Pursuant to Section 951 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, on October 18, 2010, the U.S. Securities and Exchange Commission (the SEC) proposed amending its rules to enable shareholders to cast advisory votes on executive compensation and golden parachute compensation. The proposed rules would give shareholders a vote on the following matters.
- Say-on-Pay: Shareholders would be able to cast an advisory vote on executive compensation at least once every three years.
- Say-on-Frequency: Shareholders would be able to cast an advisory vote on the desired frequency of the say-onpay vote.
- Golden Parachutes: Shareholders would be given an opportunity to cast an advisory vote on compensation arrangements and understandings in connection with merger transactions, which are commonly referred to as "golden parachutes."
Additionally, under the proposed rules issuers would be required to provide additional disclosure of golden parachute arrangements in merger proxy statements.
The proposed rules would apply to all public companies, including smaller reporting companies. However, smaller reporting companies would continue to be subject to the scaled reporting requirements under Item 402 of Regulation S-K.
Say-on-pay
New Rule 14a-21(a)
The SEC proposed creating Rule 14a-21(a), which would require issuers with a class of securities registered under Section 12 of the Securities Exchange Act of 1934 (the Exchange Act) to provide, at least once every three years, a separate shareholder advisory vote in proxy statements to approve the compensation of executives. The proposed rule would not require the use of any specific language or form of resolution to be voted on by shareholders; however, the vote would have to relate to all executive compensation disclosure included in the proxy statement pursuant to Item 402 of Regulation S-K, with the following two exceptions:
- director compensation disclosed pursuant to Item 402(k); and
- compensation policies and practices related to risk management and risk-taking incentives disclosed pursuant to Item 402(s), unless such risk considerations are a material aspect of the issuer's compensation policies or decisions.
The rule would apply to the first annual or other meeting of shareholders occurring on or after January 21, 2011.
Amendment of Item 402(b) of Regulation S-K
The SEC proposal includes amending Item 402(b) of Regulation S-K to require issuers to address in the Compensation Discussion and Analysis section whether and, if so, how their compensation policies and decisions have taken into account the results of the shareholder advisory votes on compensation.
Say-on-Frequency
New Rule 14a-21(b)
The SEC proposed creating Rule 14a-21(b) to require issuers, at least once every six years, to provide a separate shareholder advisory vote in proxy statements for any meeting for which the SEC rules require executive compensation disclosure to determine whether the shareholder vote on the compensation of executives will occur every one, two, or three years.
Proposed Rule 14a-21(b) would apply to the first annual or other meeting of shareholders occurring on or after January 21, 2011.
Amendment to Rule 14a-4
To ensure that shareholders are presented with four voting options with respect to the say-on-frequency vote (i.e., every one, two, or three years, or abstain), the SEC proposed amending Rule 14a-4 under the Exchange Act, which provides requirements as to form of proxy that issuers are required to include with their proxy materials. Rule 14a-4 would be amended to permit proxy cards to reflect the four choices for the say-on-frequency vote.
Amendment to Rule 14a-8
The proposed amendment to Rule 14a-8 of the Exchange Act would add a note to subsection (i)(10) to permit the exclusion of shareholder proposals that would provide a say-on-pay vote, seek future say-on-pay votes, or relate to sayon- frequency votes, provided that the issuer has adopted a policy on the frequency of say-on-pay votes that is consistent with the plurality of votes cast in the most recent say-onfrequency vote.
Amendments to Forms 10-K and 10-Q
The SEC has proposed amending Forms 10-K and 10-Q to require an issuer to disclose on Form 10-Q covering the period during which the shareholder advisory vote occurs, or on Form 10-K if the shareholder advisory vote occurs during the issuer's fourth quarter, its decision regarding how frequently it will conduct say-on-pay votes in light of the results of the say-on-frequency vote.
Issues Related to Say-on-Pay and Say-on-Frequency Votes
Item 24 of Schedule 14A
The proposed amendments include adding new Item 24 to Schedule 14A, which would require issuers to disclose in a proxy statement for any meeting for which the SEC rules require executive compensation disclosure that the issuer is providing a separate shareholder vote on (i) executive compensation and (ii) the frequency of the shareholder advisory vote on executive compensation. In addition, Item 24 would require the issuer to briefly explain the general effect of each vote.
Amendment to Rule 14a-6
As proposed, Rule 14a-6 would be amended to add the shareholder say-on-pay and say-on-frequency votes to the list of items that do not trigger a preliminary filing of a proxy statement with the SEC. Thus, a proxy statement that includes a solicitation of a say-on-pay or say-on-frequency vote would not need to be filed with the SEC ten calendar days before definitive proxy materials are sent to shareholders, provided that any other matters contained in the proxy statement are specified in Rule 14a-6(a).
Broker Discretionary Voting
Under the proposed rules, for issuers with a class of securities listed on a national securities exchange, broker discretionary voting of uninstructed shares would not be permitted for a say-on-pay or say-on-frequency vote. Golden Parachutes
New Item 402(t) of Regulation S-K
As proposed, Item 402(t) would require that in any proxy or consent solicitation seeking shareholder approval of an acquisition, merger, consolidation, or proposed sale or disposition of all or substantially all of an issuer's assets, an issuer must disclose its named executive officers' golden parachute arrangements in both tabular and narrative form. The table would have to include disclosure of the individual elements of compensation that an executive would receive that are based on or otherwise relate to the merger, acquisition, or similar transaction, and the total for each executive officer.
The narrative disclosure would have to describe any material conditions or obligations applicable to the receipt of payment, including noncompete, nonsolicitation, nondisparagement, or confidentiality agreements, their duration, and provisions regarding waiver or breach. The SEC also proposed a requirement to provide a description of the specific circumstances that would trigger payment, whether the payments would or could be lump sum, or annual, and their duration, and by whom the payments would be provided, and any material factors regarding each agreement. The proposed narrative items are modeled on the narrative disclosure currently required with respect to termination and change-in-control agreements.
Amendments to Schedules 14A, 14C, 14D-9, 13E-3 and Item 1011 of Regulation M-A
While not mandated by the Dodd-Frank Act, the SEC proposed requiring that the disclosure called for in Item 402(t) be included in the following1:
- information statements filed pursuant to Regulation 14C;
- proxy or consent solicitations that do not contain merger proposals but require disclosure of information under Item 14 of Schedule 14A pursuant to Note A of Schedule 14A;
- registration statements on Forms S-4 and F-4 containing disclosure relating to mergers and similar transactions;
- going private transactions on Schedule 13E-3; and
- third-party tender offers on Schedule TO and Schedule 14D-9 solicitation/recommendation statements.
New Rule 14a-21(c)
Under Rule 14a-21(c), issuers would be required to provide a shareholder advisory vote in proxy statements for meetings at which shareholders are asked to approve an acquisition, merger, consolidation, or proposed sale or other disposition of all or substantially all assets. The advisory vote would be required only with respect to the golden parachute agreements or understandings disclosed pursuant to proposed Item 402(t) of Regulation S-K.
Issuers would not be required to include in the merger proxy a separate shareholder vote on golden parachute compensation if Item 402(t) disclosure of that compensation had been included in the executive compensation disclosure that was subject to a prior say-on-pay vote.2 In order to take advantage of this exception, the executive compensation disclosure subject to the prior say-on-pay vote would need to have included Item 402(t) disclosure, which requires disclosure of a broader group of agreements and understandings than required by proposed Rule 14a-21(a) of the Exchange Act.
The SEC is seeking comments on the above-described proposals. All comments must be received by the SEC no later than November 18, 2010.
Footnotes
1 Certain exceptions apply to foreign private issuers.
2 Shareholders need not have approved the golden parachute arrangement; they only have to have had an opportunity to vote on it.
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