The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Securities Exchange Act of 1934 by adding Section 14A, which requires companies (i) to conduct a separate shareholder advisory vote to approve the compensation of certain executives, (ii) to conduct a separate shareholder advisory vote to determine how often an issuer will conduct a shareholder advisory vote on executive compensation and (iii) when soliciting votes to approve merger or acquisition transactions, to provide disclosure of certain “golden parachute” compensation arrangements and, in certain circumstances, to conduct a separate shareholder advisory vote to approve the golden parachute compensation arrangements. The U.S Securities and Exchange Commission proposed rules to implement Section 14A in October, and these new rules are expected to apply to the first annual or other meeting of shareholders occurring on or after January 21, 2011.
On November 19, 2010, Institutional Shareholder Services Inc. (a.k.a., Risk Metrics), a corporate governance advisory to the financial community (“ISS”), issued an update to its recommendations with respect to certain shareholder proxy votes for 2011. This update includes recommendations for the new proxy votes required by Section 14A.
With respect to a company’s say-on-pay vote, ISS recommends that such advisory votes be considered on a case-by-case basis. ISS will recommend a vote against where the company maintains problematic pay practices. ISS has previously identified certain problematic pay practices, which, as revised for 2011, include:
- Repricing or replacing underwater options/SARs without prior shareholder approval;
- “Excessive” perquisites or tax gross-ups; and
- New or extended agreements that provide for change-in-control payments that either (i) exceed the sum of three times base salary and average/target/most recent bonus, (ii) are triggered without involuntary job loss or diminution of duties (i.e., “single trigger” arrangements) or (iii) include excise tax gross-ups.
Vote on Frequency of Say-on-Pay Vote
Section 14A also requires a separate advisory vote on the frequency of the above-mentioned say-on-pay vote. Companies will be required to ask shareholders whether a say-on-pay vote should be included each year, every other year or once every three years. ISS recommends a vote for annual sayon- pay votes. According to ISS, a vote less frequently than every year would make it difficult to create the “meaningful and coherent communication” that the say-on-pay votes are intended to provide.
Golden Parachute Vote
Section 14A requires companies to provide a shareholder advisory vote on certain “golden parachute” compensation arrangements in merger proxy statements. ISS recommends that such votes be considered on a case-by-case basis, which is consistent with ISS’ policies on pay practices related to severance packages. ISS cautions that the following features of a golden parachute arrangement may lead to an adverse vote:
- New or recently materially amended agreements that include excise tax gross-ups;
- New or recently materially amended agreements that include modified single triggers;
- Single-trigger payments immediately upon a change in control, including cash payments and acceleration of performance-based awards even though the measures are not achieved;
- Single-trigger vesting of equity based on a definition of change of control that requires only shareholder approval (rather than consummation) of the merger;
- Potentially “excessive” severance payments;
- Recent amendments or other changes that may make packages so attractive as to influence merger agreements (which may not be in the best interests of shareholders);
- In the case of a gross-up from a pre-existing arrangement, the element that triggered the gross-up, such as large option grants at low point in stock price and unusual or “excessive” payments in cash or in equity that are made or negotiated prior to the merger; and
- The company’s assertion that a proposed transaction is conditioned on approval of the golden parachute advisory vote by shareholders.