On January 25, 2011, the Securities and Exchange Commission ("SEC") adopted final rules [see SEC Release Nos. 33-9178; 34-63768 ] for implementation of the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") related to shareholder approval of executive compensation and "golden parachute" compensation arrangements. The rules govern certain votes and disclosures required under the Dodd-Frank Act, including: (a) non-binding shareholder votes for the approval of an issuer's executive compensation arrangements; (b) non-binding shareholder votes on the frequency with which shareholders are to vote on an issuer's executive compensation arrangements; (c) the disclosure of golden parachute compensation arrangements triggered as part of a merger, acquisition, or other similar transaction; and (d) in certain instances, non-binding shareholder votes for the approval of an issuer's golden parachute arrangements based on or otherwise related to a merger, acquisition, or other similar transaction.

The rules were adopted substantially as proposed by the SEC in October, with exceptions, including: (a) disclosure of the results of the votes will now be required in a Form 8-K rather than in the issuer's next Form 10-Q or 10-K; (b) shareholder proposals relating to say-on-pay matters can be excluded under Rule 14a-8 if the issuer has adopted a policy on the frequency of say-on-pay votes that is consistent with the majority of votes cast in the most recent say-on-pay frequency vote (as opposed to the proposed plurality standard); and (c) smaller reporting companies will not be required to include say-on-pay proposals in their proxy statements until filed for their first shareholder meeting occurring on or after January 21, 2013.  

Voting on Executive Compensation and Golden Parachutes

Non-Binding Nature of Shareholder Advisory Votes

Under new Section 14A(c) of the Securities and Exchange Act of 1934 (the "Exchange Act"), all of the shareholder votes required by Section 951 of the Dodd-Frank Act related to executive compensation and golden parachutes are non-binding and advisory in nature. Section 14A(c) also makes clear that these votes do not modify or add to the fiduciary duties of boards of directors of issuers.

Shareholder Votes on Executive Compensation

Pursuant to new Section 14A(a)(1) of the Exchange Act and Rule 14a-21(a), the SEC will require issuers to provide for a separate shareholder advisory vote in proxy statements to approve the compensation of executives. This so-called "say-on-pay" vote:

  • Is required to be included in proxy statements prepared for applicable meetings held on or after January 21, 2011;
  • Must be held at least once every three calendar years;
  • Is for the approval of compensation of an issuer's named executive officers as disclosed in accordance with Item 402 of Regulation S-K (including in the Compensation Discussion & Analysis (CD&A), the compensation tables, and other narrative disclosures). The approval must be for all of the disclosures related to executive compensation required under Item 402 -- limiting the vote to more restricted subject matter, such as a vote to approve only compensation policies and procedures, would not be sufficient. The final rule does not require specific language to be used for the say-on-pay resolution on which shareholders will vote, but does include model language;
  • Is not applicable to director compensation;
  • Will not be required to be filed as part of, or trigger the obligation to file, a preliminary proxy statement, in accordance with an amendment to Rule 14a-6.

As adopted, Item 24 of Schedule 14A requires issuers to disclose in a proxy statement (a) that they are providing a separate shareholder vote on executive compensation, (b) the general effect of that vote (e.g. that it is non-binding), and (c) the current frequency of say-on-pay votes and when the next scheduled say-on-pay vote will occur. The SEC also adopted an amendment to Item 402(b) that requires issuers to discuss in CD&A whether, and, if so, how the most recent say-on-pay vote (and, to the extent material, any other prior say-on-pay votes) affected compensation policies and decisions. Companies with a public float of less than $75 million are generally not required to disclose how say-on-pay votes affected their compensation policies and decisions because they are not required to provide a CD&A (although such disclosure may be necessary if required to understand information disclosed in the Summary Compensation Table under Item 402(o)).

Shareholder Votes on the Frequency of Say-on-Pay Voting

The SEC has adopted Rule 14a-21(b) in order to implement new Exchange Act Section 14A(a)(2). Under the rule as adopted, issuers are required at least once every six calendar years to provide a separate shareholder advisory vote to determine whether the shareholder say-on-pay vote will occur every one, two, or three years. This vote is required only in proxy statements for meetings at which directors will be elected.

The shareholder vote on the frequency of the say-on-pay vote is required to be included in proxy statements prepared for applicable meetings held on or after January 21, 2011. As with the say-on-pay vote, Item 24 to Schedule 14A requires the frequency vote (including the general effect of the vote) to be disclosed and Rule 14a-6 excludes the frequency vote from triggering a preliminary filing (so long as any other matters to which the solicitation relates include only the other matters specified by Rule 14a-6(a)).

In addition, the SEC has amended Item 5.07 of Form 8-K to require an issuer to disclose its decision on how frequently it will conduct say-on-pay votes in light of the most recent shareholder vote on the subject. An issuer must amend its Form 8-K reporting the voting results from its shareholder meeting that included the frequency proposal to add this disclosure no later than one hundred and fifty calendar days after the meeting date, but in no event later than sixty calendar days prior to the deadline for shareholder proposals for the issuer's subsequent annual meeting. This amendment replaces amendments to Forms 10-K and 10-Q that the SEC had proposed related to this disclosure.

Exclusion of Shareholder Proposals Related to Say-on-Pay Voting

The SEC's amendment to Rule 14a-8 allows an issuer to exclude otherwise proper shareholder proposals requesting say-on-pay votes and votes on their frequency if it has adopted a policy on the frequency of say-on-pay votes that is consistent with the majority of votes cast in the most recent vote on say-on-pay frequency. This increases the threshold provided in the proposed rule, which required only a plurality of votes. Under the rule as adopted, if a majority does not vote in favor of any single option this exclusion is not available. An issuer's board of directors must weigh the benefits of this exclusion against the benefits of holding the vote less frequently than voted for by the shareholders in order to promote a longer term view of both issuer and executive performance.

Temporary Extension for Smaller Reporting Companies

In connection with the rules for say-on-pay votes and the frequency of say-on-pay votes, the SEC adopted a temporary exemption for smaller reporting companies (those with a public float of $75 million or less). These issuers are not required to conduct votes either on say-on-pay or on the frequency of say-on-pay votes until the first applicable meeting occurring on or after January 21, 2013. This extension is not applicable to the rules on shareholder voting and disclosure related to golden parachutes, which are discussed below.

Prohibition on Broker Discretionary Voting

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 for say-on-pay votes and votes on the frequency of say-on-pay voting.

Disclosure of Golden Parachutes

New Section 14A(b)(1) of the Exchange Act requires that golden parachute compensation to be paid to an issuer's named executive officers based on or otherwise related to a merger, acquisition, consolidation, or proposed disposition of all or substantially all of an issuer's assets be disclosed in any proxy statement or consent solicitation material related to such transaction in a "clear and simple form in accordance with regulations to be promulgated by the Commission." To meet this directive, the SEC has adopted Item 402(t) of Regulation S-K, which requires the disclosure of executive golden parachute arrangements in both tabular and narrative form. The table must include: (a) any cash severance payments, (b) the dollar value of accelerated stock and in-the-money option awards and payments in cancellation of stock and option awards, (c) pension and non-qualified deferred compensation benefit enhancements, (d) perquisites and other personal benefits and health and welfare benefits (including de minimis perquisites and benefits), (e) tax reimbursements, and (f) any other elements of compensation not specifically includable in the other columns. The table also requires footnote identification of payments occurring simply because of the transaction ("single-trigger") and those that require an additional event (e.g., consummation of a merger and subsequent termination -- "double-trigger").

Payments must be based on or otherwise related to one of the above-referenced transactions in order to require disclosure under Item 402(t). Previously vested equity awards and bona fide post-transaction employment agreements with the target or the acquirer, for example, would not be considered "based on or related to" the transaction (although information on future employment agreements might require disclosure under Item 5 of Schedule 14A).

The SEC also adopted amendments to its rules so that the disclosures under Item 402(t) have to be made for transactions that do not require filing under Section 14(a) of the Exchange Act but that nonetheless require the consent of shareholders for implementation. Tender offers (other than third-party bidders' tender offers) and Rule 13e-3 going-private transactions, for example, would necessitate Item 402(t) disclosure.

Narrative disclosure under Item 402(t) requires a description of any material condition or obligation applicable to the receipt of payment, including but not limited to non-competition, non-solicitation, non-disparagement and confidentiality provisions. Issuers must also describe the specific circumstances that trigger payment and the form of the payment.

Shareholder Votes on Golden Parachutes

New Section 14A(b)(2) and Rule 14a-21(c) require issuers to provide for a separate shareholder advisory vote on golden parachute arrangements in proxy statements for meetings at which shareholders are asked to approve a merger, acquisition, consolidation, or proposed sale or disposition of all or substantially all of the issuer's assets. This vote is not required if the disclosures required under Item 402(t) related to golden parachutes were disclosed in a prior say-on-pay vote under Rule 14a-21a. However, new golden parachute arrangements and any revision (other than just a decrease in amount or a change in amount due to a change in the issuer's stock price) to previously voted-on golden parachute arrangements are still subject to a shareholder advisory vote.

Enforcement of Golden Parachute Voting and Disclosure Rules

The SEC's rules on golden parachutes are effective for initial filings of merger proxy statements made on or after April 25, 2011. This differs from the rules on say-on-pay voting, under which the votes on say-on-pay and on the frequency of say-on-pay votes must be included in proxy statements for meetings to be held on or after January 21, 2011.