Public companies nationwide have spent their summer and fall compensation seasons finalizing compensation clawback policies ahead of the December 1, 2023 deadlines set by the New York Stock Exchange (the “NYSE”) and the Nasdaq Global Market (“Nasdaq”), as applicable, as mandated by Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of
Executive Compensation
Prohibition Against Non-Competes Expands in California
On September 1, 2023, California Governor Gavin Newsom signed Senate Bill 699, which amends California Business & Professions Code Section 16600 to prohibit an employer from entering into or attempting to enforce a non-compete agreement regardless of whether the contract was signed outside of California. The law goes into effect on January 1, 2024.
Previously, California law banned non-compete agreements, subject to limited exceptions. Section 16600 of the California Business and Profession Code states that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” By adding Section 16600.5 to the Business & Professions Code, SB 699 expands the restrictions on non-compete agreements to contracts entered outside of California.
Option Grant Practices: A Trap for the Unwary – Spring-Loading and Bullet-Dodging
A potentially overlooked but important issue that public companies should have in mind when granting option or option-like awards is avoiding the unintentional appearance of “spring-loading” and “bullet-dodging,” both of which have been a recent focus of the SEC and shareholders and viewed as potentially poor corporate governance practices.
“Spring-loading” is when a public company grants option or option-like awards shortly before the release of positive material nonpublic information, which is expected to increase the company’s stock price. The grantee of a spring-loaded award immediately benefits from the increase in the stock price. For example, if stock options are granted with an exercise price of $10 per share before market trading, and a positive earnings release causes the stock price to close the same day at $15 per share, each option would already be $5 in-the-money.
The converse of spring-loading is “bullet-dodging,” which is when a public company grants option or option-like awards shortly after the release of negative material nonpublic information, which is expected to decrease the company’s stock price. Again, the grantee immediately benefits from the decrease in the stock price. For example, if stock options are scheduled to be granted before market trading with an exercise price of $15 per share, but the grant is made after a negative earnings release, or more significantly if it is delayed until after the negative earnings release, and the stock price has since closed at $10 per share, the company would have avoided granting options that would each be $5 out-of-the-money.
Possible Extension of Clawback Rule Effectiveness is Welcome Development for Issuers
Issuers that have been scrambling to prepare their boards and executives for accelerated implementation of compliant Dodd-Frank clawback policies will be glad to hear that the NYSE and Nasdaq have filed amendments to their proposed clawback rules to extend the effective date that would apply if the proposals are approved until October 2, 2023. If approved, the amendments would give listed companies until December 1, 2023 (60 days after the effective date of the rules) to adopt a compliant Dodd-Frank clawback policy.
Tax Court Decision Interprets Profits Interest “Safe Harbor” under IRS Rev. Proc. 93-27
The Tax Court’s May 3, 2023, decision in ES NPA Holding, LLC v. Commissioner (T.C. Memo 2023‑55), upholding a taxpayer’s position to characterize a partnership interest as a profits interest under the “safe harbor” of IRS Revenue Procedure 93-27 (as clarified by IRS Revenue Procedure 2001-43), provides helpful guidance to issuers of profits interests, including private equity funds and other investment partnerships and their portfolio companies.
Seventh Circuit Affirms Discretion Over Who Gets Severance Benefits
A recent Seventh Circuit decision affirms the principle that an ERISA severance plan can reserve to the employer discretion over who is eligible for severance benefits. The case is Carlson v. Northrop Grumman Severance Plan, No. 22-1764, __ F.4th __, 2023 WL 3299703 (7th Cir. May 8, 2023).

Sweeping Ban on Non-Compete Clauses Proposed by Federal Trade Commission
On January 5, 2023, the Federal Trade Commission (“FTC”) proposed an expansive new rule which would impose a near-complete ban on the use of noncompetes (the “Proposed Rule”) by employers. The Proposed Rule is the culmination of the FTC’s recent efforts, following President Biden’s July 9, 2021 Executive Order on promoting competition in the economy…
Proxy Season Greetings: ISS and Glass Lewis Announce Policy Updates Ahead of the 2023 Proxy Season
Proxy advisory firms Institutional Shareholder Services (“ISS”) and Glass Lewis (“GL”) each published their annual policy updates for 2023, which updates made certain changes relating to executive compensation.[1] As a general matter, the changes are incremental to the existing policies and do not significantly change the rubric by which ISS and GL review compensation…
Final SEC Clawback Rules: Key Dates that Issuers Need to Know
On November 28, 2022, the Securities and Exchange Commission (the “SEC”) published the final clawback rules (the “Final Rules”) under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in the Federal Register.
Now that the Final Rules have been published in the Federal Register, issuers should be aware of the following key…
Long Time Coming: SEC Adopts Final Dodd-Frank Clawback Rules
Twelve years after the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and many years after the Securities and Exchange Commission started considering regulations implementing the clawback provisions of Dodd-Frank, the SEC published the Final “Clawback” Rules (the “Final Rules”) on October 26, 2022. The Final Rules task national securities exchanges (“exchanges”)…