The Securities and Exchange Commission, on January 25, 2011, adopted rules implementing the "say-on-pay" and "say-on-golden parachute" provisions of Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd- Frank Act). The Dodd-Frank Act requires say-on-pay and frequency of say-on-pay votes in a company's proxy statement for the first annual or other meeting of shareholders held on or after January 21, 2011. While the new rules are not effective until April 4, 2011, we expect that companies filing proxy statements between January 21 and April 4 will nevertheless comply with the rules in preparing their say-on-pay and say-on-pay frequency disclosures. Say-on-golden parachute votes are required in initial filings made on or after April 25, 2011. Smaller reporting companies are exempt from say-on-pay and frequency of say-on-pay votes, but only until January 21, 2013, and not with respect to say-on-golden parachute votes.

The SEC adopting release is available at http://sec.gov/rules/final/2011/33-9178.pdf. This article answers many questions related to the requirements contained in the SEC's final rules on this topic, and provides practical suggestions regarding implementation of say-on pay and say-on golden parachute votes.

Say-on-Pay

How often is a say-on-pay vote required?

A say-on-pay vote is required, pursuant to Rule 14a-21(a) under the Securities Exchange Act of 1934, as amended (the Exchange Act), at least once every three years. A say-on-pay vote is only required at an annual meeting or other meeting where disclosure of executive compensation is required pursuant to Item 402 of Regulation S-K.

What are shareholders asked to approve in the say-on-pay vote?

Consistent with the proposed rules, final Rule 14a-21(a) provides that shareholders will be asked to approve the compensation of the issuer's named executive officers as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion. and Analysis (CD&A), the compensation tables and the other required narrative disclosure. Since smaller reporting companies are not required to include CD&A, the say-on-pay vote for smaller reporting companies will not cover CD&A.

Does the say-on-pay vote cover director compensation?

No. The say-on-pay vote does not cover director compensation.

Does the say-on-pay vote cover an issuer's compensation policies as they relate to risk management and risk-taking incentives?

Even if an issuer includes disclosure, pursuant to Item 402(s) of Regulation S-K, with respect to its compensation policies as they relate to risk management and risk-taking incentives, the say-on-pay vote will not cover that disclosure. The SEC observes in its adopting release, however, that "to the extent that risk considerations are a material aspect of the issuer's compensation policies or decisions for named executive officers, the issuer is required to discuss them as part of its CD&A, and therefore such disclosure would be considered by shareholders when voting on executive compensation."

Do the final rules require specific language for the say-on-pay proposal?

No. Rule 14a-21(a) does not require specific language for the resolution to be voted on by shareholders. However, the SEC's adopting release provides the following example:

"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."

The adopting release notes that the shareholder vote must relate to all executive compensation disclosure set forth pursuant to Item 402 of Regulation S-K. The SEC has not indicated whether the resolution must refer specifically to "Item 402 of Regulation S-K." In light of this unresolved question, and the fact that some shareholders may not be familiar with Item 402 of Regulation S-K, issuers may consider including the reference to Item 402 together with explanatory language, such as "Item 402 of Regulation S-K, the SEC's executive compensation disclosure rule."

What proxy statement disclosure is required about the say-on-pay vote?

Item 24 of Schedule 14A requires an issuer to disclose in its proxy statement for an annual meeting at which a say-on-pay vote is to be held that the issuer is providing a separate shareholder vote on executive compensation. The issuer must also explain briefly the general effect of the vote, including the fact that the vote is non-binding. In proxy statements following the initial vote that addresses say-on-pay, the issuer must disclose the current frequency of say-on-pay votes and when the next say-on-pay vote will occur.

While an issuer is not required to provide a statement in support of its compensation program, it may elect to do so to highlight why shareholders should vote in favor of its say-on-pay proposal. This supporting statement may be placed in the proxy statement wherever the issuer chooses, but logical alternatives include within a CD&A executive summary or overview, the say-on-pay proposal section, or both.

What is the result of a negative say-on-pay vote?

The say-on-pay vote is an advisory vote that is not binding on an issuer or its board of directors. Neither the Dodd-Frank Act nor the SEC's final rules require any changes to executive compensation as a result of a negative say-on-pay vote. We expect, however, that ISS and other proxy advisors may recommend withholding votes for the re-election of compensation committee members or other directors if a company makes no changes to executive compensation following a negative say-on-pay vote. The fact that say-on-pay votes are general votes "for" or "against" executive compensation may present a challenge for companies receiving negative say-on-pay votes. A negative vote will not explain whether shareholders disapprove of a company's executive compensation package as a whole, or instead only a specific element of executive compensation or compensation paid to a specific executive. For this reason, companies that receive negative say-on-pay votes may consider conducting a thorough analysis of their executive compensation programs and/or fostering communication with institutional investors to gain their views on the reasons behind negative votes.

How does the say-on-pay vote impact CD&A?

The final rules amend Item 402(b)(1) of Regulation S-K to require an issuer to address whether and, if so, how its compensation policies and decisions have taken into account the results of its most recent say-on-pay vote. The final rules require this disclosure only for the most recent say-on-pay vote, rather than all prior say-on-pay votes, in order to focus disclosure and avoid boilerplate discussions of prior votes. The SEC's adopting release, however, notes that issuers should address their consideration of the results of prior say-on-pay votes to the extent that consideration is material to the issuer's compensation policies and decisions discussed.

Smaller reporting companies, which are not required to provide a CD&A, will need to disclose, pursuant to Item 402(o) of Regulation S-K, consideration of prior say-on-pay votes in determining executive compensation to the extent that this disclosure is a material factor necessary to an understanding of the information disclosed in the Summary Compensation Table.

Frequency of Say-on-Pay

How often is a frequency of say-on-pay vote required?

The Dodd-Frank Act requires a separate vote on the frequency of say-on-pay votes for the first annual meeting, or other meeting requiring disclosure of executive compensation, occurring on or after January 21, 2011. While final Rule 14a-21(b) is not effective until April 4, 2011, we expect that companies filing proxy statements between January 21 and April 4 will nevertheless comply with the new rules. After the initial vote, additional votes on the frequency of the say-on-pay vote are required at least once every six calendar years. In addition, say-on-pay votes and frequency of say-on-pay votes will be required of newly public companies in the proxy statement for the company's first annual meeting after its initial public offering.

What proxy statement disclosure is required about the vote on the frequency of the say-on-pay vote?

Item 24 to Schedule 14A requires an issuer to disclose in its proxy statement that the issuer is providing a separate shareholder vote on the frequency with which a say-on-pay vote should be held. The issuer is also required to explain briefly the general effect of the vote, including the fact that the vote is non-binding. In addition, the final rules add the requirement that in future years issuers must provide disclosure of the current frequency of say-on-pay votes and when the next frequency of say-on-pay vote will occur.

What choices must shareholders be given with respect to the frequency of say-on-pay votes?

Section 14(a)(2) of the Exchange Act, added by the Dodd-Frank Act, requires that shareholders be allowed to choose between holding a say-on-pay vote every one, two or three years. To implement this provision, Rule 14a-4 requires that shareholders be able to choose one of four options when completing a proxy card: one year, two years, three years or abstain.

In the adopting release, the SEC acknowledges that some proxy service providers have had difficulty in programming their systems to accommodate four choices on proxy cards and voting instruction forms. In that event, the SEC will not object if, for any meetings to be held on or before December 31, 2011, the cards and forms contain three choices (one year, two years and three years) and if the shares covered by the proxy card or voting instruction form are not voted on the frequency proposal if no box is checked.

Can the board of directors make a recommendation to shareholders with respect to the frequency of say-on-pay votes?

Yes. The SEC specifically contemplates (but does not require) that boards of directors will include a recommendation as to how shareholders should vote on the frequency of say-on-pay votes. If a board of directors does choose to make a recommendation, the proxy statement must make it clear that shareholders have four choices and that shareholders are not being asked to approve or disapprove the board of directors' recommendation. Moreover, issuers may only vote uninstructed proxy cards in accordance with the board of directors' recommendation if the issuer follows the requirements of Rule 14a-4 to: (i) include a recommendation for the frequency of say-on-pay votes in the proxy statement; (ii) permit abstention on the proxy card; and (iii) include language regarding how uninstructed shares will be voted in bold on the proxy card.

Is the vote on the frequency of say-on-pay votes binding?

No. The SEC reiterates in its adopting release that it views this vote as non-binding. The SEC takes this position notwithstanding language in Section 951 of the Dodd-Frank Act indicating that the separate vote is "to determine" the frequency of the say-on-pay vote.

What vote is required to decide how often say-on-pay votes should be held?

Normally, applicable state law or the issuer's by-laws would determine what vote is necessary for a proposal to "be adopted." In this case, however, the proposal has no legal effect and is merely advisory. Notwithstanding comments in response to the proposed rules asking the SEC to clarify the relationship between the federally created right and state law voting rights, the SEC has neglected to prescribe a standard for determining which frequency has been "adopted" by shareholders. We believe that most issuers, shareholders and proxy advisors will regard the option receiving a plurality of the votes to have "won." However, as discussed below under "Shareholder Proposals," an issuer may not be able to exclude future shareholder proposals on this topic even if it adopts a policy regarding the frequency of say-on-pay voting that is consistent with the plurality of votes.

How must an issuer inform its shareholders of the issuer's plans with respect to the frequency of say-on-pay votes?

The SEC originally proposed revisions to Form 10-Q and Form 10-K that would have required an issuer to disclose its decision with respect to how frequently the issuer will conduct advisory say-on-pay votes in light of the results of the shareholder vote on frequency. After considering comments, the SEC decided not to adopt revisions to Form 10-Q and Form 10-K and to instead adopt revisions to Form 8-K to require this disclosure. An issuer is required to disclose its decision regarding how frequently it will conduct say-on-pay votes under Item 5.07 of Form 8-K. To allow sufficient time for the issuer to consider the results of the vote, or to engage in discussions with shareholders, the issuer may provide this disclosure in an amendment to its prior Form 8-K that disclosed the results of the frequency of say-on-pay vote. This amended Form 8-K is due no later than 150 calendar days after the date of the end of the annual meeting or other meeting in which the frequency of say-on-pay vote occurred, but no later than 60 calendar days before the deadline for submission of Rule 14a-8 shareholder proposals for the subsequent annual meeting. A technical amendment to Item 5.07(b) of Form 8-K also clarifies that, with respect to frequency of say-on-pay votes, issuers must disclose the number of votes cast for each of one, two or three years, as well as the number of abstentions.

Say-on-Golden Parachutes – Disclosure Requirements

What is a say-on-golden parachute vote?

Section 951 of the Dodd-Frank Act added Section 14A(b)(2) to the Exchange Act to require a separate shareholder advisory vote on golden parachute compensation arrangements in connection with mergers and similar transactions. The vote covers golden parachute compensation arrangements disclosed in proxy statements by soliciting persons in accordance with Section 14A(b)(1) of the Exchange Act, also added by the Dodd-Frank Act.

When is additional disclosure with respect to golden parachute arrangements required?

In order to implement the requirements of the Dodd-Frank Act, the SEC has adopted new Item 402(t) to Regulation S-K to require specified disclosure with respect to golden parachute arrangements in proxy or consent solicitations in connection with an acquisition, merger, consolidation, or proposed sale or other disposition of all or substantially all assets.

Is the specified golden parachute disclosure required in filed documents other than merger proxy statements?

Yes. Although not required by the Dodd-Frank Act, under the final rules, the SEC requires golden parachute disclosure pursuant to Item 402(t) of Regulation S-K in the following filings:

  • 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 (e.g., where proxies are solicited by an acquiring company to approve a stock split in order to permit the acquirer to issue enough shares to complete an acquisition);
  • Registration statements on Form S-4 and Form F-4 containing disclosure relating to mergers and similar transactions; and
  • Going private transactions on Schedule 13E-3.

Are bidders in third-party tender offers required to include Item 402(t) disclosure in Schedule TO filings?

No. Under the final rules, Item 402(t) disclosure is not required in third-party bidders' tender offer statements, so long as the transactions are not also Rule 13e-3 going-private transactions. While the SEC originally proposed that a bidder in a third-party tender offer would be required to include Item 402(t) disclosure in Schedule TO filings to the extent known, the SEC was persuaded during the comment process that bidders may face difficulties in obtaining the information necessary to provide this disclosure. In addition, this disclosure by bidders is not necessary, since target companies are required to provide Item 402(t) golden parachute compensation in Schedule 14D-9 filings by the tenth business day from the date that tender offers are first published, sent or given to security holders.

Has the SEC limited the disclosure required for golden parachute arrangements of foreign private issuers?

Yes. Where the target or subject company is a foreign private issuer, the SEC has adopted an exception for both bidders and targets in third-party tender offers and filing persons in Rule 13e-3 going-private transactions. The SEC has also adopted an exception to the disclosure obligation under Item 402(t) with respect to agreements and understandings with senior management of foreign private issuers where the target or acquirer is a foreign private issuer.

Is the specified disclosure with respect to golden parachute arrangements required in annual meeting proxy statements?

No. Issuers may choose voluntarily to include this disclosure in an annual meeting proxy statement in order to permit a say-on-golden parachute vote at the annual meeting, as discussed below.

What disclosure is required with respect to golden parachute arrangements?

Item 402(t) of Regulation S-K requires disclosure of all golden parachute compensation relating to a merger among the target and acquiring companies and the named executives of each company. This requirement is broader than what is required by Exchange Act Section 14A(b)(1), but the SEC believes that the broader disclosure is necessary to capture the full scope of golden parachute compensation applicable to a transaction.

What types of golden parachute arrangements must be disclosed pursuant to Item 402(t)?

The disclosure required by Item 402(t) requires quantification with respect to any agreements or understandings, whether written or unwritten, between each named executive officer of the acquiring company or the target company and those companies, that concern any type of compensation, whether present, deferred or contingent, that is based on or otherwise relates to an acquisition, merger, consolidation, sale or other disposition of all or substantially all assets.

For whom must golden parachute arrangements be disclosed pursuant to Item 402(t)?

The disclosure required by Item 402(t) must be provided for each named executive officer of the acquiring company or the target company, except for persons who are named executive officers because they would have been among the most highly compensated executive officers but for the fact they were not serving as an executive officer at the end of the last completed fiscal year. However, where Item 402(t) disclosure is provided in a proxy statement soliciting shareholder approval of a merger or similar transaction, or in a filing made with respect to a similar transaction, disclosure is required for the named executive officers for whom disclosure was required in the issuer's most recent filing requiring Summary Compensation Table disclosure.

How is the Item 402(t) disclosure to be presented?

Item 402(t) requires both tabular and narrative disclosure of named executive officers' golden parachute arrangements. The final rules include the same "Golden Parachute Compensation" table as the SEC proposed:

The table presents qualitative disclosure of the individual elements of compensation that an executive would receive based on, or otherwise related to, the merger, acquisition or similar transaction, and a total for each named executive officer. In the adopting release, the SEC clarified that this disclosure is only required of compensation based on, or otherwise related to, the subject transaction. In making this clarification, the SEC noted that it agrees with commentators that it would not be useful to require disclosure of amounts that would not be paid or payable in connection with the transaction subject to shareholder approval. For example, post-transaction employment arrangements should not be included in amounts disclosed pursuant to Item 402(t). The SEC does not view future employment arrangements as compensation "that is based on or otherwise relates to" the transaction.

What is included in each column on the Item 402(t) table?

The columns of the table include the following:

Column (a) – Name of each named executive officer.

Column (b) – Any cash severance payment, such as base salary, bonus and pro-rated non-equity incentive plan payments.

Column (c) – The dollar value of accelerated stock awards, in-the-money option awards for which vesting would be accelerated, and payments in cancellation of stock and option awards. No disclosure is required with respect to previously vested equity awards.

Column (d) – Pension and non-qualified deferred compensation benefit enhancements. This column need not include compensation disclosed in the Pension Benefits Table and the Nonqualified Deferred Compensation Table.

Column (e) – Perquisites and other personal benefits and health and welfare benefits. These amounts must be included, even if the benefits are available to all employees under a broad-based plan.

Column (f) – Tax reimbursements, such as gross-ups for liability under Internal Revenue Code Section 280G.

Column (g) – Any additional elements of compensation not specifically includable in other columns.

Column (h) – The total of columns (b) through (g).

Under the final rules, issuers are permitted to include additional named executive officers and additional columns or rows to the tabular disclosure, so long as that additional disclosure is not misleading.

What footnote disclosure is required in connection with the Item 402(t) table?

Issuers must include with the Item 402(t) table footnote identification of each separate form of compensation reported, as well as separate identification of amounts attributable to "single-trigger" and "double-trigger" arrangements.

Is there a de minimis exception for the Item 402(t) table?

No. Item 402(t) does not have any de minimis exceptions. The SEC believes that the exclusion of any immaterial amounts is inconsistent with Section 14A(b)(1), which requires disclosure of "the aggregate total of all such compensation that may ... be paid or become payable."

How are the dollar amounts of equity-based compensation determined for purposes of the Item 402(t) table?

As in the proposed rules, under the final rules, where Item 402(t) disclosure is included in an annual meeting proxy statement, these amounts would be calculated based on the closing market price per share of the issuer's securities on the last business day of the issuer's last completed fiscal year, consistent with quantification standards used in Item 402(j). Under the final rules, where Item 402(t) disclosure is included in a proxy statement soliciting shareholder approval of a merger or similar transaction, these amounts would be calculated: (a) based on the consideration per share, if that value is a fixed dollar amount; or (b) on the average closing price per share over the first five business days following the first public announcement of the transaction. In this context, the final rules modify the calculation presented under the proposed rules, which used the closing price per share as of the latest practicable date.

How does the post-termination disclosure required by Item 402(j) differ from the disclosure required by Item 402(t)?

Item 402(j) requires disclosure with respect to a range of termination scenarios (e.g., death, retirement, disability, termination for cause, termination without cause and termination upon a change of control). Item 402(t) requires disclosure only with respect to compensation that is based on or otherwise relates to a merger, acquisition or similar transaction. In addition, Item 402(j) does not require disclosure about arrangements that do not discriminate in scope, terms or operation in favor of executive officers and that are available generally to all salaried employees, permits exclusion of de minimis perquisites and other personal benefits, and does not require presentation of an aggregate total of all compensation that is based on or otherwise relates to a transaction.

What narrative disclosure is required pursuant to Item 402(t)?

In addition to the table described above, issuers must include narrative disclosure that describes any material conditions or obligations applicable to the receipt of payment, including but not limited to non-compete, non-solicitation, non-disparagement or confidentiality agreements, their duration and provisions regarding waiver or breach. Issuers must also provide a description of the specific circumstances that would trigger payment, whether the payments would or could be lump sum or annual, the duration of the payments, and who would provide the payments, as well as any material factors regarding each agreement. These narrative disclosure items are modeled on the narrative disclosure required with respect to termination and change-in-control agreements.

If an issuer includes Item 402(t) disclosure in an annual meeting proxy statement, is the issuer still be required to include disclosure pursuant to Item 402(j)?

Inclusion of Item 402(t) disclosure in an annual meeting proxy statement will satisfy the requirement pursuant to Item 402(j) to disclose payments in connection with a change-of-control transaction. The issuer is still, however, required to include the rest of the required Item 402(j) disclosures with respect to the other various termination scenarios.

Say-on-Golden Parachutes – Vote Requirements

When is a say-on-golden parachute vote required?

Pursuant to Rule 14a-21(c), issuers are required to provide a separate 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. Issuers are not required to provide a separate shareholder advisory vote in proxy statements for meetings at which shareholders are asked to approve other proposals, such as an increase in authorized shares or a reverse stock split, which may be necessary to effectuate a transaction.

What does the say-on-golden parachute vote cover?

The say-on-golden parachute vote covers only the golden parachute agreements or understandings required to be disclosed by Section 14A(b)(1), which requires disclosure of any agreements or understandings between the issuer soliciting proxies and any named executive officer of that issuer or any named executive officer of the acquiring issuer, if the soliciting issuer is not the acquiring issuer.

Is a say-on-golden parachute vote required with respect to golden parachute arrangements between an acquiring issuer and the named executive officers of the target issuer?

No. A shareholder vote to approve arrangements between the soliciting target issuer's named executive officers and the acquiring issuer is not required by Exchange Act Section 14A(b)(2) since golden parachute compensation agreements or understandings between the acquiring issuer and the named executive officers of the target issuer are not within the scope of disclosure required by Section 14A(b)(1).

Do the final rules require specific language for a say-on-golden parachute proposal?

No. Rule 14a-21(c) does not require specific language for the resolution to be voted on by shareholders.

What proxy statement disclosure is required about the say-on-golden parachute vote?

Under new Item 24 to Schedule 14A, an issuer must disclose in its proxy statement that the issuer is providing a separate shareholder vote on golden parachute arrangements. The issuer must also explain briefly the general effect of the vote, including the fact that the vote is non-binding.

Can an issuer avoid having to include a say-on-golden parachute provision in a merger proxy statement by including a say-on-golden parachute vote in an annual meeting proxy statement?

Yes. Under the final rules, consistent with Section 14A(b)(2) of the Exchange Act, issuers are not required to include in a merger proxy statement a separate shareholder vote on golden parachute compensation disclosed under Item 402(t) of Regulation S-K to the extent that Item 402(t) disclosure of that compensation had been included in the executive compensation disclosure that was subject to a prior vote of shareholders under Section 14A(a)(1) of the Exchange Act and Rule 14a-21(a). As discussed further below, this exception only applies to the extent that the golden parachute arrangements triggered by the merger or similar transaction are the same as those covered in the Item 402(t) disclosure in the annual meeting proxy statement.

What if the golden parachute arrangements are expanded or otherwise amended between the annual meeting at which a say-on-pay vote on compensation disclosure that included Item 402(t) information is held and the meeting at which the merger or similar transaction is being voted on?

The exception allowing issuers to rely on an annual meeting say-on-pay vote to avoid a say-on-golden parachute vote at a meeting to approve a merger or similar transaction only applies to the extent the same golden parachute arrangements previously subject to an annual meeting shareholder vote remain in effect and the terms of those arrangements have not been modified subsequent to that vote. New golden parachute arrangements and any amendments to golden parachute arrangements that were subject to a prior say-on-golden parachute vote will be subject to a separate vote. For example, changes in compensation because of a new named executive officer, additional grants of equity compensation in the ordinary course, and increases in salary are subject to a separate vote. However, because a shareholder vote would already have been obtained on portions of the arrangements, only new and revised arrangements will be subject to a separate vote. Issuers providing for a separate shareholder vote must provide two separate tables under Item 402(t). One table will disclose all golden parachute compensation, and a second table will disclose only new and revised arrangements, so that shareholders can clearly see what is subject to the shareholder vote under Section 14A(b)(2) and Rule 14a-21(c).

Does the issuer have to allow separate say-on-pay and say-on-golden parachute votes at an annual meeting in order to avoid a say-on-golden parachute vote at a subsequent meeting to approve a merger?

No. So long as the information required by Item 402(t) of Regulation S-K is included in the annual meeting proxy statement and the shareholders vote on the overall compensation of the issuer's named executive officers, no separate vote on golden parachute arrangements will be required in order to avoid a say-on-golden parachute vote at a subsequent meeting to approve an acquisition, merger, consolidation or proposed sale, or other disposition of all or substantially all assets. It is worth noting, however, that the inclusion of a say-on-golden parachute vote with a say-on-pay vote likely will subject the compensation program to greater scrutiny and may jeopardize the broader say-on-pay vote.

Does the shareholder vote at an annual meeting have to be in favor of the issuer's overall compensation program, including the golden parachute arrangements, in order to avoid a say-on-golden parachute vote at a subsequent meeting to approve a merger?

No. Even if the shareholders vote against the issuer's overall compensation program at the annual meeting, no say-on-golden parachute vote will be required at a subsequent meeting to approve a merger or similar transaction, provided that the Item 402(t) disclosure regarding the golden parachute arrangements was included in the annual meeting proxy statement.

Preliminary Proxy Statements

Does inclusion of a say-on-pay vote or a vote on the frequency of the say-on-pay vote require an issuer to file a preliminary proxy statement with the SEC 10 days prior to mailing its definitive proxy statement?

No. Under an amendment to Rule 14a-6(a), the SEC has added say-on-pay votes and votes on the frequency of say-on-pay voting to the list of items that do not require the filing of a preliminary proxy statement, whether or not such votes are required by Section 14A. Furthermore, the SEC adopting release states that, until the final rules become effective on April 4, 2011, the SEC will not object if an issuer does not file a preliminary proxy statement if the only items that would require a filing in preliminary form are the say-on pay and say-on-pay frequency votes. Broker Discretionary Voting

Are brokers permitted to vote uninstructed shares with respect to say-on-pay and the frequency of say-on-pay?

No. Section 957 of the Dodd-Frank Act amends Section 6(b) of the Exchange Act to direct national securities exchanges to change their rules to prohibit broker discretionary voting of uninstructed shares in certain matters, including shareholder votes on executive compensation. Under the amended rules of the national securities exchanges, for issuers with a class of securities listed on a national securities exchange, broker discretionary voting of uninstructed shares is not permitted on say-on-pay and say-on-pay frequency votes.

Shareholder Proposals

Will shareholders still be allowed to submit shareholder proposals with respect to executive compensation matters, including the frequency with which say-on-pay votes should be held?

Yes. In fact, Section 14A(c)(4) of the Exchange Act, added by the Dodd-Frank Act, states that the say-on-pay and say-on-golden parachute requirements of the Dodd-Frank Act shall not be construed "to restrict or limit the ability of shareholders to make proposals for inclusion in proxy materials related to executive compensation."

If a company adopts a policy regarding the frequency of say-on-pay voting that is consistent with the vote of its shareholders, can the issuer exclude future shareholder proposals on this topic?

Yes, if, in the most recent shareholder vote on frequency of say-on-pay, (a) a single frequency (i.e., one, two or three years) received the support of a majority of the votes cast, and (b) the issuer has adopted a policy on the frequency of say-on-pay votes that is consistent with that choice, then Rule 14a-8(i)(10) permits the issuer to exclude from its proxy materials a shareholder proposal that: (i) provides for a say-on-pay vote: (ii) seeks future say-on-pay votes: or (iii) relates to the frequency of say-on-pay votes.

The proposed rules suggested that a company could exclude shareholder proposals on this topic if the issuer adopted a policy on the frequency of say-on-pay votes that is consistent with the views of the plurality of the votes cast in the most recent shareholder vote. In light of the change from the proposed plurality vote standard to the adopted majority vote standard, it is possible that some issuers may not be able to exclude shareholder proposals on this issue even if they adopt a policy on the frequency of say-on-pay votes that is consistent with the views of the plurality of votes cast. In order to make use of this exemption, issuers likely would need to recommend and adopt an annual say-on-pay vote, since ISS has recommended – and institutional investors favor and are likely to vote for – an annual say-on-pay vote. Smaller Reporting Companies

Are smaller reporting companies exempt from the say-on-pay and say-on-golden parachute requirements?

Yes, temporarily, but only from the say-on-pay requirements. The SEC proposed not to exempt smaller reporting companies from say-on-pay or say-on-golden parachute requirements. After considering comments to its proposed rules, the SEC decided to adopt a temporary exemption for smaller reporting companies. Under this temporary exemption, smaller reporting companies will not be required to conduct say-on-pay votes or frequency of say-on-pay votes until the first annual or other meeting of shareholders occurring on or after January 21, 2013. This temporary exemption does not apply to say-on-golden parachute votes.

TARP Companies

Do TARP companies need to conduct a Dodd-Frank Act say-on-pay vote in addition to the say-on-pay vote required by TARP?

No. Since the vote on executive compensation pursuant to the Emergency Economic Stabilization Act of 2008 (EESA) is effectively the same say-on-pay vote required by the SEC's final rules, an issuer with outstanding indebtedness under the TARP program is not required to conduct a say-on-pay vote pursuant to Section 14A(a)(1) and Rule 14a-21(a) until its first annual meeting after it has repaid the TARP indebtedness. In addition, the SEC adopting release states that, until the final rules are effective, the SEC will not object if a TARP recipient that includes a TARP say-on-pay vote in its proxy materials omits a Dodd-Frank Act say-on-pay vote from those materials.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.