On January 25, 2011, the Securities and Exchange Commission (SEC) issued new rules and amendments to existing rules to implement “Say on Pay,” “Frequency” and “Golden Parachute” votes mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The final rule release (No. 33-9178) is available at http://www.sec.gov/rules/final.shtml.

The new rules:

  1. Add a new Rule 14a-21(a) that:
  • Requires a Say on Pay vote at least once every three calendar years.
  • Applies to a proxy statement for a meeting, annual or special, at which directors will be elected.
  • Provides that shareholders will have a non-binding advisory vote to approve the compensation as described in the executive compensation information required by Regulation S-K Item 402 (“402 Disclosure”), including the Compensation Discussion and Analysis (CDA), for the principal executive officer, principal financial officer and other named executive officers (NEOs) as a group (not officer by officer).
  • Does not prescribe the form of vote or resolution, although the SEC notes that, as described in the proposing release, the vote must be “to approve the compensation of executives, as disclosed pursuant to [Item 402 of Regulation S-K] . . . .”1
  1. Add a new Rule 14a-21(b) and other rule amendments that:
  • Require a non-binding advisory vote on the frequency of Say on Pay votes (“Frequency”), at least every six calendar years.
  • Allow shareholders to choose a frequency of one, two or three years.
  • Require a Frequency Vote in the first proxy statement with respect to the election of directors occurring on or after January 1, 2011, including, for a new public company, its first annual meeting following the initial public offering.
  • Revise Rule 14a-4 to provide that the form of proxy must provide four choices for a Frequency vote — one, two, three years and abstain.2 Issuers may vote uninstructed proxies in accordance with management’s recommendation subject to the existing requirements of Rule 14a-4.
  • Revise Rule 14a-8 to permit the exclusion of shareholder proposals that would provide an advisory vote or seek future advisory votes to approve the compensation of executives described pursuant to 402 Disclosure or that relate to a Frequency vote if the issuer adopted a Say on Pay vote frequency policy consistent with the choice of the most recent Frequency vote per Rule 14a-21(b) and such choice received a majority of the votes cast (not a mere plurality as provided in the proposed rule).
  1. Add a new Item 24 to Schedule 14A that requires the issuer to disclose the effect of a Say on Pay and Frequency vote (advisory and non-binding per Dodd-Frank) and, when applicable, the current frequency of Say on Pay and Frequency votes and when the next such votes will occur.
  1. Revise Item 402(b) of Regulation S-K to require that the CDA address whether and how the issuer’s compensation policies and decisions take into account the most recent Say on Pay vote (not mandated by Dodd-Frank). Effects of earlier votes should be included in the CDA to the extent material to the compensation policies discussed.
  1. Amend Item 5.07 of Form 8-K to require (i) disclosure of the voting results on Frequency choices (within 4 business days after the shareholder meeting) and (ii) within 150 days after the shareholder meeting (but not less than 60 days prior to the deadline for shareholder proposals under Rule 14a-8), an amendment to the previously filed Item 5.07 Form 8-K disclosing the issuer’s decision on how frequently it will conduct Say on Pay votes.
  1. Amend Rule 14a-6 to provide that Say on Pay and Frequency votes do not require filing of preliminary proxy statements.
  1. Clarify that TARP mandated Say on Pay votes satisfy the Rule 14a-21(a) Say on Pay vote, and to exempt such issuers from Frequency votes, until the issuer is no longer subject to TARP mandates (repaid its TARP funds).
  2. Amend Regulation 14A, Schedule 14A and Item 402 of Regulation S-K, in connection with a shareholder vote on a merger or similar transactions (an “M&A Deal”)3 to:
  • Add a new Item 402(t) to Regulation S-K that requires disclosure regarding elements of compensation that each NEO would receive that are based on or otherwise related to the M&A Deal (“Deal Related Parachutes”).
  • Require disclosure with respect to each NEO of the soliciting issuer, all Deal Related Parachutes (written or unwritten) between such NEO and the buyer or the target. This will include Deal Related Parachutes between the buyer (if it must solicit a shareholder vote due to, for example, listing rules or to authorize additional shares if stock is being offered in the M&A Deal) and its NEOs, the buyer and target’s NEOs, the target and the target’s NEOs (and conceivably but unlikely, between the target and the buyer’s NEOs).
  • Require that Deal Related Parachutes are to be disclosed in a specified tabular format with narrative detail, including disclosure of material conditions upon which such compensation is to be paid or become payable, triggering events and the form and timing of payments. Issuers may add details to the tabular disclosure such as to identify single trigger and double trigger arrangements. In its release, the SEC acknowledges that previously vested equity awards are not Deal Related Parachutes nor are arrangements with respect to future employment.
  • Add a new Rule 14a-21(c) that requires a separate non-binding shareholder vote on the Deal Related Parachutes disclosed pursuant to new Item 402(t) if shareholders are asked to approve an M&A Deal at the same shareholder meeting. Consistent with Dodd-Frank, this vote only applies to Deal Related Parachute arrangements between target and its NEOs (the vote requirement is narrower than the disclosure requirements).
  • Provide an exemption from such vote if the exact same Deal Related Parachutes were previously subject to a shareholder vote (otherwise any changes (other than those that reduce total compensation payable) must be voted on with appropriate disclosure of the changes from the previously voted upon Deal Related Parachutes).

Effectiveness and Transition Matters

Dodd-Frank required initial Say on Pay and Frequency Votes be included in proxy statements for the first annual meeting occurring on or after January 21, 2011, regardless of whether the SEC adopted its proposed rules in time. Accordingly, although the new Say on Pay and Frequency vote rules are not effective until the 60th day after publication of the new rules in the Federal Register, the SEC has stated that, pending effectiveness, it will not object to forms of proxies that provide the four choices necessary for Frequency votes4 or to the failure to file a preliminary proxy statement containing a Say on Pay vote and Frequency vote if a preliminary proxy is not otherwise required.

Smaller reporting companies (generally those companies with a market float of less than $75 million) need not comply with the Say on Pay and Frequency vote rules until they file proxy materials in respect of an annual meeting occurring on or after January 21, 2013. As note above, TARP issuers are exempt from the Say on Pay and Frequency vote requirements until they have repaid outstanding indebtedness under TARP.

Compliance with the rules related to Deal Related Parachutes is required for affected documents first filed with the SEC on or after April 25, 2011.