Article by Kenneth A. Raskin, Karin B. Braverman, Colleen Hart, Kevin Keogh,

Prepared jointly by the White & Case Securities Group and the White & Case Executive Compensation, Benefits and Employment Law Group.

On January 30, 2006, the Securities and Exchange Commission (the "SEC") published proposed rules that will significantly change disclosure requirements for executive and director compensation in corporate proxy and registration statements. The proposed rules expand existing tabular disclosure and combine it with more detailed narrative disclosure. In addition to the proposed amendments to executive and director disclosure, the proposed rules also address related party transactions, director independence, revisions to Form 8-K, amendments to the exhibit filing requirements under Form 20-F, and security ownership of officers and directors. The proposed rules will be open to public comment until April 10, 2006. If adopted, the proposed rules would be effective for the 2007 proxy season but companies making compensation decisions today should consider that such decisions will need to be disclosed in accordance with the proposed rules. The most significant changes contemplated by the proposed rules are outlined below.

I. Executive and Director Compensation Disclosure

Compensation Discussion and Analysis

A new "Compensation Discussion and Analysis" section (CD&A), focusing on the most important factors underlying each company's compensation policies and decisions and the material factors relevant to the analysis of such policies and decisions, would replace the Compensation Committee Report and Performance Graph1. The CD&A will provide context for the data and narrative that follow by providing a comprehensive overview of, among other things, the objectives of a company's compensation practices, what a company chooses to reward through such practices, the elements of compensation, how the amounts of such elements are determined and how the company's decisions in respect of such elements fit into the company's overall compensation objectives. The CD&A should also include post-termination as well as in-service compensation arrangements. Companies will not be required to disclose target levels with respect to specific quantitative or qualitative performance-related factors considered by the compensation committee or the board of directors, or any factors involving confidential commercial or business information. However, to the extent that any such performance target has already been publicly disclosed, it will need to be included in the CD&A.

It should be noted that, unlike the Compensation Committee Report and Performance Graph, which were deemed "furnished" to the SEC, the CD&A will be considered a part of the proxy statement and any other filing in which it is included and will thus be deemed "filed" with the SEC and subject to Regulations 14A or 14C and to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended. To the extent that it is incorporated by reference into another periodic filing, the disclosure will be covered by the certifications made by principal executive officers and principal financial officers under the Sarbanes-Oxley Act of 2002.

Summary Compensation and Supplemental Tables

The Summary Compensation Table would be reorganized and would include additional information, including a new column that would report total compensation. The total compensation column would include, in addition to salary and other payments required to be reported in the Summary Compensation Table under the current regulations, the value of equity awards granted during the last year, the aggregate increase in the actuarial value of defined benefit pension plans accrued during the year and all earnings on deferred compensation that is not tax-qualified, each as described below. In addition, the Summary Compensation Table would be followed by two supplemental tables that report Grants of Performance-Based Awards and Grants of All Other Equity Awards during the year.

Narrative disclosure would follow all three tables in order to enhance an investor's understanding of the data presented. Unlike the CD&A, which would focus on broader topics, this narrative is intended to provide context to the quantitative disclosure in the tables. Such narrative disclosure may include, for example, the material terms in the named executive officers' employment agreements (whether written or unwritten), any repricing or material modification of any outstanding option or other stock-based award during the last fiscal year and any other significant changes to the terms of stock-based or other awards. In addition, to the extent material and necessary to an investor's understanding of the tabular data, narrative disclosure would describe material terms of performance-based awards, including, among other things, a description of the criteria to be applied in determining the amounts payable, the vesting schedule, a description of the performance-based conditions and any other material conditions applicable to the award.

Equity Awards

The proposed rules would require more detailed disclosure of outstanding equity awards. The Summary Compensation Table would be required to list the fair market value of all equity awards on the date of grant, using standard accounting methods under Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, for determining such values. Any option or freestanding stock appreciation right that has been repriced or materially modified would be required to be reflected in the table as a new award disclosing such award's total fair value after such repricing or modification.2

Disclosure regarding outstanding equity awards would also include two additional tables - one showing outstanding equity awards and a second listing option exercises and vesting during the last year. A new instruction would require footnote disclosure of the expiration dates of options, stock appreciation rights and similar instruments held at fiscal year-end, separately identifying those that are exercisable and unexercisable, and the vesting dates of shares of stock (including restricted stock, restricted stock units or other similar instruments) and incentive plan awards held at fiscal year-end.

Pension Plans

The "All Other Compensation" column in the Summary Compensation Table would include with respect to each named executive officer the aggregate increase in his or her actuarial value of both tax-qualified and nonqualified benefits accrued under defined benefit pension plans during the last year. A separate table would further disclose potential annual retirement benefits payable to each named executive officer. The new tables would replace the current Pension Plan Table, which does not require disclosure of amounts payable to each executive.

Deferred Compensation

The "All Other Compensation" column in the Summary Compensation Table would include employer contributions to defined contribution and other deferred compensation plans and all earnings on deferred compensation that is not tax-qualified, but earnings on amounts contributed to tax-qualified deferred compensation plans are not required to be disclosed. Information about each named executive officer's nonqualified defined contribution plans and other deferred compensation plans, including year-end balance, and executive contributions, company contributions, earnings and withdrawals for the last year, would also be disclosed in a separate table.

Severance Arrangements

The proposed rules would require the disclosure of specific aspects of any written or unwritten arrangement that provides for payments (including perquisites and personal benefits) at, following, or in connection with, the resignation, severance, retirement or other termination (including constructive termination) of a named executive officer, a change in his or her responsibilities, or a change in control of the company. Such disclosure would include quantification of these potential payments and benefits.


The proposed rules reduce the threshold for disclosing perquisites and other personal benefits. Unless the aggregate value of perquisites and personal benefits is less than $10,000, all perquisites and personal benefits must be disclosed in the "All Other Compensation" column of the Summary Compensation Table and identified in a footnote. Furthermore, if the individual value of a perquisite or personal benefit exceeds the greater of $25,000 or ten percent of total perquisites or other personal benefits, such value must be disclosed in the footnote.3 The proposed rules also provide interpretive guidance for determining what constitutes a perquisite. An item is not a perquisite if it is "integrally and directly related" to the performance of an executive's duties. Otherwise, an item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect, irrespective of whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees. The SEC staff takes a very narrow view of what is "integrally and directly related" to job performance and specifically states, for example, that this concept does not extend to items that facilitate job performance, such as the use of corporate aircraft. The fact that a company has characterized an expense as a business expense for tax purposes is not relevant to the inquiry of whether such expense constitutes a perquisite or personal benefit for SEC disclosure purposes. This interpretative guidance is relevant for interpreting the current regulations regarding perquisite disclosure, and may therefore impact disclosure in the 2006 proxy season.

Director Compensation

A Director Compensation Table, similar to the Summary Compensation Table, and related narrative would disclose director compensation for the last year, including a breakdown of types of fees, if necessary to an understanding of the table. Companies would also be required to disclose for each director such director's outstanding equity awards at fiscal year-end.

Disclosure Required for Additional Individuals

Under the proposed rules, tabular and narrative compensation disclosure would be required for a company's chief executive officer, chief financial officer, the three other highest paid executive officers and the directors.4 In addition, for the first time, the aggregate total compensation and job description of up to three other non-executive employees would have to be disclosed, if such employees are paid more than any of the named executive officers.

II. Revisions to Form 8-K

The proposed rules would modify the disclosure requirements in Form 8-K to capture some employment arrangements and material amend-ments thereto only for named executive officers and would consolidate all Form 8-K disclosure regarding employment arrangements under a single item. Specifically, the proposed rules would amend Item 1.01 of Form 8-K to eliminate employment compensation arrangements and to cover only material employment compensation arrangements involving named executive officers under a modified broader Item 5.02. Companies would also need to disclose under Item 5.02 a brief description of any material plan, contract or arrangement to which a covered officer or director is a party that is entered into or materially amended in connection with any of the triggering events specified in Item 5.02, or any grant or award to any such covered person, or modification thereto, under any such plan, contract or arrangement in connection with any such event. Arrangements entered into with the principal executive officer or principal financial officer (or modifications thereof) would be required to be disclosed under Item 5.02 irrespective of whether such occurrence is in connection with a triggering event specified in Item 5.02.

In addition, a revision to General Instruction D to Form 8-K would permit companies to omit the Item 1.01 heading in a Form 8-K also disclosing any other Item, so long as the substantive disclosure required by Item 1.01 is included in the Form 8-K. This would not extend to allowing companies to omit any other caption if the Item 1.01 caption is included.

III. Foreign Private Issuers

The proposed rules would revise the exhibit instructions to Form 20-F to provide that foreign private issuers would be required to file any employment or compensatory plan with manage-ment or directors (or portion of such plan) only when the foreign private issuer either is required to publicly file the plan or arrangement in its home jurisdiction or if the foreign private issuer has otherwise publicly disclosed the plan.

IV. Beneficial Ownership Disclosure

The proposed rules would require footnote disclosure of the number of shares pledged as collateral for loans or other obligations by named executive officers, directors and director nominees. This requirement would not extend to significant shareholders, other than with respect to pledges that may result in a change of control (as currently required under Item 403(c) of Regulation S-K).

V. Certain Relationships and Related Transactions Disclosure

The proposed rules would update, clarify, and slightly expand the disclosure provisions regarding related person transactions. Principal changes would include a disclosure requirement regarding policies and procedures for approving related party transactions, a slight expansion of the categories of related persons and a change in the threshold for disclosure from $60,000 to $120,000. The requirement to disclose these transactions would also be made more principles-based, and would require disclosure if the company is a participant in a transaction in which a related person has a direct or indirect material interest. The proposed rules would eliminate the distinction between indebtedness and other types of related person transactions. Disclosure of indebtedness transactions would be required with regard to all related persons covered by the related person transaction disclosure requirement, including significant shareholders. The proposed rule would also require disclosure of all material indirect interests in indebtedness transactions of related persons, including significant shareholders and immediate family members.

A proposed new item would require (a) disclosure of whether each director and director nominee is independent; (b) a description of any relationships not otherwise disclosed that were considered when determining whether each director and director nominee is independent; and (c) disclosure of any audit, nominating and compensation committee members who are not independent.

VI. Plain English Disclosure

The proposed rules would require companies to prepare most of this disclosure using plain English principles in organization, language and design.


1. Under current rules, in the annual proxy statement, a company must include a report from the compensation committee of the company's board of directors on the company's executive compensation policies and practices. This Compensation Committee Report discusses the compensation policies applicable to the company's executive officers, including the specific relationship of corporate performance to executive compensation.

2 The proposed rules eliminate the ten-year option/SAR repricing table and instead require disclosure of any option or SAR repricings or material modifications in the Summary Compensation Table and the narrative disclosure, as described above.

3 The current rules require disclosure of perquisites if their value exceeds the lower of an aggregate amount of $50,000 or 10 percent of total annual salary and bonus.

4 The current rules generally require tabular disclosure only with respect to the chief executive officer and the next four most highly compensated executive officers of a company. The current regulations also do not specifically require disclosure for a company's principal financial officer (although disclosure for such individual is often included due to the likelihood of such individual being one of the company's most highly compensated executive officers).

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