Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) added Section 14A to the Securities Exchange Act of 1934 (the “Exchange Act”) which requires reporting companies to make certain new disclosures and enable shareholders to cast advisory votes on executive compensation (“say-on-pay”), the frequency of say-on-pay votes (a “frequency vote”) and compensation arrangements and understandings in connection with business combination transactions (“golden parachutes”). On January 25, 2011, the Securities and Exchange Commission, by a 3-2 vote, adopted new Rule 14a-21 and several amendments to existing rules and forms to implement the requirements of Section 14A. See SEC Release No. 33-9178 (January 25, 2011) (Adopting Release) and SEC Release No. 33-9153 (October 18, 2010) (Proposing Release).
Overview of Changes Made in Final Rules
The final rules were adopted substantially in the form proposed, except for the following:
- the final rules provide that smaller reporting companies will be exempt from the say-on-pay and frequency vote requirements until January 21, 2013;
- the final rules clarify that the say-on-pay and frequency votes are required only in a proxy statement for a meeting at which directors are elected;
- the final rules allow exclusion of a shareholder proposal regarding the say-on-pay vote or the frequency vote if a majority of votes were cast in favor of one of the three frequency vote choices – every year, every two years, or every three years – and the company implements a policy consistent with the frequency selected by the majority of votes cast;
- the final rules moved the disclosure regarding the company’s action as a result of the frequency vote and whether the company will follow the shareholder recommendation from Forms 10-Q or 10-K to a new Item 5.07(d) in From 8-K;
- the final rules require the tabular disclosure with respect to golden parachutes under new Item 402(t) of Regulation S-K to identify by footnote the amounts attributable to “single-trigger” arrangements and “double-trigger” arrangements; and
- the final rules amend Schedule TO to provide that bidders in third-party tender offers are not required to provide the new golden parachute disclosures required by Item 1011(b) of Regulation M-A.
Say-on-Pay Shareholder Approval of Executive Compensation.
New Rule 14a-21(a) requires a shareholder advisory vote to approve executive compensation at least once every three calendar years. The rule does not require any specific language to be used in the resolution, but the say-on-pay vote must be based on all of the executive compensation disclosures required by Item 402 of Regulation S-K contained in the proxy statement, including the CD&A and narrative and tabular disclosures. The instructions to Rule 14a-21(a) provide a non-exclusive example of resolution language that would satisfy the rule. New Item 24 to Schedule 14A requires disclosure that the say-on-pay vote is being conducted and the effect of such vote, including the fact that it is non-binding. An amendment to Item 402(b) of Regulation S-K requires disclosure in the CD&A regarding whether and, if so, how the issuer’s compensation policies and decisions reflect the results of the most recent say-on-pay vote. The adopting release notes that issuers should also address their consideration of the results of earlier say-on-pay votes to the extent such consideration is material to the compensation policies and decisions discussed in the CD&A.
Shareholder Approval of the Frequency of Say-on-Pay Votes.
New Rule 14a-21(b) requires a shareholder advisory vote at least once every six calendar years regarding the frequency of the say-on-pay vote. The rule does not require any specific language to be used in the resolution. New Item 24 to Schedule 14A requires disclosure that the frequency vote is being conducted and the effect of such vote, including the fact that it is non-binding. New Item 24 to Schedule 14A also requires disclosure regarding the current frequency of say-on-pay votes and when the next say-on-pay vote will occur. The adopting release notes that this disclosure would not be expected in the proxy materials for the meeting where an issuer initially conducts the say-on-pay and frequency votes. An amendment to Rule 14a-4 requires companies to provide four choices on the proxy card with respect to how often the say-on-pay vote should be held – every year, every two years, every three years, or abstain from voting – rather than a choice to approve or disapprove a company recommendation regarding the frequency vote. The adopting release notes that issuers may vote uninstructed proxy cards in accordance with management’s recommendation for the frequency vote only if the issuer includes a recommendation in the proxy statement, permits abstention on the proxy card, and includes language regarding how uninstructed shares will be voted in bold on the proxy card.
Item 402(t) of Regulation S-K details new golden parachute disclosure requirements. The new disclosure requirements include both narrative and tabular disclosure of all elements of golden parachute compensation as well as disclosure of the total of all golden parachute compensation. The disclosure includes compensation arrangements involving either the target or acquiring company and the named executive officers of either company. An amendment to Schedule 14A requires this golden parachute disclosure in proxy or consent solicitation materials relating to any acquisition, merger, consolidation, or proposed sale or disposition of all or substantially all assets of the issuer. If the disclosure required by Item 402(t) is included in a proxy or consent solicitation seeking approval of an acquisition, merger, consolidation, or proposed sale or disposition of all or substantially all assets of the issuer, then the Item 402(t) disclosure should include only compensation that is based on or otherwise relates to the transaction that is the subject of such proxy or consent solicitation.
New Rule 14a-21(c) requires a shareholder advisory vote to approve certain golden parachute arrangements disclosed pursuant to Item 402(t) in business combination proxy statements. The requirement for this vote does not apply to a target issuer if it has previously included the golden parachute disclosure in its annual meeting or other proxy statement where the golden parachute arrangements and understandings were subject to a say-on-pay advisory vote. The adopting release notes that the exception will be available only to the extent the same golden parachute arrangements previously subject to an annual meeting shareholder vote remain in effect, and the terms of those arrangements have not been modified subsequent to the say-on-pay vote.
The SEC also adopted the following:
- an amendment to Rule 14a-6(a) clarifying that an advisory vote on executive compensation, including the say-on-pay vote and the frequency vote, will not trigger a preliminary proxy statement filing requirement;
- an amendment to Rule 14a-8 providing that shareholder proposals with respect to say-on-pay votes and the frequency of say-on-pay votes may be excluded if a majority of votes were cast in favor of one of the three frequency options and if the issuer adopts a policy on frequency consistent with the frequency option approved by a majority of votes cast at its most recent shareholder meeting;
- an amendment to Form 8-K requiring disclosure regarding the company’s action as a result of the frequency vote and whether the company will follow the shareholder recommendation. The issuer must file an amendment to the Form 8-K that initially disclosed the results of the frequency vote no later than 150 calendar days after the date of the meeting at which the vote took place, but at least 60 calendar days prior to the deadline for the submission of shareholder proposals for the issuer’s subsequent annual meeting;
- amendments to Schedule 14C, Schedule 14D-9, Schedule 13E-3, and Regulation M-A requiring golden parachute disclosures similar to the disclosures required by the amendment to Schedule 14A, as well as an amendment to Schedule TO providing that bidders in third-party tender offers are not required to provide the new golden parachute disclosures required by Item 1011(b) of Regulation M-A; and
- issuers that received financial assistance under the Troubled Asset Relief Program (“TARP”) are exempt from the say-on-pay and frequency vote rules until all of their TARP debt has been repaid because they are currently required to conduct an annual say-on-pay vote under TARP.
Section 957 of the Dodd-Frank Act required amendments of the exchange rules to prohibit broker discretionary voting of uninstructed shares with respect to election of directors, executive compensation and “any other significant matter” which the SEC confirms in the adopting release includes the say-on-pay, frequency and golden parachute votes. See SEC Release No. 34-62874 (September 9, 2010) (NYSE) and SEC Release No. 34-62992 (September 24, 2010) (NASDAQ).
The final rules on the say-on-pay and frequency votes will be effective 60 days after the adopting release is published in the Federal Register; however, under the Dodd-Frank Act, the say-on-pay and frequency votes are required in any proxy statement for an annual or other meeting of shareholders held on or after January 21, 2011. The SEC has indicated that generally it will not object if issuers comply with the terms of the new rules in connection with any say-on-pay or frequency vote filings made prior to effectiveness of the rules. Smaller reporting companies are exempt from the say-on-pay and frequency vote requirements until meetings held on or after January 21, 2013. The rules and requirements for golden parachute disclosures and advisory votes will be effective for applicable filings made on or after April 25, 2011.