Alert October 26, 2010

SEC Proposes “Say on Pay” Rules

On October 18, 2010, the SEC issued proposed rules (the “Proposed Rules”) designed to implement the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) which require issuers to (1) solicit a shareholder advisory vote on executive compensation at least once every three years, (2) allow shareholders to determine how frequently they will vote on executive compensation, and (3) solicit a shareholder advisory vote on so-called “golden parachute” compensation arrangements in connection with mergers or other extraordinary corporate transactions.  Under the Dodd-Frank Act, issuers are required to implement the first two of these requirements effective with respect to proxy statements for annual or other meetings occurring on or after January 21, 2011, regardless of whether the SEC’s implementing rules are in place.  Issuers are not, however, required to implement the advisory vote on golden parachute arrangements until after the SEC regulations have been finalized.  Comments on the Proposed Rules are due by November 18, 2010.

Shareholder Advisory Vote on Executive Compensation.  Proposed Rule 14a-21(a) sets forth the general requirement that at least once every three years, a proxy for a meeting of shareholders must include a separate resolution subjecting all of the executive compensation disclosed pursuant to Item 402 of Regulation S-K to a non-binding shareholder advisory vote (a “Say on Pay Vote”).  The Proposed Rule does not dictate the specific form of resolution for this advisory vote.  In addition to this general rule, the SEC has proposed that:

  1. issuers be required to disclose in their proxy statements that they are conducting a Say on Pay Vote and the effects of the vote, such as whether each such vote is non-binding; and
  2. issuers be required to disclose whether they have taken the Say on Pay Vote into account in determining executive compensation policies and decisions.

Frequency of Shareholder Advisory Votes on Executive Compensation.  Proposed Rule 14a-21(b) requires that at least every six years, a proxy for a meeting of shareholders must include a separate, non-binding resolution on whether the Say on Pay Vote should occur every one, two or three years (a “Frequency Vote”).  In addition to this general rule, the SEC has proposed that:

  1. issuers disclose in their proxy statements that they are conducting a Frequency Vote and the effects of the vote, such as whether each such vote is non-binding;
  2. shareholders be allowed four options:  voting for a one-, two- or three-year interval between Say on Pay Votes, or abstaining from voting;
  3. an issuer be permitted to exclude a shareholder proposal on a Say on Pay Vote or Frequency Vote provided that the issuer has adopted a policy on the frequency of Say on pay Votes that is consistent with the plurality of votes cast in the most recent Frequency Vote.

Disclosure of Golden Parachute Arrangements and Shareholder Advisory Votes on those Arrangements.  Proposed Rule 14a-21(c) sets forth the general requirement that any proxy in which shareholders are asked to approve a merger or other extraordinary corporate transaction (including a tender offer, going-private transaction or sale of assets) must contain disclosures regarding the compensation arrangements among the target, the acquiring company and the named executive officers of both entities relating to the extraordinary corporate event (“Golden Parachute Arrangements”), and must provide for a separate non-binding shareholder advisory vote on the Golden Parachute Arrangements unless such arrangements have been previously approved pursuant to a Say on Pay Vote.  Golden Parachute Arrangements would have to be disclosed in a clear and simple form, including both tabular and narrative presentation.  The tabular presentation would have to include the following categories of compensation and an aggregate total:

  • cash;
  • equity (accelerated vesting of in-the-money options and cash-out of equity awards);
  • pension and nonqualified deferred compensation benefit enhancement;
  • perquisites and other personal benefits;
  • tax reimbursement; and
  • all other items.

An issuer could include Golden Parachute Arrangements in a Say on Pay Vote at an annual meeting by including the proposed new disclosure in its proxy statement and thereby avoid a subsequent vote at the special meeting approving the corporate transaction to which the Golden Parachute Arrangements relate, but any new Golden Parachute Arrangements not previously approved would have to be separately disclosed and subject to a separate advisory vote.

Proposed Amendments to Forms 10-K and 10-Q.  Proposed amendments to Forms 10‑K and 10-Q would require an issuer to disclose in the first Form 10-Q or Form 10-K due after a Frequency Vote its decision on the frequency of Say on Pay Votes over the next six years.

Transition Matters.  The SEC release describing the Proposed Rules (the “Proposing Release”) states that prior to adopting final rules on the Say on Pay Vote and Frequency Vote, the SEC will not require a preliminary proxy filing based solely on the fact that proxy materials include a Say on Pay Vote or Frequency Vote as required by the Dodd-Frank Act.  The Proposing Release includes relief from the certain SEC proxy rule requirements applicable to the presentation of voting options for the Frequency Vote that is designed to allow for proxy service provider limitations in the short-term.  Finally, the Proposing Release includes relief from the Dodd-Frank Act’s Frequency Vote requirements for issuers that conduct annual Say on Pay Votes because they are TARP recipients.