On Oct. 18, 2010, the
proposed rules implementing the shareholder advisory votes on executive
compensation required by Section 951 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the Dodd-Frank Act) enacted last July.
Summary of Dodd-Frank Act § 951
Section 951 of the Dodd-Frank Act contains three requirements relating to
shareholder advisory votes on executive compensation:
- Say-on-Pay Vote: At least once every three years, a public company must give
shareholders a non-binding vote in the annual proxy on whether to approve the
company’s compensation for its named executive officers as disclosed pursuant to
Item 402 of Regulation S-K.
- Say-on-Frequency Vote: At least once every six years, a public company must
give shareholders a non-binding vote in the annual proxy on whether to hold the
say-on-pay vote every one, two or three years.
- Golden Parachute Disclosure and Vote: In connection with certain merger or
acquisition transactions, a public company that solicits a merger proxy must
disclose to shareholders in the merger proxy any so-called “golden parachute”
arrangements between it and its named executive officers, or between the
acquiring company and the named executive officers of the acquiring company if
the company soliciting the merger proxy is not the acquiring company. In
addition, unless golden parachute arrangements have already been subject to a
say-on-pay vote, the company must give shareholders a non-binding vote on
whether to approve such arrangements (the “say-on-golden-parachute” vote).
General Highlights of Proposed Rules
- All Public Companies Impacted: The proposed rules would clarify that all
public companies (including smaller reporting companies) must comply with all of
the Section 951 requirements. Smaller reporting companies would, however, remain
subject to their current scaled reporting requirements under Item 402 of
Regulation S-K. For example, the proposed rules would not require a smaller
reporting company to include a Compensation Discussion & Analysis (CD&A) in its
annual proxy statement in order to comply with the say-on-pay vote. Non-public
companies are not affected by these rules.
- Jan. 21, 2011 Partial Effective Date: The proposed rules are subject to a
public comment period ending Nov. 18, 2010, and will not become effective until
the comment period has ended and the SEC has issued final rules. However, the
proposed rules confirm, regardless of whether the SEC has finalized the proposed
rules by the time preliminary or definitive proxies are required to be
filed, that shareholder resolutions for the say-on-pay and
say-on-frequency votes must be included in a public company’s proxy solicitation
materials for its first annual shareholders meeting occurring on or after Jan.
21, 2011. However, the say-on-golden-parachute disclosure and vote requirements
apply only to shareholder meetings occurring on or after the later of (i) Jan.
21, 2011, or (ii) when the proposed rules have been finalized.
- Specific Resolution Language Not Required: The SEC has not proposed specific
language that must be used for the resolutions for any of the three votes; it
has simply provided that the substantive requirements for each vote must be met.
- Disclosure of Non-Binding Nature of Votes: Public companies would be required
to disclose to shareholders in the proxy statement that separate say-on-pay and
say-on-frequency votes are being provided, and briefly explain the nature of
each vote, including that it is non-binding.
- No Preliminary Proxy Required: The proposed rules would add the say-on-pay and
say-on-frequency votes as items that do not trigger a preliminary proxy filing.
Public companies may rely on this position as a first-year transition matter,
even if the SEC fails to finalize the rules before proxies are required to be
- No Broker Discretionary Voting: The proposed rules confirm, in accordance with
amendments to listing standards that the national securities exchanges have
already begun to adopt, that brokers may not vote uninstructed shares on
executive compensation matters, including the say-on-pay and say-on-frequency
votes. Brokers are already prohibited from voting uninstructed shares on matters
(including the say-on-golden-parachute vote) in connection with merger or
- TARP Companies Exempt from Say-on-Frequency Vote: Because financial
institutions that participate in TARP are already subject to an annual
non-binding shareholder vote on executive compensation, the proposed rules would
clarify that these companies, for as long as they remain in TARP, are not
required to provide the say-on-frequency vote. TARP companies may rely on this
as a first-year transition matter, even if the SEC fails to finalize the rules
before proxies are required to be filed.
Highlights of Proposed Say-on-Pay Rules
The proposed rules would implement the say-on-pay vote as follows:
- The vote must cover all executive compensation disclosed pursuant to Item 402
of Regulation S-K, including the CD&A, the Summary Compensation Table, and the
related tables and narrative sections.
- The vote does not cover non-employee director compensation disclosed in the
proxy or the company’s compensation-related risk management policies required to
be disclosed pursuant to Item 402(s) of Regulation S-K, to the extent such
disclosure is not included or incorporated in the CD&A.
- Going forward, companies must include in their CD&As a mandatory discussion of
whether and, if so, how their compensation decisions and policies have taken
into account the results of the say-on-pay vote.
Highlights of Proposed Say-on-Frequency Rules
The proposed rules would implement the say-on-frequency vote as follows:
- Shareholders must be given four choices: whether the say-on-pay vote will
occur every one, two or three years, or to abstain from voting. For example,
offering a vote in which the only options are to approve or disapprove holding a
say-on-pay vote every two years would not be permitted. Companies may include a
recommendation on the frequency, as long as shareholders are presented with all
- If the company adopts a policy to hold the say-on-pay vote in accordance with
the frequency selected by the plurality of votes cast, then the company may
exclude any subsequent shareholder proposal seeking a more- or less-frequent
say-on-pay vote as “substantially implemented.” This is true even if the
compensation programs have materially changed since the most recent say-on-pay
- In addition to reporting the results of the vote on Form 8-K (which is already
required), the company must disclose in its next 10-Q or 10-K filing its
decision on how frequently it will conduct future say-on-pay votes in light of
the results of the say-on-frequency vote.
- As a first-year transition matter, public companies may rely on the proposed
rules to offer a proxy ballot with four choices as described above, even if the
rules have not been finalized before proxies are required to be filed for
shareholder meetings occurring on or after Jan. 21, 2011. In addition, if a
proxy service provider is unable to program four choices, the proposed rules
would permit three choices instead – one, two or three years, without an option
for “abstain,” as long as uninstructed ballots are not voted.
Highlights of Proposed Golden Parachute Disclosure Rules
The proposed rules would implement the golden parachute disclosure
requirements as follows:
- For all named executive officers of the target company and the acquiring
company (excluding any named executive officer, other than a former PEO or PFO,
who was not serving as an executive officer as of the last day of the prior
fiscal year), the person soliciting the merger proxy (typically the target
company in a merger) must disclose any so-called “golden parachute” arrangements
between such NEOs and the target company or the acquiring company (including any
arrangements between the acquiring company and the named executive officers of
the target company).
- For this purpose, “golden parachute” arrangements would mean any arrangements
concerning compensation that is based on or otherwise related to the merger or
acquisition transaction, including accelerated vesting of equity awards and
enhanced pension or nonqualified deferred compensation benefits, but excluding
previously vested equity awards, compensation previously disclosed in the
Pension Benefits or Nonqualified Deferred Compensation tables, and compensation
from bona-fide post-transaction employment agreements.
- Tabular and narrative disclosure is required. Tabular disclosure must be
quantitative and presented in the following form:
- Footnotes to the table must identify and quantify (i) each separate form of
compensation included in each column (other than the “total” column), and (ii)
amounts payable under “single-trigger” arrangements vs. amounts payable under
“double-trigger” arrangements included in each column (including the “total”
column). The value of accelerated equity awards for this purpose is equal to
their intrinsic value as of the most recent practicable date. In contrast to
annual proxy reporting requirements, all perquisites (including perquisites with
an aggregate incremental value less than $10,000) must be reported, as must the
value of all health and welfare plan benefits (including benefits under plans
that do not discriminate in favor of executive officers).
- The narrative disclosure must describe any material conditions or obligations
applicable to golden parachute payments (i.e., restrictive covenant agreements),
specific circumstances that trigger payment, the form and source of those
payments, and any other material factors concerning each agreement.
- Public companies are permitted (but not required) to present the golden
parachute disclosure in the annual proxy as well, where it would be subject to
the say-on-pay vote. For this purpose, the value of equity awards would be
reported based on the last day of the prior fiscal year.
- The disclosure rules would apply not only to merger proxies solicited for a
merger or similar transaction, but generally to any filing relating to such
transactions, including registration statements containing disclosures relating
to such transactions, filings for going private transactions, and filings for
third-party tender offers (with an exemption for transactions involving foreign
private issuers). The rules would clarify that the golden parachute disclosure
is required no matter what form the transaction takes, while the
say-on-golden-parachute vote (described below) is only applicable if merger
proxies are solicited, as provided in the statute.
Highlights of Proposed Say-on-Golden-Parachute Rules
The proposed rules would implement the say-on-golden-parachute vote as
- The say-on-golden-parachute vote is required only with respect to golden
parachute arrangements that have not previously been subject to a say-on-pay
vote. Thus, companies can avoid the say-on-golden-parachute vote by presenting
the golden parachute disclosure in the annual proxy in accordance with the
requirements described above and subjecting them to the say-on-pay vote. For
this purpose, it does not matter whether the golden parachute arrangements were
approved in the say-on-pay vote, only that the vote was held. Disclosure of
golden parachute arrangements in accordance with the normal annual proxy
disclosure rules is insufficient for this purpose; the disclosure must be
presented in the annual proxy in accordance with the special disclosure rules
- Disclosure of the golden parachute arrangements is always required in the
merger proxy, even if no say-on-golden-parachute vote is required (for the
reasons described above).
- Even if the golden parachute arrangements have been disclosed in the annual
proxy and subjected to the say-on-pay vote, the say-on-golden-parachute vote is
still required if there have been any modifications to the arrangements since
the say-on-pay vote, or if the NEOs have changed or any new arrangements have
been adopted. In that case, the say-on-golden-parachute vote is only required
with respect to the new or modified portion of the arrangement. For this
purpose, the company must disclose two separate tables in the merger proxy, one
showing all golden parachute arrangements and the other showing only the new or
modified portions of the arrangements subject to the vote.
- In the typical case where the target company is the person soliciting the
merger proxy, while any golden parachute arrangements between the acquiring
company and the named executive officers of the target company must be
disclosed, such arrangements are exempted from the say-on-golden-parachute vote.
In this case, assuming a say-on-golden-parachute vote is required with respect
to other golden parachute arrangements between the target company and its NEOs,
or the acquiring company and its NEOs, the target company is expected to
disclose two separate tables in the merger proxy, one showing all golden
parachute arrangements and the other showing only those arrangements subject to
Proxy Vote Reporting Requirements for Institutional Investment Managers
separate release issued on the same date, the SEC also proposed
rules implementing the proxy vote reporting requirements for institutional
investment managers required by Section 951 of the Dodd-Frank Act. The rules
would require certain institutional investment managers to annually report their
votes on say-on-pay, say-on-frequency and say-on-golden-parachute arrangements
matters. The proposed rules would implement the reporting requirements as
- All institutional investment managers that manage equity securities having an
aggregate fair market value of at least $100 million are subject to the new
reporting rules. Covered institutional investment managers will need to report
their votes not later than Aug. 31 of every year, for the 12 months ended June
- Covered institutional investment managers must identify the securities voted,
the nature of compensation matters voted on, the number of shares over which the
manager held voting power and the number of shares voted, and how the manager
voted those shares.
- The SEC has proposed a revised Form N-PX on which covered institutional
investment managers must disclose their votes according to the requirements
- Assuming the proposed rules are adopted, the SEC expects to require covered
institutional investment managers to file their first reports on Form N-PX
covering votes at shareholder meetings that occur on or after Jan. 21, 2011, and
on or before June 30, 2011. The reports would be required to be filed not later
than Aug. 31, 2011.
For additional information, please contact any member of our
Corporate Governance teams.