Dodd-Frank Act Mandates New Corporate Governance and Executive Compensation Requirements

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act"). In addition to changes affecting financial service companies, the Act includes a number of corporate governance and executive compensation provisions that apply to all publicly traded companies (subject to exemptions for smaller issuers). The Act requires the SEC to adopt rules implementing various provisions, and many of the new corporate governance and executive compensation requirements may be in effect for the 2011 proxy season. An important change from earlier versions of the Act is that it does not require public companies to adopt a majority voting standard for uncontested director elections.

Proxy Access
The Act explicitly authorizes the SEC to adopt rules requiring companies to include in their proxy statements nominees submitted by shareholders, subject to the terms and conditions that the SEC determines are in the interests of shareholders and that protect investors. The Act provides that the SEC may adopt exemptions from the proxy access requirements, such as for small issuers.

Say on Pay
At least once every three years, companies must include a non-binding shareholder vote to approve executive compensation disclosures in proxy statements. Shareholders also must vote at least once every six years to determine whether the say-on-pay proposal will be considered every year, or every second or third year. The say-on-pay requirements become effective six months after the date of enactment of the Act. The Act provides that the SEC may adopt exemptions from the say-on-pay vote requirements, such as for small issuers. Unless the SEC adopts rules dealing with this issue, issuers other than companies who received TARP funds will be required to file preliminary proxy materials with the SEC due to the inclusion of say-on-pay votes in their proxy statements.

Golden Parachute Vote in Connection with Acquisitions
If shareholders vote on an acquisition, a merger, a consolidation, or a proposed sale or other disposition of all or substantially all of a company's assets, then the company that is soliciting proxies must include in its proxy statement a separate, non-binding shareholder vote on "golden parachute" compensation, which includes any agreements or understandings the company has with any of its named executive officers (or, if the company is not the acquiring company, with the acquiring company) concerning any type of compensation based on or otherwise relating to the transaction that may be paid or become payable to the named executive officer and on the aggregate total of all such compensation payable to or on behalf of the executive officer. The compensation covered includes present, deferred and contingent compensation. No separate vote is required, however, if the agreements or understandings were previously subject to a say-on-pay vote.

These provisions become effective for shareholder meetings held after six months from enactment of the Act. The Act provides that the SEC may adopt exemptions from the golden parachute vote requirements, such as for small issuers.

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