On January 25, 2011, the SEC adopted rules for the implementation of Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which relates to shareholder advisory votes (so called "say-on-pay" votes) on executive compensation and "golden parachute" compensation arrangements. The final rules are substantially similar to proposed rules issued by the SEC in October 2010. They will be effective 60 days after their publication in the Federal Register, although certain provisions became effective on January 21, 2011 by virtue of the Dodd-Frank Act and certain provisions will have delayed effective dates, as described below.1 A complete copy of the final rules is contained in SEC Release No. 33-9178 and can be found at www.sec.gov/rules/final/2011/33-9178.pdf.
Shareholder Advisory Vote on Executive Compensation
Companies are required, at least once every three calendar years, to provide a separate non-binding shareholder advisory vote to approve the compensation of their named executive officers as such compensation is disclosed in accordance with SEC rules. This would include the Compensation Discussion and Analysis (CD&A), the compensation tables and other narrative executive compensation disclosures required by SEC rules. The shareholder vote is required in connection with an annual meeting of shareholders, or a special meeting, at which proxies are solicited for the election of directors.
The rule does not require any specific language or form of resolution to be voted on by shareholders; however, the resolution should recite that the vote relates to all executive compensation “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 be insufficient.
Director compensation is not subject to the shareholder advisory vote.
Companies are required to address in their proxy statement whether and, if so, how their compensation policies and decisions have taken into account the results of the most recent shareholder advisory vote on executive compensation. Companies should 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 Advisory Vote on the Frequency of Shareholder Votes on Executive Compensation
Companies are required, at least once every six calendar years, to provide a separate non-binding shareholder advisory vote to determine the frequency of shareholder votes on executive compensation — every one, two or three years. The shareholder vote is required in connection with an annual meeting of shareholders, or a special meeting, at which proxies are solicited for the election of directors. The rule does not require any specific language or form of resolution to be voted on by shareholders.
The new rules amend the proxy card requirements to accommodate the need to provide shareholders with four choices regarding the frequency of say-on-pay votes: every one, two or three years, or abstain.
A company is not permitted to exclude from proxy materials a shareholder proposal that provides a say-on-pay vote, seeks future say-on-pay votes or relates to the frequency of say-on-pay votes (including proposals drafted as requests to amend a company's governing documents) unless:
- in the most recent vote on the 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 cast;
- the company has adopted a policy on the frequency of say-on-pay votes that is consistent with the majority vote; and
- the company implements this frequency.
In response to comments, the SEC changed the threshold from a plurality vote initially proposed to a majority vote. Given the nature of the vote — with shareholders receiving three substantive choices — it is possible that no single choice will receive a majority of votes and as a result there may be companies that will not be able to exclude subsequent shareholder proposals regarding say-on-pay matters, even if the company adopts a policy on frequency that is consistent with the plurality of votes cast.
The final rules require a Form 8-K filing —instead of a Form 10-Q or Form 10-K filing under the proposed rules — disclosing a company's decision regarding how frequently it will conduct shareholder advisory votes on executive compensation following each shareholder vote on the frequency of say-onpay votes.
A company must file a Form 8-K disclosing the results (preliminary or final) of the shareholder vote on frequency within four business days of the shareholder meeting. Pursuant to the new rules, a company must file an amendment to this Form 8-K no later than 150 calendar days after the date of the end of the shareholder meeting at which the frequency vote occurred, but in no event later than 60 calendar days prior to the deadline for the submission of shareholder proposals under SEC rules for the subsequent annual meeting, as disclosed in the proxy materials for the meeting at which the frequency vote occurred.
Additional Rules Relating to Advisory Votes
A proxy statement that includes a solicitation with respect to any shareholder advisory vote on executive compensation, including a say-on-pay vote or a vote on the frequency of say-on-pay votes, does not require a preliminary proxy statement filing, so long as any other matters to which the solicitation relates do not require such a filing.
Broker discretionary voting of uninstructed shares is not permitted for advisory say-on-pay votes, frequency of say-on-pay votes or golden parachute votes.
Because companies with outstanding indebtedness under the Troubled Asset Relief Program (TARP) have existing obligations to conduct a separate annual shareholder vote to approve executive compensation, these companies are exempt from the new rules requiring an additional say-on-pay or frequency of say-on-pay vote until they have repaid all outstanding indebtedness under the TARP.
Shareholder Advisory Vote and Disclosure of Golden Parachute Arrangements
In proxy statements for meetings at which shareholders are asked to approve an acquisition, merger, consolidation or sale of all or substantially all of its assets, shareholders must be provided a separate advisory vote on the golden parachute arrangements. This vote need only cover arrangements between the company seeking the shareholder vote and its named executive officers, even though SEC rules will require more extensive disclosure, including arrangements between both the acquiring company or the target company and the named executive officers of either company. The rule does not require any specific language or form of resolution to be voted on by shareholders.
Companies are not required to include in the proxy statement a separate shareholder vote on golden parachute compensation if that compensation had been included in the executive compensation disclosure that was subject to a prior say-on-pay vote, so long as such previous disclosure complied with the new golden parachute disclosure rules and the same golden parachute arrangements remain in effect. New golden parachute arrangements and any revisions to golden parachute arrangements are subject to the separate shareholder advisory vote requirements; however, changes that result only in a reduction of total compensation do not require a new shareholder vote.
Companies are required to include, in any proxy or solicitation material to approve an acquisition, merger, consolidation or sale of all or substantially all of its assets, a table separately quantifying for each named executive officer the full value of the following which is based on the transaction:
- cash severance payments;
- accelerated stock awards, in-the-money option awards for which vesting would be accelerated and payments in cancellation of stock and option awards;
- pension and nonqualified deferred compensation benefit enhancements;
- perquisites and other personal benefits and health and welfare benefits;
- tax reimbursements;
- any other benefits; and
- the total amount of all such payments and benefits.
Companies are required to footnote certain information in the table, including identifying singletrigger and double-trigger arrangements, and to include narrative disclosure comparable to the disclosure currently required for termination and change in control agreements.
Disclosure is required only for compensation that is based on or relates to the subject transaction. Disclosure is not required of previously vested equity awards, information already disclosed in the proxy statement Pension Benefits and Non-Qualified Deferred Compensation Table or compensation payable under post-transaction employment agreements to be entered into in connection with the transaction.