Download Disclosure pertaining to authorization of benefits to senior corporate

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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).
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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.
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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.
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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
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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
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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
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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)
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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
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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
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ISRAEL SECURITIES AUTHORITY
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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.
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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.
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ISRAEL SECURITIES AUTHORITY
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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.
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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.
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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.
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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.
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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.
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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……………………