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Legal Update

Jan 28, 2011

SEC Adopts Final Rules on Shareholder Advisory Votes for Say on Pay and Golden Parachutes Mandated by the Dodd-Frank Act

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The Securities and Exchange Commission (the “Commission”) has adopted final rules implementing the provisions of the Dodd- Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) relating to non-binding shareholder advisory votes on the compensation of a company’s named executive officers (“NEOs”) disclosed in a company’s annual proxy statement and so-called “golden parachute” severance packages disclosed in a proxy or information statement in connection with a business combination transaction. This management alert provides a brief summary of the new rules and a summary of the steps that companies will have to take to comply with the new rules.

Say on Pay Votes

A public company will be required to have its first say on pay vote at its first annual meeting taking place on or after January 21, 2011, the six-month anniversary of the effective date of the Dodd-Frank Act . Thereafter, a company must seek a say on pay vote at least once every one, two or three years as presumably determined by a separate shareholder advisory vote. The new rules include say on pay votes in the list of items that do not require the filing of preliminary proxy materials with the Commission.

The new say on pay rules require a non-binding advisory vote with respect to all compensation of a company’s NEOs under Item 402 of Regulation S-K, which includes a company’s compensation policies and procedures with respect to NEOs described in the Compensation Discussion & Analysis (the “CD&A”) as well as the tabular and narrative disclosure of compensation, contractual rights and severance benefits of NEOs elsewhere in the proxy. The new rules require the proxy to include disclosure explaining the vote is being sought pursuant to provisions of the Dodd-Frank Act, its general effect, and that it is non-binding. In addition, the new rules require a company, commencing in 2012, to update its CD&A to address whether and, if so, how its compensation policies and procedures take into account the results of say on pay votes.

The new rules do not require the specific use of any specific language or form of shareholders’ resolution, however the SEC has added a general instruction to the final rules which provides non-exclusive, sample disclosure that will be deemed to comply with the new rules. The rules permit a company to seek a single advisory vote on all compensation of all of its NEOs as a group. A company also may elect to seek separate votes with respect to separate elements of compensation for all of the NEOs, such as separate votes for base salary, bonus, and equity compensation awards, or for individual NEOs, but we do not expect most companies to elect either of these options.

The new rules also provide that these matters are ones as to which brokers are prohibited from exercising discretionary voting without instructions from the beneficial owner pursuant to Section 957 of the Dodd-Frank Act.

Frequency Votes

In addition to the first say on pay vote that occurs at a public company’s first annual meeting taking place on or after January 21, 2011, a company also must seek a separate shareholder advisory vote on whether the say on pay vote should be held every one, two or three years. A company must seek this frequency vote at least once every six years. In addition, the final rules also require annual proxy disclosure of the current frequency of a company’s say on pay votes and when the next say on pay vote will occur.

As is the case with say on pay votes, the new rules require the proxy to include disclosure explaining the vote is being sought pursuant to provisions of the Dodd-Frank Act, its general effect and that it is non-binding. The filing of preliminary proxy materials is not required for these votes.

The new rules require that proxy cards give shareholders four options with respect to a frequency vote: one, two or three years or to abstain from voting.

A board of directors may, but is not required to, include its recommendation. The proxy disclosure, however, must clearly state that shareholders have four choices and are not voting to approve or disapprove the board’s recommendation. The final rules provide that if a company provides a recommendation with respect to the frequency vote and provides for all four voting options on the proxy card, then management may vote signed but uninstructed proxy cards in accordance with the company’s recommendation for the frequency vote so long as the proxy card includes prominent, boldface language in accordance with current rules stating how uninstructed shares will be voted.

In addition, because the frequency vote is advisory, the new rules do not mandate a standard for determining which frequency is deemed to have been recommended by shareholders. However, if a company has adopted a policy on the frequency of say on pay votes that is consistent with the choice selected by the majority of votes cast in the most recent frequency vote, then the new rules would permit a company to exclude from its proxy materials subsequent shareholder proposals recommending a frequency standard inconsistent with that elected by a majority of its shareholders. It is noteworthy that the original exclusionary threshold that was proposed by the Commission was a plurality standard and not the majority standard adopted in the final rules. The final rules further expand the scope of the proposed rules to also permit a company to exclude from its proxy materials subsequent shareholder proposals relating to executive compensation advisory votes within substantially the same scope as the new say on pay rules if the company has adopted a policy on the frequency of say on pay votes that is consistent with the choice selected by the majority of votes cast in the most recent frequency vote. Abstentions would be disregarded in this context.

The new rules require a company to disclose under expanded Item 5.07 of Form 8-K the results of its say on pay and frequency votes together with the results of all other voting results from the meeting within four business days of the meeting. In addition, the final rules require a company to amend this Form 8-K to disclose its decisions regarding how frequently it will hold say on pay votes in light of the voting results from the meeting. The amendment to the Form 8-K will be due no later than 150 calendar days after the meeting, but in no event later than 60 calendar days prior to the deadline for the submission of shareholder proposals under Rule 14a-8 for the subsequent annual meeting.

Golden Parachutes

The new rules create a new paragraph (t) of Item 402 of Regulation S-K that requires enhanced disclosure relating to all golden parachute compensation arrangements in connection with certain transactions relating to an acquisition, merger, consolidation, proposed sale, or disposition of all or substantially all of a company’s assets. The disclosure is required in proxy statements seeking approval of the issuance of shares in a merger proxy and Schedule 14D-9 solicitation/recommendation statements to ensure that the disclosure is required regardless of the form of the transaction. However, the SEC determined not to adopt the proposed rules that also would have required Item 402(t) disclosure in Schedule TO filings by third party bidders, so long as the transaction is not a going private transaction subject to Rule 13e-13. The new rules require a target company to disclose all written or unwritten agreements that it has with its NEOs or the NEOs of the acquiring company with respect to compensation that is based on or otherwise relates to such transaction. In addition, if the acquiring company is making the solicitation, then it must provide the same disclosure with respect to any agreements or understandings with its NEOs or the NEOs of the target.

The new rules mandate tabular disclosure of the compensation arrangements covered by the new rules that is somewhat different from (and is more extensive than) the narrative disclosure of change-in-control and post-termination arrangements currently required under paragraph (j) Item 402 of Regulation S-K. The new tabular disclosure must quantify for each NEO:

  • cash severance payments;
  • accelerated stock awards, accelerated vesting option awards, and payments made in cancellation of stock and option awards;
  • pension and nonqualified deferred compensation benefit enhancements;
  • perquisites;
  • tax gross-ups;
  • any other benefits; and
  • the aggregate of all such compensation.

The final rules clarify that disclosure of amounts that would not be paid or payable in connection with the transaction subject to shareholder approval is not required. The final rules also permit a company to insert additional columns or rows in the table to provide additional information that the company believes is meaningful for investors.

The new rules require footnote disclosure of which amounts in the table are triggered by the transaction (i.e., single trigger) and which amounts are contingent upon additional conditions, such as termination of employment (i.e., double trigger). The rules do not require disclosure or quantification of amounts of previously vested awards, compensation from bona fide post-transaction employment agreements executed in connection with the merger or acquisition transaction, or compensation disclosed in the Pension Benefits Table and Nonqualified Deferred Compensation tables.

The new rules also require additional narrative disclosure of:

  • any material conditions or obligations applicable to the receipt of payment (including non-compete and non-solicitation agreements, their duration, and provisions regarding waiver or breach);
  • a description of the specific circumstances that would trigger payment (whether lump sum or annual, their duration, and who would provide the payments);and
  • any material factors regarding each agreement.

Under the new rules, as noted above, any proxy or information statement relating to an acquisition, merger, consolidation, proposed sale, or disposition of all or substantially all of a company’s assets must include a separate shareholder advisory vote on these compensation arrangements unless all of the transaction-related compensation agreements and understandings were the subject of a prior say on pay vote. As noted, a say on pay vote that includes only the narrative disclosure of change-in-control and post-termination arrangements currently required under paragraph (j) Item 402 of Regulation S-K would not be sufficient for this purpose. We believe that most companies will not elect to comply with the new disclosure referred to here in their annual proxy statements and to include them only if and when there is a merger or similar transaction.

For more information or if you have specific questions regarding the Dodd-Frank Act, please contact the Seyfarth attorney with whom you work or any Securities attorney on our website.