The Dodd-Frank Wall Street Reform and Consumer Protection Act has added a number of provisions to the proxy statement requirements, some of which will definitely be required to be addressed in this year’s proxy statement and some of which are more likely to be required in next year’s proxy statement. This memo summarizes some of the most significant new requirements, already required to be addressed in this year’s proxy statement. A separate Alert will address provisions that will become effective later, including the timing of those requirements and actions that you can take now to prepare for those provisions.
“Say on Pay” and “Say When on Pay”
New Securities Exchange Act Section 14A requires any registrant holding an annual shareholders meeting after January 21, 2011 to include in its proxy statement: (1) a non-binding shareholder vote to approve the compensation of the registrant’s named executive officers disclosed pursuant to Item 402 of Regulation S-K and (2) a non-binding shareholder vote to determine whether to conduct a Say on Pay Vote every one, two or three years thereafter. The Say on Pay vote will be required to be held at least once every three years, and the Say When on Pay Vote will be required to be held at least at least once every six years.
The SEC has issued proposed rules to implement Section 14A. While the timetable for adoption of final rules remains uncertain, registrants will be required to comply with Section 14A in their 2011 proxy statement regardless of whether final rules have been adopted. Accordingly, registrants should include resolutions implementing the Say on Pay Vote and Say When on Pay Vote in their 2011 proxy statements.
Form of Resolutions implementing Say on Pay vote and Say When on Pay vote. The SEC’s proposed rules do not specify the form that the shareholder resolutions should take but do provide some guidance on what is sufficient for compliance. The proposed rules specifically require that the Say on Pay Vote be to approve all executive compensation disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis section (CD&A), compensation tables, and all other narrative compensation disclosures. For example, the SEC has stated that a vote relating only to compensation “policies and procedures” would be insufficient.
With respect to the Say When on Pay vote, the proposed rules specify that the resolution and proxy card must permit shareholders to choose among exactly four options. Shareholders must be able to vote in favor of holding the Say on Pay vote every one, two or three years or to abstain from voting. The proposed rules allow the board of directors to make a recommendation on the frequency of the Say on Pay vote, but the proxy materials must clearly indicate that the shareholders are not voting to approve or disapprove of the board’s recommendation, but rather to choose among the four available options. The proxy card must have a separate box for each of the four options. Registrants should consider contacting their proxy service providers to confirm that they are equipped to comply with this requirement.
Related Disclosure. The proposed rules require registrants to disclose in their proxy statement that they are holding a separate Say on Pay vote and Say When on Pay vote and to describe the general effect of each vote, most notably that they are non-binding. More than 100 proxy statements already have been filed including this disclosure, and we are collecting examples.
The proposed rules require that, in the future, registrants disclose in the CD&A whether they have taken previous Say on Pay votes into account in their compensation policies and procedures and how they have done so. Institutional Shareholder Services has already stated that they will also take this into account in making recommendations with respect to institutional shareholder voting.
No Requirement to File Preliminary Proxy Statement. The SEC generally requires a registrant to file its proxy statement in preliminary form at least 10 days before distributing it to shareholders unless the proxy statement is limited to certain matters, such as the election of directors or approval or ratification of accountants. The proposed rules would specifically add the Say on Pay vote and Say When on Pay vote to the list of matters that do not require a preliminary proxy filing. The SEC stated in the proposing release that until it takes final action to implement these requirements, it will not object if issuers do not file preliminary proxy statements if the only matters that would require a preliminary filing are the Say on Pay vote and the Say When on Pay vote.
Shareholder Director Nominations
In November 2010, the SEC adopted Rule 14a-11 in an effort to facilitate shareholders’ exercise of state law rights to nominate and elect directors. Rule 14a-11 allows a shareholder or group of shareholders to include a limited number of shareholder nominated directors in a registrant’s proxy statement, provided that they meet the eligibility and notice requirements. The SEC has delayed application of Rule 14a-11 pending the resolution of litigation challenging the adoption of the rule. It is currently anticipated that the rule, in any event, will not be effective before late 2011.
Currently, registrants are not implementing Rule 14a-11, but in anticipation of the future effectiveness of this rule, registrants may wish to begin to consider adopting bylaw amendments specifying (1) director qualifications and (2) advance notification of director nominations.