The US eases remuneration and other disclosure requirements for start-up companies – a path for Australia?
27/04/2012
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In Australia, life seems to get more difficult for small listed companies.  This includes the unhelpful 2009 changes to the tax treatment of options provided as an alternative to cash pay, and the drafting of a two-strikes rule that inadvertently allows minority shareholders with concerns about non-remuneration issues to control the vote (see HERE

Just about the only concession for small companies we can think of in this area is that the ASX Listing Rule 12.8 requirement that the board remuneration committee consists entirely of non-executive directors only applies to ASX300 companies.

Apart from a securities exchange with lesser reporting requirements, such as London’s AIM, an alternative may be seen in recent US legislative changes to reduce reporting requirements for smaller companies.

The US governance reform legislation may run to thousands of pages, but at least a genuine effort has been made to give smaller companies a break on compensation disclosure requirements.  On 5 April 2012, President Obama signed the Jumpstart Our Business Startups Act into law, after the Act received bipartisan support in Congress.  The JOBS Act, as it is known, simplifies the IPO process for ‘emerging growth companies’ (i.e. companies with annual gross revenues of less than US$1 billion that conduct their IPO on or after 9 December 2011).  ‘EGCs’ are exempt from a number of the Dodd-Frank Wall Street and Consumer Protection Act requirements, including:

·         The ‘say on pay’ advisory vote on compensation of named executive officers, including the corresponding say on pay frequency vote

·         On a merger or acquisition, to 1) provide disclosure on ‘golden parachute’ payments to named executive officers and 2) hold a non-binding stockholder vote on such payments

·         Making ‘pay versus performance’ disclosures comparing the compensation actually paid to the named executive officers and the company’s financial performance and

·         Providing ‘internal pay equity disclosure’ showing the ratio between the median compensation of the company’s employees and its CEO.

EGCs are also permitted to comply with the reduced compensation disclosure requirements that apply to companies with a market capitalisation of less than US$75 million and which

1.    Reduce the number of named executive officers from 5 to 3 (the CEO and two other most highly compensated executive officers)

2.    Limit the Summary Compensation Disclosure Tables to 2 years

3.    Eliminate the Compensation Discussion and Analysis, and disclosure of equity awards, option exercise and stock vesting, etc.

These reduced disclosure requirements apply for as long as the company remains an EGC i.e. until the earliest of 1) the last day of the financial year during which it has gross revenues of US$1 billion or more; 2) the last day of the fiscal year following the fifth anniversary of the IPO and 3) the date on which it has issued more than US$1 billion in non-convertible debt during the previous 3 years or 4) when it becomes a ‘large accelerated filer’ (generally meaning that its public float is $700 million or more).

Other Dodd-Frank Act requirements continue to apply for EGCs, including mandatory clawback policies, compensation committee and compensation committee adviser independence and disclosure of hedging by employees and directors.

Interestingly, some US commentators have suggested that EGCs may choose to voluntarily comply with requirements from which they are exempted, to provide potential investors with confidence they have access to all material information.  This argument is likely to be strongest in relation to the exemption the JOBS Act provides to EGCs from the normal independent accounting requirements. The final text of the JOBS Act is available HERE.

For an argument against loosening the regulatory requirements for EGCs, see HERE. © Guerdon Associates 2021
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