On Oct. 18, 2010, the SEC 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 filed.
- 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 acquisition transactions.
- 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 four choices.
- 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 vote.
- 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: Name (a) Cash ($) (b) Equity ($) (c) Pension/ NQDC ($) (d) Perquisites/ Benefits ($) (e) Tax Reim burse ment ($) (f) Other ($) (g) Total ($) (h) PEO PFO A B C
- 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 follows:
- 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 described above.
- 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 the vote.
Proxy Vote Reporting Requirements for Institutional Investment Managers
In a 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 follows:
- 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 30.
- 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 described above.
- 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.