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Newsletters / SEC Adopts Final Rules on Say-on-Pay, Say-on-Frequency and
Say-on-Parachutes
SEC Adopts Final Rules on Say-on-Pay, Say-on-Frequency and
Say-on-Parachutes
January 28, 2011
The SEC recently adopted final rules regarding
shareholder advisory votes on executive compensation , the frequency of
say-on-pay votes and golden parachute arrangements. Public
companies must provide shareholders with a say-on-pay vote and say-on-frequency
vote at the first annual or other meeting of shareholders where directors are
elected occurring on or after January 21, 2011. The
say-on-parachutes vote and enhanced disclosure of golden parachute compensation
will be required for initial filings by all public companies on or after April
25, 2011. While the final rules are similar to the proposed
rules understanding the differences will assist in preparing for the 2011 proxy
season.
On January 25, 2011, the U.S. Securities and Exchange
Commission (SEC) adopted final rules regarding shareholder advisory votes on
executive compensation (say-on-pay), the frequency of say-on-pay votes
(say-on-frequency) and golden parachute arrangements (say-on-parachutes) under
Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act). Except for certain smaller reporting
companies, public companies must provide shareholders with a say-on-pay vote and
say-on-frequency vote at the first annual or other meeting of shareholders where
directors are elected occurring on or after January 21, 2011.
The say-on-parachutes vote and enhanced disclosure of golden parachute
compensation will be required for initial filings by all public companies on or
after April 25, 2011. The full text of the final rules is
available at http://www.sec.gov/rules/final/2011/33-9178.pdf.
Proposed rules were issued on October 18, 2010, which was described in a
McDermott White Paper available at http://www.mwe.com/info/news/wp1010a.pdf.
The final rules are in many respects similar to the proposed
rules. Important differences between the proposed rules and
the final rules, plus a detailed summary of the final rules are provided
below.
Key Highlights
-
The final rules with respect to say-on-pay and
say-on-frequency become effective 60 days after publication in the Federal
Register. Nevertheless, we anticipate many public companies
will follow the final rules prior to their effective date.
-
Smaller reporting companies (companies with
public float of less than $75 million) are not required to provide say-on-pay
and say-on-frequency votes until 2013; however, all public companies but must
comply with the final rules applicable to say-on-parachutes votes on and after
April 25, 2011.
-
As expected, public companies will not need to
file a preliminary proxy with the SEC due to a say-on-pay or a
say-on-frequency vote.
-
The SEC provided an example of a resolution
that will be considered to comply with the final rules applicable to
say-on-pay; no example was provided for the say-on-frequency
vote.
-
Public companies will generally need to
disclose their determination with respect to the frequency of future
say-on-pay votes within 150 days after the say-on-frequency vote; this
reflects a change from the proposed rules, and we anticipate that many public
companies will provide this disclosure well before this
deadline.
-
If a public company adopts a say-on-frequency
policy that reflects a majority of the votes cast at the most recent
shareholder meeting, then it will be permitted to exclude a subsequent
shareholder proposal seeking a more frequent say-on-pay
alternative.
-
The categories of transactions for which golden
parachute disclosure will be required has been expanded to include tender
offers and going private transactions but this is just a disclosure
requirement since no shareholder vote on the golden parachute arrangements in
these transactions is required.
-
The final rules will require public companies
in future years to address in the Compensation Discussion & Analysis
(CD&A) whether, and, if so, how they considered the results of their most
recent say-on-pay advisory vote, if any, and how that consideration affected
executive compensation decisions and
policies.
Background
Section 951 of the Dodd-Frank Act includes three
shareholder advisory votes which are covered under the SECfs final
rules:
-
gSay-on-Payh Vote – voting on whether to approve
the compensation of named executive officers as disclosed under federal
securities law
-
gSay-on-Frequencyh Vote – voting at least once
every six years on whether the say-on-pay vote should occur every one, two or
three years
-
gSay-on-Parachutesh Vote – voting on whether to
approve so-called golden parachute compensation in connection with a business
combination
None of these shareholder votes is binding on the
board of directors or the issuer. The results of a say-on-pay
vote or say-on-parachutes vote do not overrule prior decisions and does not
increase or change the fiduciary duties of the board of directors.
Say-On-Pay Votes
The SEC has adopted rules under new Section 14A(a) of
the Securities Exchange Act of 1934, which requires issuers subject to the
federal proxy rules to conduct a shareholder advisory vote on executive
compensation, beginning with the first shareholdersf meeting taking place on or
after January 21, 2011, even if the proxy statement for the meeting has already
been filed.
Scope of Say-On-Pay Votes and Voting
Procedures
New Rule 14a-21(a) requires public companies, not
less frequently than once every three calendar years, to provide a separate
shareholder advisory vote to approve the compensation of named executive
officers described in their proxy statements for annual or special meetings at
which directors are elected. The shareholder vote must relate
to all executive compensation disclosed under Item 402 of Regulation S-K,
including the CD&A, the compensation tables and other required narrative
executive compensation disclosures. Neither the compensation
of directors nor the compensation policies and practices related to risk
management and risk-taking incentives will be subject to the shareholder
advisory vote, unless discussed in the CD&A.
The final rule does not require issuers to use any
specific language or form of resolution for the say-on-pay vote, but the
instructions to Rule 14a-21 provide the following example of a resolution that
would satisfy the requirements of Section 14A(a):
gRESOLVED, that the compensation paid to the
companyfs named executive officers, as disclosed pursuant to Item 402 of
Regulation S-K, including the Compensation Discussion and Analysis,
compensation tables and narrative discussion is hereby
APPROVED.h
The final rule does not attempt to address the issue of
what counting or approval standard should be applied to a say-on-pay vote
(except to remind issuers that, as with any matters that involve gexecutive
compensationh brokers may not vote shares as to which they
have not received voting instructions from the ultimate beneficial
owners). Public companies should follow the counting and
approval standards required by the law of their state of
incorporation.
Disclosure Related to Say-On-Pay
Votes
The adopted rules add new Item 24 to Schedule 14A,
requiring issuers to disclose in their proxy statements that they are providing
shareholders an opportunity to cast a say-on-pay vote and to
briefly explain the general non-binding effect of the vote.
In future years issuers will be required to disclose under Item 24 the current
frequency of the say-on-pay votes and when the next say-on-pay vote will occur,
a requirement added in response to comments on the proposed
rules. The final rules amend Rule 14a-6 to exempt issuers
from filing a preliminary proxy statement with the SEC due to the inclusion of a
say-on-pay vote.
The final rules amend the list of items that public
companies are required to discuss in their CD&As under Item 402(b) of
Regulation S-K, to include a discussion as to whether and, if so, how the issuer
has considered the results of the most recent say-on-pay vote (as well as prior
votes, to the extent material) in determining compensation policies and
decisions and how that consideration has affected the issuerfs compensation
policies and decisions. As a practical matter, the addition
of this CD&A disclosure obligation, which was not required by the Dodd-Frank
Act, puts pressure on the compensation committee to carefully consider how to
respond to say-on-pay votes.
Say-On-Frequency
Votes
The SEC has adopted rules implementing the requirement
under Section 14A(a) that public companies subject to the federal proxy rules
provide their shareholders with an advisory vote on the desired frequency of the
say-on-pay votes described above, beginning with the first shareholdersf meeting
taking place on or after January 21, 2011.
Voting Procedures
New Rule
14a-21(b) requires issuers, not less frequently than once every six calendar
years, to provide, in their proxy statements for annual or special meetings at
which directors are elected, a separate shareholder advisory vote to determine
whether the say-on-pay vote will occur every one, two or three years.
If shareholders return proxy cards without indicating a
choice, issuers may only vote shares held by those shareholders in accordance
with managementfs recommendation for the say-on-frequency vote if management
actually includes such a recommendation in the proxy statement; a choice to
abstain is provided on the proxy card; and disclosure is included on the proxy
card in bold that informs shareholders how uninstructed shares will be
voted.
Additionally, under amended Rule 14a-8, if a public
company adopts a say-on-frequency policy consistent with a
single choice that received a majority of votes cast (i.e. one,
two or three years) in the most recent say-on-frequency vote, the issuer will be
able to exclude from its proxy materials subsequent shareholder proposals
related to say-on-pay votes and the frequency of such votes on the basis that
any such proposal has been gsubstantially implemented.h The
proposed rules had provided for this relief if the say-on-frequency policy was
consistent with just a plurality of the votes cast.
Disclosure Related to Say-On-Frequency
Voting
In addition to disclosure regarding the say-on-pay
vote, new Item 24 of Schedule 14A requires issuers to disclose in the proxy
statement that they are providing a separate say-on-frequency vote and to
briefly explain the general non-binding effect of this vote.
Amended Rule 14a-6 exempts issuers from filing a preliminary proxy statement
with the SEC due solely to a say-on-frequency vote.
The final rules require Form 8-K reporting of a public
companyfs decision regarding how frequently it will conduct say-on-pay votes no
later than 150 calendar days after the date of the meeting in which the
say-on-frequency vote took place, but no later than 60 calendar days prior to
the deadline for submission of Rule 14a-8 shareholder proposals for the
subsequent annual meeting. The Form 8-K timing chosen by the
SEC is designed to permit boards time to consider the outcome of the
shareholdersf say-on-frequency vote, but also to give shareholders time, after
the issuer has announced its say-on-frequency policy, to submit proposals for
the next proxy cycle if they disagree with the issuerfs policy or otherwise
believe companies are not being sufficiently responsive to shareholder wishes on
executive compensation.
Say-on-Parachutes
The SEC has adopted rules regarding disclosure and
say-on-parachute advisory votes that must be provided with respect to golden
parachute compensation arrangements triggered by certain forms of corporate
transaction (as described below). Golden parachute
compensation is defined to include any type of compensation (whether present,
deferred or contingent) that is based on or related to a covered corporate
transaction for the named executive officers of the issuer or of the acquiring
person (assuming the person conducting the solicitation is not the acquiring
person).
Form of New Disclosure for Golden Parachute
Compensation
New Item 402(t) of Regulation S-K expands what
must be disclosed regarding golden parachutes. Unlike the
termination and change-in-control compensation disclosures currently required by
Item 402(j) of Regulation S-K, new Item 402(t) would require:
-
A standardized form of table
-
All compensation to each named executive
officer that is gbased on or otherwise relate[s]h to a business combination
transaction, including cash severance, the dollar value of accelerated stock
awards, pension and non-qualified deferred compensation enhancements,
perquisites and tax reimbursements
-
Disclosure of all perquisites and other
personal benefits, (with no de minimis exclusion), and benefits under
arrangements that do not discriminate in favor of executive officers (such as
group health, life insurance, etc., normally excluded from disclosure
of executive compensation)
-
A gtotalh amount of golden parachute
compensation for each person in the table
Disclosures must also include a narrative
discussion to explain exactly how various payments are triggered, material
conditions or obligations applicable to the receipt of payment, how and when
payments are to be made for each agreement, and material assumptions related to
uncertainties for the provision of payments or the amounts
thereof. The compensation disclosed may be limited to that
related to the subject transaction only, and need not cover parachute
compensation that might be received under other circumstances (unless included
in a regular annual proxy statement).
Interplay Between Golden Parachute Disclosure and
Say-on-Parachutes
The final rules require disclosure of
golden parachute compensation arrangements under Item 402(t) for any transaction
at which shareholders are asked to approve an acquisition, merger, consolidation
or a proposed sale or other disposition of all or substantially all assets of
the company, including Rule 13e-3 ggoing privateh transactions and third-party
tender offers. A separate say-on-parachute advisory vote with
respect to these golden parachute compensation arrangements will be required
pursuant to new Rule 14a-21(c) in connection with shareholder meetings at which
shareholders are asked to approve any of the foregoing business combinations
except a going private transaction or a third-party tender offer (even
though the disclosure is required for all such transactions). However, the final
rules permit the exclusion of a say-on-parachute advisory vote in connection
with such transactions if the same golden parachute arrangements were subject to
a previous say-on-pay advisory vote. In order to take
advantage of this exception, a company would have to voluntarily include Item
402(t) golden parachute compensation disclosure in a previous regular annual
meeting proxy statement.
As noted above, the disclosure required by Item 402(t)
is more expansive than the disclosure currently required for termination and
change-in-control payments under Item 402(j). If the Item 402(t) information is
provided, a public company does not need to include the information regarding
potential payments upon a change of control that would otherwise be provided
pursuant to Item 402(j), except for disclosure regarding potential payments upon
termination of employment. However, a company will need to
obtain another approval at the time of a covered corporate transaction if golden
parachute arrangements have been changed or a new named executive officer has
been hired subsequent to the prior say-on-pay advisory vote (in which case two
tables would need to be disclosed, to show what was previously approved and what
has changed). Companies will need to weigh the potential
benefits of this exception against the risk of higher scrutiny of a say-on-pay
vote at an annual meeting, and the burden of complying with Item
402(t).
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