On October 18, the SEC proposed changes to its proxy and disclosure rules to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring shareholder advisory votes on executive compensation and "golden parachute" compensation known as "say on pay," "say on frequency" and "say on golden parachutes." Although Section 951 of the Dodd-Frank Act established the key terms of the new vote requirements, the SEC's rule proposals provide much needed guidance on their administration. Comments on the proposed rules, which are described in Release No. 33-9153, must be submitted by November 18, 2010.

January 21, 2011 effective date for say-on-pay and say-on-frequency votes

Under the Dodd-Frank Act, separate shareholder advisory resolutions to approve executive compensation and the frequency of such say-on-pay votes must appear in proxy statements relating to a company's first annual or special meeting of shareholders held on or after January 21, 2011, whether or not the SEC's rule proposals are adopted by that date. Accordingly, say-on-pay and say-on-frequency vote proposals will have to be included in any preliminary or definitive proxy statement for an annual or special meeting that will be held on or after January 21, 2011, even if the proxy statement is filed with the SEC before January 21, 2011. The SEC's proposal contains transition provisions, discussed below, on which companies may rely pending adoption of the final rules on these votes.

Say on pay

Dodd-Frank Requirement. The Dodd-Frank Act requires companies to present to their shareholders, at least once every three years, an advisory resolution to approve executive compensation as disclosed in the proxy statement.

Proposed SEC Rules. A new Exchange Act Rule 14a-21(a) would implement the say-on-pay vote requirement. Although the proposed rule does not specify a form of say-on-pay resolution or the disclosure to accompany the resolution, the vote would have to relate to all compensation of the company's named executive officers required to be disclosed by Item 402 of Regulation S-K. Accordingly, the say-on-pay vote would cover executive compensation as disclosed in the Compensation Discussion and Analysis (CD&A) and the compensation tables and related narrative discussion. Under the SEC's proposal, the say-on-pay vote would not cover either the compensation of directors or disclosure concerning the company's compensation policies and practices as they relate to risk management and risk-taking incentives (unless and to the extent a company were to address those risks in the CD&A).

The proposal would make related changes to the SEC's proxy and disclosure rules:

  • Disclosure of effect of vote – A new Item 24 of Schedule 14A would require companies to explain the general effect of the say-on-pay vote, including that the vote would not be binding on the company or its board of directors. Companies would not be required to disclose any action they would expect to take in response to the vote.
  • Disclosure of how compensation decisions are affected by prior say-on-pay votes – An amendment to Item 402(b) of Regulation S-K would require companies to disclose in the CD&A whether and, if so, how they have considered the results of prior mandatory say-on-pay votes in administering their compensation policies and decisions.
  • No requirement to file preliminary proxy statement – An amendment to Exchange Act Rule 14a-6(a) would exclude the say-on-pay vote from the types of proposals that require the filing of a preliminary proxy statement.
  • Non-routine matter for broker votes – The say-on-pay vote would be an executive compensation matter on which brokers would not be permitted to vote uninstructed shares.

Say on frequency

Dodd-Frank Requirement. Under the Dodd-Frank Act, companies are required to conduct, at least once every six years, a separate shareholder advisory vote on a resolution to determine whether the company will hold a say-on-pay vote every year, every two years or every three years.

Proposed SEC Rules. A new Exchange Act Rule 14a-21(b) would implement the requirement for shareholder approval of the frequency of say-on-pay votes. The say-on-frequency vote would have to be included in a proxy statement for an annual or special meeting of shareholders requiring compensation disclosure. As proposed, Rule 14a-21(b) does not specify a form of resolution for the vote or the disclosure to accompany the resolution.

A proposed amendment to Exchange Act Rule 14a-4 would clarify the proxy presentation for say-on-frequency votes. Rule 14a-4 currently provides that, on proposals other than the election of directors, shareholders must be given the choice to cast "for," "against" or "abstain" votes. The proposed amendment would add an exception to this requirement and allow shareholders to vote for holding a say-on-pay vote every year, every two years or every three years, or to abstain from voting on the proposal. Although the SEC indicated that it expects boards of directors to make a recommendation on the frequency of say-on-pay votes, the proxy would have to make it clear that shareholders are voting on the four prescribed choices (every one, two or three years, or abstention), and not on approval or disapproval of the board's recommendation.

Other changes to the SEC's other proxy and disclosure rules relating to say-on-frequency votes would involve:

  • Disclosure of effect of vote – The new Item 24 of Schedule 14A would require companies to explain the general effect of the say-on-frequency vote, including that the vote would not be binding on the company or its board of directors.
  • Exclusion of certain Rule 14a-8 shareholder proposals – An amendment to Exchange Act Rule 14a-8 would allow companies to exclude a shareholder proposal from their proxy materials seeking a say-on-pay vote or a say-on-frequency vote if (1) the company has adopted a policy on the frequency of say-on-pay votes that is consistent with the choice selected by the plurality vote of shareholders on the most recent say-on-frequency vote and (2) the company conducts a say-on-frequency vote at least once every six years. The plurality vote standard would be used solely for purposes of the exclusion determination and not to determine whether the say-on-frequency resolution should be considered to have been adopted or approved as a matter of state law.
  • Disclosure in Form 10-Q or Form 10-K – Under the proposed rules, companies would have to disclose, in the Form 10-Q or Form 10-K report covering the period in which the say-on-frequency vote occurs, their decisions regarding how frequently they will conduct say-on-pay votes in light of the results of the say-on-frequency vote.
  • No requirement to file preliminary proxy statement – An amendment to Exchange Act Rule 14a-6(a) would exclude the say-on-frequency vote from the types of proposals that require the filing of a preliminary proxy statement.
  • Non-routine matter for broker votes – The say-on-frequency vote would be an executive compensation matter on which brokers would not be permitted to vote uninstructed shares.

Transition provisions for say on pay and say on frequency

Companies holding shareholder meetings on or after January 21, 2011 that may file their proxy materials before the SEC has finalized its rules will be able to benefit from the following accommodations by the SEC:

No preliminary proxy statement required – The SEC will not object if a company does not file a preliminary proxy statement if the only matters that would have required the preliminary filing are the shareholder advisory votes on say on pay and the frequency of say on pay.

Proposed mechanics for say-on-frequency vote may be followed – Notwithstanding the inconsistency of the say-on-frequency vote alternatives with the form of proxy required under current Rule 14a-4, the SEC will not object if the form of proxy for the proposal provides shareholders with a means to specify a choice among frequencies of one, two or three years, or abstention with respect to the proposal. In addition, if proxy service providers are not able to reprogram their systems to enable shareholders to vote among the four choices, the form of proxy may include only the first three choices (voting for say on pay every one, two or three years), without a box indicating an "abstain" vote. In that case, the company would not have the discretion to vote shares represented by an executed proxy returned by a shareholder who fails to select one of the three choices.

Say on golden parachutes

Dodd-Frank Requirement. The Dodd-Frank Act requires that, when a company seeks shareholder approval of an acquisition, merger, consolidation or proposed sale or other disposition of all or substantially all of the company's assets, the company must disclose any agreements or understandings that the soliciting company has with its named executive officers or with the named executive officers of the acquiring company (if the soliciting company is the target company) with respect to compensation that is based on or otherwise relates to such a transaction. Unless such golden parachute agreements or understandings previously have been subject to a say-on-pay vote required under the Dodd-Frank Act, the company would have to conduct a separate shareholder advisory vote to approve the agreements or understandings.

Proposed SEC Rules. A new Exchange Act Rule 14a-21(c) would require companies engaging in one of the foregoing transactions to conduct a separate shareholder advisory vote on the foregoing golden parachute compensation arrangements required to be disclosed in accordance with proposed Item 402(t) of Regulation S-K described below. The vote would not be binding on the company or its board of directors. Consistent with the SEC's proposed rules on say-on-pay and say-on-frequency votes, the proposed rule for say on golden parachutes would not prescribe a specific form of resolution or the disclosure to accompany the resolution. A vote on golden parachute arrangements will not be required for proxy statements relating to a meeting of shareholders until the effective date of the SEC's new rules implementing this requirement.

A new Item 402(t) of Regulation S-K would require disclosure of all golden parachute compensation (whether written or unwritten) relating to the transaction among the target and acquiring companies and the named executive officers of each company. The disclosure would have to be presented in both narrative and tabular form. The tabular disclosure would present information for the following categories of compensation payable to each named executive officer, as well as the total of all such compensation:

  • Cash severance payments (such as base salary, bonus, and pro-rata non-equity incentive plan compensation payments);
  • 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;
  • Pension and nonqualified deferred compensation benefit enhancements;
  • Perquisites and other personal benefits and health and welfare benefits;
  • Tax reimbursements (such as Internal Revenue Code Section 280G tax gross-ups); and
  • Additional elements of compensation not specifically includible in the other columns of the table.
  • Footnotes to the table would have to identify separately the amounts attributable to "single trigger" payment arrangements and those attributable to "double trigger" payment arrangements.

If a compensation arrangement relating to a transaction previously has been the subject of a periodic say-on-pay vote under Rule 14a-21(a), a say-on-golden parachute vote would not have to be duplicated when the company seeks shareholder approval of the transaction. For the arrangement to have been subject to a previous say-on-pay vote, it must have been presented in a manner that satisfied the requirements of new Item 402(t), rather than existing Item 402(j) of Regulation S-K, which generally requires disclosure in annual meeting proxy statements of amounts payable in connection with employment terminations and a change in control of the company. Among the differences from proposed Item 402(t), Item 402(j) does not require tabular presentation of this information, permits exclusion of certain items that do not discriminate in scope in favor of executives or that involve de minimis amounts, and does not require presentation of a total of all golden parachute amounts payable to the named executive officers.

Looking ahead

The Dodd-Frank Act and the SEC's new proposals have added to the significant work already required to produce a public company proxy statement. Calendar-year companies and other issuers planning to hold annual shareholder meetings in the early part of 2011 should consider prompt action to map out the corporate action and disclosures required for presentation of their say-on-pay and say-on-frequency proposals. Many companies that have not previously presented say-on-pay proposals can expect more intensive attention by shareholders to their executive compensation policies and practices and related disclosures in the CD&A. This prospect may warrant renewed internal consideration of the executive compensation program and how it should be described in the proxy statement. Companies also may wish to review their bylaws describing the vote required for shareholder action in order to determine whether the bylaws should be modified in light of the plurality vote that could result from the division of shareholder votes among the required choices for say-on-frequency proposals.