On October 28, 2010, the U.S. Securities and Exchange Commission (the "SEC") issued Release No. 34-63124, proposing new rules to implement Section 14A of the Securities Exchange Act of 1934 (the "Exchange Act"), which was created under Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law on July 21, 2010. The new rules would require a public company1 to conduct separate shareholder advisory votes on executive compensation and "golden parachute" arrangements, as disclosed pursuant to Item 402 of Regulation S-K. The votes cast by shareholders pursuant to Section 14A will be non-binding on the company and its board of directors and will not create or change the fiduciary duties of the company or its board of directors. The SEC will be accepting public comments on the proposals until November 18, 2010.
Section 14A(a)(1) of the Exchange Act requires that, at least once every three years at an annual meeting of shareholders (or another meeting of shareholders for which the SEC rules require Item 402 disclosure of executive compensation), a public company afford its shareholders the right to a separate, non-binding vote to approve the executive compensation of the company's named executive officers2 required to be disclosed in the proxy statement relating to such meeting pursuant to Item 402 of Regulation S-K3 (a "Say-on-Pay Vote").
Under Section 14A(a)(2), at least once every six years, a company must also submit a separate non-binding resolution allowing shareholders the opportunity to vote on whether the Say-on-Pay Vote will occur every one, two or three years (a "Say-on-Frequency Vote").4
Section 14A(b)(1) of the Exchange Act requires that, in connection with a meeting at which shareholders are asked to approve a proposed acquisition, merger, consolidation, or proposed sale or other disposition of all or substantially all the assets of a company (a "change of control transaction"), the company must disclose in its proxy statement all compensation agreements and understandings between the soliciting company and any of its named executive officers (or any named executive officers of the acquiring company, if the soliciting company is not the acquiring company) that are based on or related to the transaction (so called "golden parachute" arrangements). Section 14A(b)(2) requires the company to afford its shareholders the opportunity to approve the golden parachute arrangements in a separate, non-binding shareholder vote (a "Say-on-Golden-Parachute Vote").
However, the company need not submit its golden parachute arrangements to shareholders for approval at the meeting related to the change of control transaction if: (i) the golden parachute arrangements were previously subject to a Say-on-Pay Vote under Section 14A(a);5 (ii) the disclosure requirements under Item 402(t) of Regulation S-K (as outlined below) were satisfied in the proxy statement relating to the meeting at which shareholders are afforded the Say-on-Pay Vote;6 and (iii) the terms of the golden parachute agreements or arrangements that were previously subject to the Say-on-Pay Vote have not been modified.7
Additional Disclosure Requirements Related to Golden Parachutes
The SEC's rule proposals will require more detailed disclosure of golden parachutes in the context of a change of control transaction than the SEC's rules currently require.8 Under Section 14A(b), the disclosure in the proxy statement must include a clear and simple presentation of the aggregate total of all compensation payable to any named executive officer based on or related to the change of control transaction and the conditions upon which the compensation may be paid or become payable. The SEC's proposed rules would require disclosure of named executive officers' golden parachute arrangements in both tabular and narrative formats that include separated items for the elements of the officers' compensation.9
Pursuant to Item 402(t) of Regulation S-K, a company would have to describe all material conditions and obligations applicable to the receipt of any executive compensation payments (such as noncompete and confidentiality agreements), a description of the specific circumstances that would trigger such payments, whether the payments would or could be paid in a lump sum or annually, the duration of the payments, who would provide the payments and material factors about each golden parachute arrangement.
Timing Requirements Under Section 14A
A company will be required to include both the Say-on-Pay Vote and the Say-on-Frequency Vote in its proxy statement for the first annual meeting (or other shareholder meeting) occurring after January 21, 2011, regardless of whether the SEC has adopted proposed rules to implement Section 14A. On the other hand, a company will not be required to submit Say-on-Golden-Parachute Votes to shareholders at shareholder meetings related to change of control transactions until the later of January 21, 2011, or the time when rules implementing Section 14A have become effective.
Section 14A Vote Language
The SEC's rule proposal does not express specific language or a form of resolution that must be presented for the shareholder advisory votes required by Section 14A. The SEC has stated only that the respective votes must relate to all executive compensation disclosed pursuant to Item 402 of Regulation S-K.10
Disclosure of the Effects of Section 14A Advisory Votes
Disclosure of Non-binding Effect. Under the proposed SEC rules, a company must disclose the non-binding nature of the Section 14A advisory votes in the proxy statements relating to meetings at which shareholders are entitled to cast such votes.
Disclosure in Compensation Discussion and Analysis. A company that is required to include a Compensation Discussion and Analysis section in its proxy statement pursuant to Item 402 of Regulation S-K will have to include in that analysis disclosure of whether, and, if so, how, the company has considered the results of previous Section 14A advisory votes in determining its executive compensation policies and decisions.11 Although a smaller reporting company does not have to include a Compensation Disclosure and Analysis section in its proxy statement, it may have to include disclosure of the effects that Section 14A advisory votes have had on its executive compensation policies and decisions as a result of Item 402(o) of Regulation S-K, which requires a smaller reporting company to provide a description of any material factors necessary to an understanding of the information disclosed in its Summary Compensation Table.
Disclosure in Form 10-Q and Form 10-K. Under the proposed rules, a company will have to disclose in its quarterly report on Form 10-Q covering the period in which a Section 14A advisory vote occurs (or in its annual report on Form 10-K if the vote occurs in the company's fourth quarter) its decision regarding the frequency of its Say-on-Pay Votes in light of the results of the Say-on-Frequency Vote.
No Preliminary Proxy Statement Required
The SEC has proposed to amend Rule 14a-6(a) of the Exchange Act such that Say-on-Pay Votes and Say-on-Frequency Votes will not trigger the requirement that a company file its proxy statement in preliminary form, so long as none of the other matters in the proxy statement trigger such a filing under Rule 14a-6(a).
No Broker-Discretionary Voting
Under the proposed rules, brokers will not be permitted to vote uninstructed shares in Say-on-Pay Votes or Say-on-Frequency Votes.12
Annual Reporting of the Proxy Voting Records of Registered Management Investment Companies
On October 28, 2010, the SEC also published proposed Rule 14Ad-1 under the Exchange Act and the Investment Company Act of 1940 in Release No. 34-63123. If adopted, Rule 14Ad-1 will require an institutional investment manager that is subject to Section 13(f)13 of the Exchange Act ("Section 13(f)") to report to the SEC, at least annually on Form N-PX, how it voted on any shareholder advisory votes pursuant to Section 14A, unless such votes are otherwise required to be publicly reported by an SEC rule or regulation. Under proposed Rule 14Ad-1, an institutional investment manager would be required to report the Section 14A advisory votes only with respect to securities for which it had or shared the power to vote, or had or shared voting power over the particular Section 14A advisory vote, without regard to whether it has voting power over other matters.
Rule 14Ad-1 will require institutional investment managers to report the Section 14A advisory votes on an annual basis, not later than August 31 of each year, for the most recent 12-month period ended June 30. In order to implement Rule 14Ad-1, the SEC has also proposed to amend Form N-PX,14 which, as amended, would require an institutional investment manager subject to Section 13(f) to disclose the number of shares over which it had or shared voting power, the number of shares voted, and how the shares were voted by it in any Section 14A advisory vote.
To prevent duplicative reporting, the amendments to Form N-PX would permit a single institutional investment manager to report Section 14A advisory votes in cases where multiple institutional investment managers share voting power, and an institutional investment manager to satisfy its reporting obligations by reference to the Form N-PX report of a fund that includes the manager's Section 14A advisory votes.
The SEC will be accepting public comments regarding the proposals outlined above until November 18, 2010.