Alert December 21, 2009

SEC Adopts Final Rules Requiring Additional Proxy Statement Disclosures and Earlier Disclosure of Voting Results from Stockholder Meetings


January 15, 2010

 

Update: SEC Staff Guidance on Compliance Dates and Transition Rules

Subsequent to the original publication of this Public Company Advisory, the Securities and Exchange Commission published guidance on compliance dates and transition rules for the new corporate governance and executive officer and director compensation disclosure requirements. See the update appended to the end of this Public Company Advisory for a summary of that guidance.

 

On December 16, 2009, the Securities and Exchange Commission (“SEC”) adopted rules requiring companies to make additional disclosures in proxy statements about (i) their board of directors and executive officers, including director and director nominee qualifications, legal actions involving directors, director nominees or executive officers, board leadership structure and risk oversight; (ii) compensation policies and practices that relate to risk management practices and risk-taking incentives; and (iii) potential conflicts of interest of compensation consultants that advise companies and their boards of directors. In addition, the new rules change how companies must report awards of stock and options in the Summary Compensation Table and Director Compensation Table and when companies must report voting results from stockholder meetings.

The rules are effective for filings made on or after February 28, 2010. The text of the SEC release is available on the SEC’s website here. The additional disclosures will be required in companies’ proxy statements and certain other filings for which disclosure regarding corporate governance, directors and executive officers and compensation is required, which may include Form 10-K annual reports and registration statements under the Securities Exchange Act of 1934 and registration statements under the Securities Act of 1933 and Investment Company Act of 1940.

Board of Directors and Executive Officers

The rules require companies to make additional disclosures about their board of directors and executive officers, including:

  • Director Qualifications. For each director and director nominee, a discussion of the specific experience, qualifications, attributes and skills that led to the board’s conclusion that the person should serve as a director in light of the company’s business and structure. If material, this disclosure is required to cover more than the past five years, including information about the person’s particular areas of expertise or other relevant qualifications.
  • “Bad Boy” Disclosures. An expanded list of legal proceedings involving a director, director nominee or executive officer that must be disclosed, which includes (i) orders, judgments, decrees or findings relating to alleged violations of securities or commodities laws, laws respecting financial institutions or insurance companies or laws prohibiting fraud and (ii) sanctions or orders of any self-regulatory organization, such as the stock exchanges, or other similar organizations. In addition, the look-back period for disclosing these legal proceedings, as well as the other “bad boy” legal proceedings previously required to be disclosed, has been increased from five years to 10 years.
  • Other Directorships. Any other public company or registered investment company directorships held by directors and director nominees during the past five years, as opposed to just current directorships, which are required to be disclosed by existing rules.
  • Leadership Structure. The leadership structure of the board of directors, including whether the same person serves as both chief executive officer and chairman of the board and, if so, whether the company has a lead independent director and the specific role the lead independent director plays in the leadership of the board. The disclosure must indicate why the company has determined that its leadership structure is appropriate given the specific characteristics or circumstances of the company.
  • Risk Oversight. The board’s role in the oversight of risk, such as how the board administers its oversight function, and the effect that this has on the board’s leadership structure.
  • Diversity. Whether, and if so how, the nominating committee or the board considers diversity in identifying nominees for director. If the nominating committee or the board has a policy with regard to the consideration of diversity in identifying director nominees, the company must describe how this policy is implemented as well as how it assesses the effectiveness of its policy.

Action Items:

    Compensation Policies and Practices Relating to Risk Management

    Under the new rules, if risks arising from a company’s compensation policies and practices for its employees are reasonably likely to have a material adverse effect on the company, then the company is required to include a discussion of these compensation policies and practices as they relate to risk management practices and risk-taking incentives. The SEC has indicated that situations that may trigger disclosure include, among others, compensation policies and practices:

    • At a business unit that carries a significant portion of the company’s risk profile;
    • At a business unit with compensation structured significantly differently than other units within the company;
    • At a business unit that is significantly more profitable than others within the company;
    • At a business unit where the compensation expense is a significant percentage of the unit’s revenues; and
    • That vary significantly from the overall risk and reward structure of the company, such as when bonuses are awarded upon accomplishment of a task, while the income and risk to the company from the task extend over a significantly longer period of time.

    If a company determines that disclosure is required, the SEC has provided the following examples of issues that the company may need to address for the business units or employees:

    • General design philosophy of compensation policies and practices for employees whose behavior is most affected by the incentives established by the policies and practices, and the manner of their implementation;
    • Risk assessment or incentive considerations, if any, in structuring compensation policies and practices or in awarding and paying compensation;
    • How compensation policies and practices relate to the realization of risks resulting from the actions of employees in both the short term and the long term, including policies requiring claw backs or imposing holding periods;
    • Policies regarding adjustments to compensation policies and practices to address changes in risk profile, and material adjustments made as a result of any such changes; and
    • Monitoring of compensation policies and practices to determine whether its risk management objectives are being met with respect to incentivizing its employees.

    Important note: smaller reporting companies will not be subject to these new rules.

    Action Items:

      Potential Conflicts of Interest of Compensation Consultants

      The rules also require disclosure of the fees paid to compensation consultants in the following circumstances:

      • Compensation Consultant Engaged by Compensation Committee. If a compensation consultant is engaged by the compensation committee to provide advice or recommendations on the amount or form of executive and director compensation and the compensation consultant or its affiliates also provided additional services to the company or its affiliates in an amount in excess of $120,000 during the company’s last fiscal year, then the company must disclose (i) the aggregate fees for determining or recommending the amount or form of executive and director compensation and (ii) the aggregate fees for such additional services. In addition, the company must disclose whether the decision to engage the consultant for the other services was made or recommended by management and whether the compensation committee or the board approved such other services.
      • Compensation Consultant Engaged by Management. If the compensation committee has not engaged a compensation consultant, but management has engaged a compensation consultant to provide advice or recommendations on the amount or form of executive and director compensation and the compensation consultant or its affiliates also provided additional services to the company in an amount in excess of $120,000 during the company’s last fiscal year, then the company must disclose (i) the aggregate fees for determining or recommending the amount or form of executive and director compensation and (ii) the aggregate fees for such additional services. Note: For companies where the compensation committee and management have separate compensation consultants, no disclosure requirement is triggered for services provided by management’s compensation consultant, regardless of whether those services relate to executive or director compensation or other matters.

      Action Items:

        Summary Compensation Table and Director Compensation Table Changes

        Under the new rules, in the Summary Compensation Table and Director Compensation Table, companies must disclose the aggregate grant date fair value of stock and option awards in the year in which the grant was made. Previously, companies were required to report the amount recognized during the year for accounting purposes for all stock and option awards, regardless of when they were granted. This will be a significant change in how total compensation will be calculated for directors and named executive officers. For example, if a company granted one of its named executive officers an equity award on December 31, 2009 with a grant date fair value of $500,000 that vested over five years, under the new rules, the company would be required to report the entire $500,000 as 2009 compensation. Under the old rules, the grant date fair value would have been incorporated into the executive’s compensation over five years (approximately $100,000 per year).

        For equity awards that are subject to performance conditions, the value that is to be reported is to be based on the probable outcome of such conditions, which should be consistent with the estimate of the aggregate compensation cost to be recognized under applicable accounting rules, excluding the effect of estimated forfeitures. However, companies must also disclose in footnotes to the tables the value of the award at the grant date assuming that the highest level of performance conditions will be achieved.

        In adopting the new rule, the SEC specifically considered whether the grant date fair value for stock and option awards should be included for the year in which the grant occurred for accounting purposes or the year to which the grant related. The SEC concluded that the amount should be included for the year in which the grant date occurred, stating that “because it appears that multiple subjective factors, which could vary significantly from company to company, influence equity awards granted after fiscal year end, we are concerned that changing the approach to reporting [away from the requirement to report awards in the year granted] could result in inconsistencies that would erode comparability.”

        This rule change is also significant because it influences the total compensation number that is used to determine which executive officers are “named executive officers” whose compensation information must be disclosed in the proxy statement. Under SEC rules, “named executive officers” generally includes the CEO and CFO as well as the three other most highly compensated executive officers based on their total compensation as reported in the Summary Compensation Table. As a result, if an executive officer who would not ordinarily be a named executive officer receives a large one-time grant in a particular year, that executive officer could become a named executive officer for that year. In the adopting release, the SEC specifically acknowledged this consequence and indicated that in such situations the company can consider including compensation disclosure for the executive officer who ordinarily would have been a named executive officer to supplement the required disclosures.

        Under the new rules, data for prior years, if included in the table, must be recalculated in accordance with the new rules.

        Action Items:

          Early Disclosure of Stockholder Votes on Form 8-K

          The rules create a new Item 5.07 of Form 8-K pursuant to which companies are required to disclose the results of stockholder votes within four business days of a stockholder meeting or written consent in lieu of a stockholder meeting. In the event that final voting results are not available, companies must file preliminary voting results within four business days of the vote, and file the final voting results within four business days after they become available. This item replaces the previous Form 10-Q and Form 10‑K requirement to report these voting results for stockholder meetings or consents that occurred during the quarterly period to which the report related (or the fourth quarter for Form 10‑Ks).

          Update: SEC Staff Guidance on Compliance Dates and Transition Rules

          As described above in this Public Company Advisory, the Securities and Exchange Commission adopted significant amendments to its rules governing corporate governance and executive officer and director compensation on December 16, 2009. The SEC published additional guidance on December 22, 2009 that provides some clarifications on when companies must comply with these amendments. The table below summarizes the SEC guidance.

          Note regarding voluntary early compliance: The SEC has stated that a company that is not required to comply with the new disclosure requirements for its 2009 Form 10‑K and related proxy statement may voluntarily comply with some or all of the new disclosure requirements, but if the company voluntarily complies with the new Summary Compensation Table and Director Compensation Table rules, it must comply with all new applicable disclosure requirements.

          Company with fiscal year ended on or after December 20, 2009

          Company with fiscal year ended prior to December 20, 2009

          Filed before February 28, 2010

          Filed on or after February 28, 2010

          Filed any time before or after February 28, 2010

          Form 10-K

          Not required

          Required

          Not required

          Preliminary Proxy Statement

          Not required if definitive proxy statement is expected to be filed before February 28, 2010; otherwise, compliance with amended rules is required

          Required

          Not required

          Definitive Proxy Statement

          Not required

          Required

          Not required

          Registration Statements (existing filer)

          Not addressed1

          Not addressed1

          Not required until Form 10‑K for 2010 fiscal year is filed

          Registration Statements (new filer/IPO)

          Required in order to be declared effective on or after February 28, 2010 if registration statement was first filed on or after December 20, 20092

          Form 8-K (New Item 5.07)

          Required for any meeting that takes place on or after February 28, 2010

           

          1 The SEC guidance did not specifically address these situations. In these cases, companies should obtain additional guidance from the SEC if they do not intend to comply with the amended rules.

          2 The SEC guidance did not specifically address whether companies would be required to comply with the amended rules with respect to registration statements (A) first filed before December 20, 2009 that are declared effective after February 28, 2010 or (B) first filed on or after December 20, 2009 that are declared effective before February 28, 2010. The SEC guidance also did not specifically address whether companies with a 2009 fiscal year ended prior to December 20, 2009 would be subject to different requirements. Companies in these situations may want to seek additional guidance from the SEC.