertaining to this benefit and its characteristics shall be provided, including dates related to provision of said benefit (date of endowment, date of expiration) vesting period, sum of benefit and its fair value; for this purpose "fair value" - within the meaning thereof under accounting rules as defined in financial statements; This ruling does not detract from the disclosure required in accordance with Securities Law (Private Offering of Securities in a Listed Company) Regulations, 2000. C Retirement benefit: details pertaining to retirement benefits, including all its components, should be provided as well as terms and conditions of said retirement. 3 Method of stipulating retirement benefits – Disclosure regarding the method of stipulating retirement benefits shall be provided. If the benefit was provided within the general framework of retirement plans for senior officers, details and the authorization date of the aforesaid plans should be provided. 7 ISRAEL SECURITIES AUTHORITY 4 Detailed list of organs that authorized retirement benefits for senior officers and the date of authorization. The nature of information and data provided to these organs at the time of approving the benefits. 5 Reasons for the size of benefits and means of determining them 1. Board of directors' and the auditing committee's (where its authorization is required) shall provide reasons for authorizing the pay and the benefit plan presented to them - all components included, with particular reference to components of the benefit. Example of evaluating components of benefits: if a benefit includes an annual bonus, which is paid only in case the annual yield on the capital in the reporting year is higher then the fixed rate, the data on the yield in the years preceding the reporting year must also be provided. The reasons, authorizing organs provided for choosing a specific rate and the variance between it and the rate of yield on capital in the previous years must also be provided. If there is no variance – the fact should be explained. 2. In case there was an opposition to the authorization of said benefits, the fact should be stated and the reasons for said opposition – detailed. 3. It should also be stated whether the data pertaining to compensation in similar companies, and compensation data customary in this field, had been examined and whether the compensation approved for a senior officer is reasonable under given circumstances. 4. Once the aforesaid information had been presented to the board of directors and the auditing committee – the disclosure should specify whether there is a variance in the approved benefit, and at what rate, from the described above data. 6 Additional benefit: if additional benefit is provided to a senior officer by a corporation controlled by a corporation or by a controlling shareholder – due to his position in the group, the nature and scope of said benefit should be detailed; including the entity providing the aforesaid benefit, position for which it was granted and the period for which he will be entitled for it. 7 Modification of terms: if a benefit brought up for authorization, for a CEO or the chairman of the board, varies significantly from the one that was customary in the past in the corporation for said positions – the benefit that was customary shall be detailed. 8 The disclosure required under this ruling shall be provided as part of the immediate report, as is obligatory under the Reporting Regulations, Controlling Shareholder Regulations and Private Offering Regulations. 8 ISRAEL SECURITIES AUTHORITY 9 This ruling does not detract from reporting regulations where there was an agreement, event or other matter defined as irregular in terms of the corporation's activities, as provided for under Regulation 36 of the Reporting Regulations. Application This ruling goes into effect on the date of publication. Published on the date……………………