Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. No. 111-203 (July 21, 2010)) amended the Securities Exchange Act of 1934 by adding new Section 14A. Section 14A(a)(2) states, "Not less frequently than once every 6 years, a proxy or consent or authorization for an annual or other meeting of the shareholders for which the proxy solicitation rules of the Commission require compensation disclosure shall include a separate resolution subject to shareholder vote to determine whether votes on the [say-on-pay] resolutions required under paragraph (1) [of Section 14A(a)] will occur every 1, 2, or 3 years." (emphasis supplied)
The statute thus requires a "resolution" "to determine" the frequency of shareholder say-on-pay votes. However, the question for shareholders here is a multiple-choice one: the frequency to be determined is every one, two, or three years. The multiple-choice nature of the shareholder determination makes it difficult to develop a "resolution" in the traditional form: "Resolved, that specified action be taken" for submission to a shareholder vote, because inherent in any such resolution is the binary nature of the shareholder decision either to approve or not to approve the resolution.
During the course of SEC rulemaking to implement this statutory provision, a number of commentators pointed out the difficulty of incorporating the multiple-choice frequency decision into a "Resolved, that" format. For example, the November 18, 2010 comment letter submitted by the Society of Corporate Secretaries and Governance Professionals stated:
In contrast to the Say on Pay Proposal, the Frequency Proposal required by proposed Rule 14a-21(b) does not easily lend itself to formulation as a resolution because shareholders are being asked to select one of three possible frequencies. Therefore, we suggest that the Commission either (i) clarify in the final rules that the "separate resolution" requirement is satisfied by companies including the Frequency Proposal in their proxy statements without the need for any additional specific resolution in that proposal or (ii) provide non-exclusive examples of "separate resolution" language in the final rule release that would meet the rule's requirements with regard to the Frequency Proposal.
To similar effect was the November 22, 2010 comment letter submitted by the Committee on Federal Regulation of Securities of the Section of Business Law of the American Bar Association, stating, "the Commission should confirm in its adopting release or instructions to Item 24 that an issuer is not required to phrase the proposal as a 'Resolved' statement, as we believe that a multiple choice frequency vote is not easily presented using 'Resolved' language."
Attempting to fit the tripartite frequency choice into a traditional resolution may result in a variant of the following:
RESOLVED, that the holders of the common stock of the Company indicate, by their vote on this resolution, whether the vote on executive compensation should take place every one year, every two years or every three years.
Conceptually, approval of the resolution itself, which is ordinarily the point of submission to shareholders, is not contemplated. The vote on one of the three frequencies would not by its terms be a vote to approve or not approve the resolution, and the proxy card would not contemplate a yes or no vote. To present a resolution, but not to ask for a shareholder vote on its approval, risks confusion. Among other things, the issuer will encounter difficulties in describing the vote required to approve this "matter" (see Schedule 14A, Item 21), since the matter would ordinarily be thought of as approval of the resolution, but no vote on approval of the resolution is being sought or cast.
On January 25, 2011, the SEC issued final rules implementing these provisions of the statute (Release Nos. 33-9178; 34-63768).1 In the adopting release, the SEC took note of the fact that a number of commentators requested that the Commission clarify whether the say-on-frequency vote should be presented in the form of a resolution, given that shareholders will have a choice among three frequencies or abstaining from the frequency vote. However, the Commission offered no such clarification. Rule 14a-21(b), like the statute, requires that there be a resolution. In the adopting release, the SEC stated, "After considering and reviewing comments on the proposed rule, we do not believe it is necessary to provide a form of resolution for the vote required by Rule 14a-21(b)." By contrast, with respect to the say-on-pay vote, which is easily reflected in a customary resolution format, the Commission did include in the instructions to new Rule 14a-21(a) a non-exclusive example of a resolution that could be used.2 The absence of an exemplar of a resolution for the multiple-choice say-on-frequency vote is indicative of the difficulty of incorporating this vote into a traditional "Resolved, that" format, and may fairly be read as expressing the SEC's position that language in a "Resolved, that" format is not required.
This situation calls for a practical interpretation of the requirement of a "resolution" in the language of Section 14A(a)(2) and Rule 14a-21(b) with respect to the say-on-frequency vote. The intent of the statute and the rule is to afford shareholders the ability to express a preference (or abstain from expressing a preference) as to whether the say-on-pay vote should be held every one, two, or three years. New Rule 14a-4(b)(3) specifies that the form of proxy providing for the shareholder frequency vote shall provide means whereby the person solicited is afforded an opportunity to specify by boxes a choice among one, two, or three years, or abstain. The presentation of such means should be considered to comply with the statutory requirement of a separate "resolution subject to shareholder vote to determine" the frequency of say-on-pay votes, without the necessity of soliciting shareholder votes on a statement that begins "Resolved, that."
A separate question arises from the multiple-choice nature of the say-on-frequency vote. What shareholder vote shall be considered to be necessary to "approve" a particular frequency? Or is "approval" even a relevant concept here?
In the adopting release, the SEC stated (fn 121) that because the frequency vote is "advisory," there was no need to prescribe a standard for determining which frequency has been "adopted" by shareholders. However, there is still a need to assess whether the collective will of shareholders has been effectively expressed, even in a nonbinding way. For example, shareholders often vote on shareholder proposals of a precatory or nonbinding nature. After the vote, the Board, in determining what action, if any, should be taken as a result of the voting on the nonbinding proposal will, as a base matter, want to understand whether the nonbinding proposal represents the expressed will of the shareholders. In coming to that understanding, the Board will ordinarily apply the requirements applicable under the governing corporation law and the corporation's constituent documents for determining the vote required for shareholders to "approve" a matter. If that vote has not been obtained, the Board will be justified in concluding that the matter has not been approved, and as a result there is no effective shareholder nonbinding recommendation to even be considered.
The situation is complicated in the case of the shareholder frequency vote, which is expressed as a multiple choice. It could easily occur, for example, that the votes actually cast are relatively evenly split among the three frequencies, with one frequency receiving a plurality, but less than a majority of the votes cast. In addition, since shareholders are permitted to abstain from voting, it is possible that none of the frequencies would receive a majority of the votes present and entitled to vote on the matter. In assessing that requirement, abstentions function effectively as "no" votes.
As noted above, Item 21 of Schedule 14A requires that the proxy statement state, as to each "matter" "which is to be submitted to a vote of security holders," "the vote required for approval or election, other than for the approval of auditors." This Item also requires disclosure of the "treatment and effect of abstentions and broker non-votes under applicable state law as well as registrant charter and by-law provisions."
Section 216 of the Delaware General Corporation Law provides that unless otherwise specified in the corporation's certificate of incorporation or bylaws, "in all matters other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders." Directors shall be elected "by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors." There is no provision in the statute for a plurality vote requirement for any matter other than the election of directors.
Other jurisdictions establish an approval requirement of a majority of votes cast, rather than a majority of those present and entitled to vote. Section 7.25(b) of the Model Business Corporation Act states, "If a quorum exists, action on a matter (other than the election of directors) by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless the articles of incorporation require a greater number of affirmative votes." There is no provision in the MBCA for a plurality vote requirement in any matter other than the election of directors.
While these requirements can ordinarily be varied in a corporation's constituent documents, it would be a rare situation for such documents to provide for a plurality vote requirement in any matter other than the election of directors.
As a result, in complying with the requirement of Item 21 to describe the vote required to approve a particular frequency for say-on-pay votes, in most cases it will be appropriate to say that the vote required will be a majority - either a majority of the votes cast on the matter, or a majority of the votes present and entitled to vote on the matter. And the Board, in considering its determination of what frequency it should approve, may legitimately take into account the fact, if true, that no frequency received a majority, and hence that no frequency has been effectively recommended even in a nonbinding way by shareholders.