SEC ADOPTS FINAL SAY-ON-PAY RULES
On January 25, 2011, the Securities and Exchange Commission (“SEC”) adopted final rules related to the say-on-pay and golden parachute provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). The final rules largely resemble the proposed rules with some modifications, including a two-year delay for smaller reporting companies on those provisions not related to golden parachute compensation. The final rules will become effective 60 days after their publication in the Federal Register though we anticipate most companies will comply with such rules now. Portions of the rules related to disclosure and approval of golden parachutes in merger and sale transactions become effective for certain filings made on or after April 25, 2011. The following offers a summary of the requirements related to say-on-pay in light of these final rules, which are available here.
Approval of Executive Compensation – “Say-on-Pay”
For the first proxy solicitation made in connection with an annual meeting where directors will be elected (or a special meeting in lieu of such meeting) occurring after January 21, 2011, companies (other than smaller reporting companies who will be phased in after the effectiveness of the final rules as described below) must include a non-binding resolution to approve the compensation paid to their named executive officers as disclosed pursuant to Item 402 of Regulation S-K (the “say-on-pay vote”). Companies also must conduct future say-on-pay votes at least once every three calendar years thereafter.
Compensation Subject to Approval
The say-on-pay vote applies to all compensation paid to named executive officers as disclosed pursuant to Item 402 of Regulation S-K. The disclosures subject to approval include the Compensation Discussion and Analysis (“CD&A”), compensation tables and other narrative disclosures and exclude disclosures related to director compensation. Disclosures called for by Item 402(s) of Regulation S-K describing compensation policies and practices as they relate to risk management and risk-taking incentives are not subject to approval. However, companies remain obligated to describe such policies and practices in their CD&A to the extent they make up a material aspect of their executive compensation practices and, as a result, shareholders may consider those policies and practices when voting on executive compensation.
Form of Resolution
The SEC offered the following non-exclusive sample resolution that meets the rule requirements:
“RESOLVED, that the compensation paid to the company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion is hereby APPROVED.”
Frequency of Say-on-Pay Vote – “Say-on-Frequency”
For the first proxy solicitation made in connection with an annual meeting where directors will be elected (or a special meeting in lieu of such meeting) occurring after January 21, 2011, companies (other than smaller reporting companies who will be phased in after the effectiveness of the final rules as described below) must include a non-binding resolution to determine whether they should offer a say-on-pay vote every one, two or three years. Companies also must conduct future votes on the frequency of say-on-pay votes at least once every six calendar years thereafter. As a practical matter, companies should consider whether to decide in advance the frequency they will adopt under certain scenarios so as to be in a position to announce and include this information with the initial Form 8-K filed after the meeting. Presumably, the inclusion of this information in the initial Form 8-K will eliminate the requirement to file the amendment, although we are seeking clarification from the SEC staff on this point.
Disclosing the Results and the Companies Policy Regarding Frequency
The proposed rules related to say-on-pay contemplated companies disclosing the adopted frequency in a Form 10-Q or 10-K. The final rules altered this approach. Under the final rules, companies must disclose the results of the shareholder vote related to frequency in a Form 8-K within four days of the vote. Companies must then amend this Form 8-K to provide the frequency adopted by the company. This amendment must occur within 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 for the next annual meeting.
Rejecting Shareholder Proposals
The proposed rules contemplated that a company adopting the frequency preferred by a plurality of the shareholders could exclude shareholder proposals requesting a say-on-pay vote. The final rules limited this provision by adding the requirement that a majority of the shareholders support one frequency. In cases where no frequency receives the support of a majority of the shareholders, companies may not take advantage of this provision to exclude shareholder proposals requesting a say-on-pay vote.
Form of Proxy
The form of proxy for the frequency vote must contain four choices: one, two and three years and abstain. Companies may vote uninstructed proxy cards if they (1) include a recommendation, (2) permit abstentions, and (3) include language detailing how uninstructed shares will be voted.
Form of Resolution
The SEC did not offer a sample resolution that meets the rule requirements for the frequency vote, thereby not answering the question debated by practitioners as to whether a formal resolution on the frequency vote is required in light of the specific “resolution” language in the Act and Rule 14a-21(b) despite the difficulty in crafting a formal resolution that makes sense as a result of the four shareholder choices. Practices on this point may differ and will likely evolve over time.
Golden Parachute Compensation – “Say-on-Golden-Parachute”
The final rules contain provisions related to both the disclosure and approval of golden parachute compensation arrangements.
The final rules require companies to disclose golden parachute compensation that named executive officers could or will receive in connection with certain transactions. The final rules call for this disclosure in more situations than contemplated by the Act. Broadly speaking, golden parachute compensation arrangements must be disclosed in mergers, acquisitions, going private transactions and tender offers regardless of whether a corresponding shareholder vote will occur. The final rules require both target and acquiring companies to include these disclosures in various filings related to these transactions though third-parties are not required to provide the disclosure with respect to the target company in most tender offers.
In proxy solicitations where a company asks its shareholders to approve an acquisition, merger, consolidation or disposition of substantially all of the company’s assets, that company must include a non-binding shareholder resolution to approve the golden parachute arrangements with their named executive officers, unless such arrangements have already been subject to a vote of the shareholders. Other proposals that may be necessary for such merger or sale transactions (e.g. increases to authorized shares or stock splits) do not in and of themselves trigger the requirement to seek approval of golden parachute compensation arrangements. Target companies also do not need to seek approval of arrangements between their named executive officers and the acquiring company.
Exceptions to Golden Parachute Vote – Previously Approved Arrangements
Companies do not need to seek shareholder approval of golden parachute compensation arrangements that have been previously disclosed and subjected to a shareholder say-on-pay vote. Companies may voluntarily provide the golden parachute compensation disclosure in an annual proxy statement with a general say-on-pay vote in order to take advantage of this exception. This exception applies only to arrangements that have not been altered. Even changes in golden parachute compensation resulting from additional equity grants or salary increases prevent reliance on this exception to the extent of such changes. Changes related to fluctuations in stock price or changes that result in a reduction to the total compensation payable, however, do not limit a company’s ability to take advantage of this exception. As a practical matter, we believe most companies will not include the golden parachute compensation disclosure in their annual proxy statements.
Changes to CD&A
Companies must now include in their CD&A a description of whether and how they considered the results of the most recent say-on-pay vote in determining their compensation policies and decisions and how that consideration affected their executive compensation decisions and policies.
Smaller Reporting Companies and IPOs
The final rules provide smaller reporting companies some relief from the shareholder votes on executive compensation. Companies that qualify as “smaller reporting companies” on January 21, 2011 (including newly public companies that qualify after January 21, 2011) do not need to hold a say-on-pay or frequency vote until the first meeting at which directors are elected that occurs on or after January 21, 2013. Additional guidance from the SEC staff is necessary, however, with respect to the application of this two-year delay on companies moving out of or into smaller reporting company status. The final rules also make clear that because smaller reporting companies need not include a CD&A, they also need not disclose whether and how consideration of the shareholder vote affected executive compensation policies unless such consideration is a material factor necessary to understanding the information in the Summary Compensation Table.
Following an initial public offering, companies immediately become subject to the say-on-pay rules unless they are a smaller reporting company in which case they are phased in as described above.
Additional Logistics of Say-on-Pay Votes
Additional Disclosures Required for Advisory Votes
Companies providing any of the separate shareholder advisory votes discussed above must disclose in their proxy statement that such votes are provided pursuant to section 14A of the Securities Exchange Act (15 U.S.C. 78n-1). Companies also must describe the effect of such vote (such as whether it is non-binding) and, after the initial vote occurs, the current frequency of such vote and when the next shareholder advisory vote will occur.
No Preliminary Proxy Statement Filing
The SEC added the non-binding shareholder votes discussed above to the list of proposals that do not trigger a requirement to file a preliminary proxy statement.
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This alert is a copyrighted publication produced by Oppenheimer Wolff & Donnelly LLP. The information contained in this alert is of a general nature and is subject to change. Readers should not act without further inquiry and/or consultation with legal counsel.