On January 25, 2011, the Securities and Exchange Commission ("SEC") adopted amendments to its proxy rules1 to implement the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to the approval by shareholders of executive compensation and "golden parachute" compensation arrangements. Section 951 of the Dodd-Frank Act amended the Securities Exchange Act of 1934 by adding Section 14A, which requires public companies to conduct a separate shareholder advisory vote to approve the compensation of executives (the "say-on-pay" vote), as disclosed pursuant to Item 402 of Regulation S-K, and to permit shareholders to weigh in on how often a company should conduct a shareholder advisory vote on executive compensation (the "frequency of say-on-pay" vote). The SEC's new rules related to "say-on-pay" and "frequency of say-on-pay" votes are effective April 4, 2011. Companies that qualified as "smaller reporting companies"2 as of January 21, 2011 and newly public companies that qualify as smaller reporting companies after January 21, 2011 will not be subject to "say-on-pay" and "frequency of say-on-pay" votes until the first meeting of shareholders at which directors will be elected occurring on or after January 21, 2013.

The Dodd-Frank Act requires separate resolutions subject to a shareholder vote to approve executive compensation and to approve the frequency of say-on-pay votes in proxy statements relating to a public company's first annual or other meeting of the shareholders occurring on or after January 21, 2011. Any proxy statement that is required to include executive compensation disclosure pursuant to Item 402 of Regulation S-K, even if filed prior April 4, 2011, must include the separate resolutions for shareholders to approve executive compensation and the frequency of say-on-pay votes. Public companies will not be required to file proxy materials in preliminary form if the only matters that would require a filing in preliminary form are the say-on-pay vote and frequency of say-on-pay vote.

In addition, the new SEC rules require companies soliciting votes to approve a merger, acquisition, sale of all or substantially all of the assets provide disclosure of certain "golden parachute" compensation arrangements and conduct a separate shareholder advisory vote to approve these golden parachute compensation arrangements. The golden parachute compensation arrangements disclosure and a separate resolution to approve golden parachute compensation arrangements pursuant to new Rule 14a-21(c) are required in merger proxy statements for meetings of shareholders occurring on or after April 25, 2011.

Say-on-Pay and Frequency of Say-on-Pay Votes

Approval of Say-on-Pay and Frequency of Say-on-Pay Resolutions

Under new Rule 14a-21(a), a public company is required, not less frequently than once every three calendar years, to provide for a separate shareholder advisory vote to approve the compensation of its named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis ("CD&A"), compensation tables and narrative discussion3.

The final SEC rule does not require companies to use any specific language or form of resolution to be voted on by shareholders. The resolution should indicate that the shareholder advisory vote is to approve the compensation of the company's named executive officers as disclosed pursuant to Item 402 of Regulation S-K. A vote to approve a proposal on a different subject matter, such as a vote to approve only compensation policies and procedures, would not satisfy this requirement. The instruction to Rule 14a-21(a) provides the following non-exclusive example of a resolution that would satisfy Rule 14a-21(a):

RESOLVED, that the compensation paid to the company's named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby APPROVED.4

The compensation of directors is not subject to the shareholder advisory vote. In addition, if a company includes disclosure about its compensation policies and practices as they relate to risk management and risk-taking incentives, these policies and practices will not be subject to the shareholder advisory vote. However, to the extent that risk considerations are a material aspect of the public company's compensation policies or decisions for its named executive officers, then the public company is required to discuss these policies in its CD&A. If this is the case, such disclosure would be considered by shareholders when voting on executive compensation. Finally, in addition to the required say-on-pay and frequency of say-on-pay votes, companies may solicit shareholder votes on a range of compensation matters to obtain more specific feedback on the company's compensation policies and programs.

In addition, under new Rule 14a-21(b), public companies are required, not less frequently than once every six calendar years, to include a separate resolution, subject to shareholder advisory vote, to determine whether the shareholder vote on the compensation of the company's executives should occur every 1, 2, or 3 years. The separate shareholder vote on executive compensation and frequency of say-on-pay votes are required only when proxies are solicited for an annual or other meeting of security holders at which directors will be elected and for which the SEC rules require the disclosure of executive compensation pursuant to Item 402 of Regulation S-K.

Public companies are required to disclose in a proxy statement for an annual meeting (or other meeting of shareholders at which directors will be elected and for which the SEC rules require executive compensation disclosure) that they are providing a separate shareholder say-on-pay and the frequency of say-on-pay votes pursuant to the Dodd-Frank Act and to briefly explain the general effect of the vote, such as whether the vote is non-binding. Companies should also provide disclosure of the current frequency of say-on-pay votes and when the next scheduled say-on-pay vote will occur in their proxy materials. Public companies are not expected to disclose either the current frequency or when the next scheduled say-on-pay vote will occur in proxy materials for the meeting where a company initially conducts the say-on-pay and frequency votes.

The SEC rules also provide requirements as to the form of proxy that public companies are required to include with their proxy materials with respect to the frequency vote. The amended rules require proxy cards to reflect the choice of 1, 2, or 3 years (or every year, every other year or every three years), or abstain, for the frequency of say-on-pay vote.

Amendments to Compensation Discussion and Analysis Requirements

The SEC amended the CD&A requirements to clarify that one of mandatory principles-based topics to be discussed in the CD&A should be the company's consideration of the most recent say-on-pay vote. Such mandatory topic should focus on whether, and if so, how the public company has considered the results of the most recent say-on-pay vote in determining compensation policies and decisions, and how that consideration has affected the company's executive compensation policies and decisions. Public companies should address their consideration of the results of earlier say-on-pay votes to the extent such consideration is material to the company's compensation policies and decisions discussed.

Smaller reporting companies are subject to scaled disclosure requirements in Item 402 of Regulation S-K and are not required to include a CD&A. Smaller reporting companies are required to provide a narrative description of any material factors necessary to an understanding of the information disclosed in the Summary Compensation Table. If the consideration of prior say-on-pay votes is such a factor for a particular public company, disclosure of this fact would be required in the narrative description accompanying the Summary Compensation Table.

Shareholder Proposals

Rule 14a-8(i)(10) permits a public company to exclude a shareholder's proposal if the company has already substantially implemented the proposal. Under certain conditions, a public company may exclude subsequent shareholder proposals that seek a vote on the same matters as the shareholder advisory votes on say-on-pay and frequency of say-on-pay. The SEC added a note to Rule 14a-8(i)(10) to permit the exclusion of a shareholder proposal that would provide a say-on-pay vote, seeks future say-on-pay votes, or relates to the frequency of say-on-pay votes if, in the most recent shareholder vote on frequency of say-on-pay votes, a single frequency (i.e., one, two or three years) received the support of a majority of the votes cast5 on the matter and the company adopted a policy on the frequency of say-on-pay votes that is consistent with the shareholders' choice. For example, if in the first vote under Rule 14a-21(b) a majority of votes were cast for a two-year frequency for future shareholder votes on executive compensation, and the public company adopts a policy to hold the vote every two years, a shareholder proposal seeking a different frequency could be excluded so long as the company seeks votes on executive compensation every two years.

A shareholder proposal that would provide an advisory vote or seek future advisory votes on executive compensation with substantially the same scope as the say-on-pay vote should also be subject to exclusion if the company adopts a policy that is consistent with the majority of votes cast. Like additional frequency votes, the note to Rule 14a-8(i)(10) conditions exclusion on the public company implementing the frequency favored by a majority of shareholders.

Amendment to Form 8-K

Item 5.07 of Form 8-K currently requires a public company to disclose the results of its shareholders' meeting and to indicate the number of votes cast for, against, or withheld, as well as the number of abstentions and broker non-votes as to each matter on which shareholders voted at the meeting. Under the amended Item 5.07, with respect to the vote on the frequency of say-on-pay votes, the company is required to disclose the number of votes cast for each of 1 year, 2 years, and 3 years options, as well as the number of abstentions.

Amended Item 5.07 of Form 8-K also requires each public company to disclose its decision regarding how frequently it will conduct shareholder advisory votes on executive compensation. To comply with this new requirement related to the Board's decision regarding the frequency of the shareholder vote on executive compensation, a public company will have to file an amendment to its prior Form 8-K filing under Item 5.07 that disclosed the results of the shareholder vote on frequency no later than 150 calendar days after the date of the end of the annual or other meeting at which such vote took place, but in no event later than 60 calendar days prior to the deadline for the submission of shareholder proposals under Rule 14a-8 for the coming annual meeting.

Item 5.07 is not among the list of items subject to the safe harbor from liability under the Exchange Act. Companies that fail to file a timely report required by Item 5.07 will lose their eligibility to file Form S-3 registration statements.

Filing a Preliminary Proxy Statement for Say-on-Pay and Frequency Votes is Not Required

The SEC amended its rules to exclude shareholder votes to approve executive compensation and the frequency of shareholder votes on executive compensation, from the preliminary proxy statement filing requirement.

Approval and Disclosure of Golden Parachute Arrangements

Approval of Golden Parachute Arrangements

The SEC adopted new Rule 14a-21(c), pursuant to which a public company is required to include a separate resolution, subject to shareholder advisory vote, in a proxy statement for a meeting at which shareholders are asked to approve an acquisition, merger, consolidation, or proposed sale or other disposition of all or substantially all assets of the company, to approve any agreements or understandings and compensation disclosed pursuant to Item 402(t) of Regulation S-K (referred to as golden parachute arrangements). Any agreements or understandings between an acquiring company and the named executive officers of the registrant, where the registrant is not the acquiring company, are not required to be subject to the separate shareholder advisory vote.

Generally, the disclosure of golden parachute arrangements under Item 402(t) is not required to be included in annual meeting proxy statements. However, some public companies may choose to include this information because such companies will not be required to include in the merger proxy a separate shareholder vote on the golden parachute compensation if the same golden parachute compensation was included in the executive compensation disclosure that was subject to a prior say-on-pay vote.6

New golden parachute arrangements and any revisions to golden parachute arrangements that were subject to a prior say-on-pay vote require a separate merger proxy shareholder vote.7 However, changes that result only in a reduction in value of the total compensation payable would not require a new shareholder vote. Examples of changes requiring a new vote include: changes in compensation because of a new named executive officer, additional grants of equity compensation in the ordinary course, and increases in salary.

Companies providing for a shareholder vote on new arrangements or revised terms will need to provide two separate tables in merger proxy statements. One table will disclose all golden parachute compensation, including both arrangements and amounts previously disclosed and the new arrangements or revised terms. The second table will disclose only the new arrangements or revised terms subject to the vote, so that shareholders can clearly see what is subject to the shareholder vote. Similarly, in cases where Item 402(t) requires disclosure of arrangements between an acquiring company and the named executive officers of the soliciting target company, companies will need to clarify whether these agreements are included in the shareholder advisory vote by providing a separate table of all agreements and understandings subject to the shareholder advisory vote, if different from the full scope of golden parachute arrangements disclosed under Item 402(t).

Disclosure of Golden Parachute Arrangements

The SEC adopted the new Item 402(t) of Regulation S-K to require disclosure of named executive officers' golden parachute arrangements in both tabular and narrative formats. The required table is included as Exhibit A hereto. In the event uncertainties exist as to the provision of payments and benefits, or the amounts involved, a public company is required to make a reasonable estimate applicable to the payment or benefit and disclose material assumptions underlying such estimate in its disclosure. Item 402(t) does not permit the disclosure of an estimated range of payments.

The tabular disclosure required by Item 402(t) requires quantification with respect to any agreements or understandings, whether written or unwritten, between each named executive officer and the acquiring company or the target company, concerning any type of compensation, whether present, deferred or contingent, that is based on or otherwise relates to an acquisition, merger, consolidation, sale or other disposition of all or substantially all assets.

Item 402(t) also requires companies to describe any material conditions or obligations applicable to the receipt of payment, including but not limited to non-compete, non-solicitation, non-disparagement or confidentiality agreements, their duration, and provisions regarding waiver or breach. Public companies are also required to provide a description of the specific circumstances that would trigger payment, whether the payments would be lump sum, or annual, and their duration, and by whom the payments would be provided, and any material factors regarding each agreement. Such material factors would include, provisions regarding modifications of outstanding options to extend the vesting period or the post-termination exercise period, or to lower the exercise price.

Item 402(t) does not require disclosure or quantification of previously vested equity awards because these award amounts are vested without regard to the transaction. Also, the SEC rules do not require tabular disclosure and quantification of compensation from bona fide post-transaction employment agreements to be entered into in connection with the merger or acquisition transaction. However, information regarding such future employment agreements is subject to disclosure pursuant to Item 5 of Schedule 14A to the extent that such agreements constitute a "substantial interest" in the matter to be acted upon.

A public company may choose to include the disclosure in the annual meeting proxy statement to qualify for the exception from the separate merger proxy vote. If the golden parachute disclosure is included in an annual meeting proxy statement, the price per share amount will be calculated based on the closing market price per share of the company's securities on the last business day of the public company's last completed fiscal year. In a proxy statement soliciting shareholder approval of a merger or similar transaction, the tabular quantification of dollar amounts based on the company's stock price will be based on the consideration per share, if such value is a fixed dollar amount, or otherwise on the average closing price per share over the first five business days following the first public announcement of the transaction.

In addition, a company seeking to satisfy the exception from the separate merger proxy shareholder vote by including Item 402(t) disclosure in an annual meeting proxy statement soliciting the say-on-pay vote will be able to satisfy Item 402(j) disclosure requirements8 with respect to a change-in-control of the public company by providing the disclosure required by Item 402(t). The public company must still include in its annual meeting proxy statement disclosure in accordance with Item 402(j) about payments that may be made to the named executive officers upon termination of employment.

EXHIBIT A: Golden Parachute Compensation