The Securities and Exchange Commission proposes rules to implement Section 951 of the Dodd-Frank Act, enabling shareholders to cast advisory votes on executive compensation at stockholder meetings starting January 21, 2011 as well as “golden parachute” compensation arrangements.

On October 18, 2010, the Securities and Exchange Commission proposed rules to implement Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires public companies to provide shareholders with an advisory "say-on-pay" vote to approve executive compensation at least once every three years, an advisory vote to determine the frequency of the say-on-pay vote at least once every six years, and an advisory vote on "golden parachute" compensation arrangements.

Importantly, the Dodd-Frank Act requires public companies to provide shareholders with the say-on-pay vote, and the vote to determine the frequency of the say-on-pay vote, in their proxy materials for their first annual or other meeting of shareholders occurring on or after January 21, 2011. Any proxy statements filed for meetings taking place on or after January 21, 2011 must include separate resolutions for the say-on-pay vote to approve executive compensation and the frequency of the say-on-pay vote, whether or not the SEC has adopted rules implementing these requirements.

Proposed Rules Relating to Say-On-Pay

The SEC’s proposed rules add a new Rule 14a-21(a) to the Securities Exchange Act of 1934. Proposed Rule 14a-21(a) requires public companies to include a separate non-binding advisory vote on compensation of executives in its annual proxy at least once every three years, beginning with their first shareholder meeting held on or after January 21, 2011. The proposed rule does not require the use of a specific form of resolution or specific language for voting purposes, but does provide that the vote must relate to all compensation required to be disclosed under Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, the compensation tables and other narrative executive compensation disclosures.

Additionally, the SEC proposed to amend Item 402(b) of Regulation S-K to require public companies to address in their Compensation Discussion and Analysis whether, and if so, how, they have considered the results of past mandatory say-on-pay votes and how that consideration has affected their compensation policies and decisions. Companies would also be required to disclose that the say-on-pay vote is being provided and the effect of such vote (i.e., that the vote is non-binding).

Frequency of Say-On-Pay Votes

The SEC proposed new Rule 14a-21(b) to address the frequency of say-on-pay votes. Proposed Rule 14a-21(b) requires public companies to, at least once every six years, include a separate non-binding advisory vote as to how often the say-on-pay vote should occur (i.e., every year, every two years or every three years). Companies must provide this vote on the frequency of say-on-pay votes at their first shareholder meeting held on or after January 21, 2011.

Proposed amendments to Rule 14a-4 provide requirements as to the form of the proxy and proxy card, to give shareholders four choices on the frequency of say-on-pay votes (i.e., whether the say-on-pay vote should occur every year, every two years, every three years or abstain). While a company's Board of Directors may include their recommendation as to the frequency of the say-on-pay votes, it must be clear that the shareholder vote is to choose among the alternatives, and not a vote to approve or disapprove of the recommendation. Similar to the requirements for the say-on-pay vote, the proposed rules require companies to disclose that the vote is being provided on the frequency of the say-on-pay vote and the effect of such vote (i.e., that the vote is non-binding).

In addition, the SEC's proposed rules amend Item 9B of Form 10-K and add a new Item 5(c) of Form 10-Q to require disclosure concerning a company's decision on how frequently to conduct say-on-pay votes in light of the results of the frequency vote.

Exclusion of Certain Shareholder Proposals

The SEC proposed an amendment to Rule 14a-8 to clarify the status of shareholder proposals relating to say-on-pay votes or the frequency of say-on-pay votes. Proposed Rule 14a-8 permits companies to exclude from their proxy materials shareholder proposals that seek a say-on-pay vote or that relate to the frequency of say-on-pay votes, provided that they have adopted a policy on the frequency of say-on-pay votes consistent with the plurality of votes cast in the most recent vote on frequency, and provided that they have had the vote on frequency at least every six years.

Exemption from Rules for TARP Companies

Public companies with outstanding liabilities under the Troubled Asset Relief Program would be exempt under the proposed rules requiring say-on-pay votes and frequency of say-on-pay votes until they have repaid all of the indebtedness under TARP. These companies would be exempt because under TARP these companies are already obligated to conduct annual shareholder votes to approve executive compensation.

Disclosure and Shareholder Approval of "Golden Parachute" Arrangements

In addition to requiring a shareholder vote on "golden parachute" arrangements, the proposed rules also expand the applicable disclosure requirements. Proposed Item 402(t) of Regulation S-K would require “clear and simple” disclosure of named executive officers' "golden parachute" compensation in both a narrative and tabular format in any proxy or consent solicitation to approve an acquisition, merger, consolidation or proposed sale or disposition of all or substantially all of the assets of a company. The proposed rules would also require this disclosure in filings relating to other similar types of transactions, including going private transactions and tender offers. Companies would be required to disclose any agreements or understandings that a target company or the acquiring company has with any named executive officers of either the target or acquiring company concerning any type of compensation that is based on or otherwise relates to the transaction.

Proposed Rule 14a-21(c) would require a separate shareholder advisory vote in proxy statements for meetings at which shareholders are asked to approve an acquisition, merger or similar transaction to approve the company's "golden parachute" arrangements. The shareholder vote, however, would only apply to agreements and arrangements between the soliciting person and any named executive officers of the target company (or of the acquirer, if the soliciting person is not the acquirer). Typically, the target company is the soliciting person, and any agreements or understandings between its named executive officers and the acquiring company would not be subject to the vote.

A separate vote would not be required if these "golden parachute" arrangements were subject to a prior say-on-pay vote under proposed Rule 14a-21(a). To take advantage of this exception, issuers would need to include the new Item 402(t) disclosure in the proxy statement that includes the say-on-pay vote, and the exception would only be available to the extent the same "golden parachute" arrangements subject to the say-on-pay vote remained in effect and the terms had not been modified. If any changes were made or any new arrangements entered into after the say-on-pay vote, only such changes and arrangements would be subject to a separate shareholder vote.

Unlike the say-on-pay and frequency of say-on-pay votes, the proposed disclosures and shareholder vote relating to "golden parachute" arrangements will not be required until the SEC issues final rules.

SEC Guidance Pending Final Rules

Pending the adoption of final rules, the SEC has stated it will not object if issuers do not file proxy material in preliminary form if the only matters that would otherwise require a preliminary proxy statement are the say-on-pay vote and frequency of say-on-pay vote. Similarly, the SEC provided some flexibility under existing rules to permit companies to implement the say-on-pay provisions, permitting companies to specify choices of one, two or three years or abstain (current rules provide that companies may only have approve, disapprove or abstain as voting choices) and to omit the “abstain” choice if proxy service providers are unable to process more than three choices.