On January 25, 2011, the Securities Exchange Commission (SEC) issued final rules (Final Rules)1 implementing Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which generally provides shareholders of US public companies with the right to cast three types of pay votes: (i) a vote to approve the compensation of the named executive officers (say on pay vote); (ii) a vote on the frequency with which shareholders should be entitled to cast votes on the company’s executive compensation (frequency vote) and (iii) a vote to approve certain payments made in connection with an acquisition, merger or other specified corporate transaction (golden parachute vote).
The SEC issued its proposed say on pay rules (Proposed Rules) on October 18, 2010, which are summarized in our prior Client Alert entitled, “SEC Announces Preliminary Say on Pay Rules.”2 While the final rules generally follow the Proposed Rules issued in October, they make changes and clarifications that are important to certain types of issuers and fact patterns. The most significant changes are summarized in this Update.
- Smaller Reporting Companies Temporarily Exempted. The Final Rules temporarily exempt smaller reporting companies (i.e., generally, public companies with less than $75 million in public equity float) from holding say on pay and frequency votes until January 21, 2013. SEC officials stated that the delay will allow the SEC time to consider whether adjustments to the rules are appropriate for smaller reporting companies. Smaller reporting companies are still required to hold golden parachute votes during this temporary exemption period.
- General Effective Date of the Final Rules. The Final Rules become effective 60 days following publication of the rules in the Federal Register. Although the Final Rules will not become effective until after many companies have filed their 2011 proxy statements, companies that have not yet filed should follow the Final Rules.
- Compensation Discussion and Analysis Disclosure. The Proposed Rules required that a company discuss all previous say on pay votes in its compensation discussion and analysis (CD&A). The Final Rules limit the required CD&A discussion to the company’s most recent vote. However, previous say on pay votes should still be discussed to the extent that they are considered material to a company’s compensation decisions. In subsequent proxy statements filed after the first proxy statement filed on or after January 21, 2011, the Final Rules require companies to discuss in the CD&A whether they considered the results of the most recent vote and if so, how such consideration affected the companies’ executive compensation decisions and policies. Further, because smaller reporting companies generally are not required to include a CD&A in their proxy statements, they are not required to discuss their most recent say on pay vote unless it is a material factor to understanding the information in the company’s summary compensation table.
- Say on Pay Resolution Language Example. The Final Rules include a non-exclusive example of a say on pay vote resolution. A company is free to adopt different language in its resolution as long as it complies with the requirements listed in the Final Rules. The Final Rules do not provide example language for the frequency vote. By their literal terms, the Final Rules, like the Proposed Rules, require companies to include a separate resolution subject to the frequency vote.
- Higher Threshold Required to Exclude Shareholder Proposals Seeking Different Frequency Vote. Although the Proposed Rules provided that a company could exclude a shareholder proposal seeking a say on pay vote or a different say on pay vote frequency if the company adopted a frequency that was supported by a plurality vote of the shareholders, the Final Rules increase the threshold so that a company may only exclude such a shareholder proposal if the company adopts a frequency that is supported by a majority vote of its shareholders. As a result, a company whose frequency vote does not receive a majority vote from its shareholders will be unable to exclude any shareholder proposals seeking a say on pay vote or a frequency vote.
- Uninstructed Proxy Cards and the Frequency Vote. The adopting release makes it clear that a company may vote its uninstructed proxy cards on the frequency vote if the company: (1) includes a recommendation to shareholders for the frequency of say on pay votes in the proxy statement (2) permits abstentions on the proxy card; and (3) includes language clearly stating how uninstructed shares will be voted.
- Proxy Card Transition Relief. The Final Rules require companies to provide four choices with respect to the frequency vote, i.e., one year, two years, three years or abstain from voting. In the event that a company’s proxy service provider cannot reprogram its systems in time to meet this requirement, the Final Rules allow for such company to make available only the three frequency choices and to omit the abstention choice. However, companies that do so will not be able to vote uninstructed proxy cards in accordance with the board’s recommendation for the frequency vote, even if the proxy card is returned with no selection made. This transition relief expires on December 31, 2011.
- Company’s Frequency Decision Must be Disclosed in Form 8-K. The Proposed Rules required a company to disclose its decision on how often it would hold a say on pay vote on either the Form 10-Q or Form 10-K covering the period during which the frequency say on pay vote occurred. Due to concerns that such disclosure would not provide companies with sufficient time to fully consider the results of their frequency vote, the Final Rules allow for more flexible timing by requiring disclosure on Form 8-K instead provided that such filing must be made no later than the earlier of 150 calendar days after the date of the shareholder meeting or 60 calendar days prior to the deadline for the submission of shareholder proposals for the subsequent annual meeting.
- Golden Parachute Vote Requirements. The Final Rules defer the effective date of the golden parachute vote requirements to proxy materials filed on or after April 25, 2011. Like the Proposed Rules, the Final Rules require golden parachute compensation arrangement disclosures in connection with shareholder meetings to vote on certain change of control transactions and do not require this special vote if the golden parachutes have been subject to a prior say on pay vote. However, if a company modified its golden parachute arrangements after the prior vote, it will be forced to subject the new arrangements and revised terms to a new golden parachute vote. The adopting release for the Final Rules provides an exception, however, such that if the modification results in the value of the golden parachute arrangement declining, no new golden parachute vote would be required.