In our 2011 Proxy Season Update dated January 12, 2011 (available here) we provided a detailed discussion of the SEC's new requirements that US public companies submit "Say on Pay" and "Say on Frequency" proposals to advisory votes of their shareholders. We noted that these requirements applied to annual or other shareholder meetings held on or after January 21, 2011, even though the SEC had not yet adopted final rules implementing the Dodd-Frank Act's mandates for non-binding shareholder votes on management compensation matters. The SEC closed that loop on January 25, adopting the rules in substantially the form they were proposed on October 18, 2010.

In this follow-up to our earlier 2011 Proxy Season Update, we focus on the key differences between the proposed and final rules and summarize relevant guidance provided by the SEC in the adopting release issued in conjunction with its approval of the rules in their final form. We also provide an overview of an additional rule approved by the SEC at its January 25th meeting – the "Say on Golden Parachutes" shareholder voting and disclosure requirements.

Say on Pay

Public companies are required to submit a non-binding Say on Pay proposal for a shareholder vote at least once every three years, starting with a company's first shareholder meeting held on or after January 21, 2011. The vote relates to the compensation of a company's "named executive officers" and is an advisory vote only - the outcome does not negate or otherwise change compensation decisions made by the compensation committee or board of directors. The final rules clarify that:

  • a Say on Pay advisory vote is required only with respect to annual or special meetings at which directors are being elected; and
  • a Say on Pay advisory vote is required not less frequently than every three calendar years.

Although the final rule, like the proposed rule, does not require the company to use any specific language in its Say on Pay resolution, the final rules make clear that the resolution must include the relevant language from Section 14A(a)(1) of the Securities Exchange Act – stating that the vote is on the compensation of executives, as disclosed pursuant to Regulation S-K Item 402.

In addition, the SEC provided a non-exclusive example of a resolution that, in its view, would satisfy the applicable Say on Pay resolution requirements:

"RESOLVED, that the compensation paid to the company's named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion is hereby APPROVED."

Say on Frequency

Public companies also must submit a non-binding Say on Frequency proposal for a shareholder vote at least once every six years, starting with a company's first shareholder meeting held on or after January 21, 2011. This proposal allows shareholders to vote on how frequently a Say on Pay proposal will be submitted for a shareholder vote - every year, every second year or every third year. As is the case with Say on Pay, the Say on Frequency vote is an advisory vote only and is not binding on the company. This "multiple choice" element means that shareholders will be permitted to express a specific preference as to the frequency of Say on Pay proposals rather than simply being given the opportunity to approve or disapprove the company's recommendation regarding frequency. The final rules clarify that:

  • a Say on Frequency advisory vote is required only with respect to annual or special meetings at which directors are being elected; a Say on Frequency advisory vote is required not less frequently than every six calendar years; and
  • proxy statements must disclose the current frequency of the Say on Pay advisory vote and when the next Say on Pay vote is scheduled to occur.

One important development regarding Say on Frequency is the guidance the SEC has provided in its adopting release regarding the voting of "uninstructed" proxy cards – that is, proxy cards that do not specify a choice among the one year, two year or three year (or abstain) frequency alternatives. In response to comments, the SEC indicated that companies may vote uninstructed proxy cards in accordance with management's recommendation regarding frequency, as long as:

  • the proxy statement includes a recommendation regarding Say on Frequency;
  • the proxy card permits a shareholder to abstain from voting on the Say on Frequency proposal; and
  • the proxy card includes a statement, in bold-face type, as to how shares represented by uninstructed proxy cards will be voted.

As we noted in our earlier Update, public companies and their boards of directors are not obligated to make any recommendation regarding frequency, but we expected that most companies would do so. This SEC position regarding the voting of uninstructed proxy cards provides additional motivation for companies to include a specific recommendation (and to comply with the other disclosure requirements) so as to allow the voting of uninstructed proxy cards.

Exclusion of Shareholder Proposals – Final Rules Narrow the Exclusion

As was the case with the proposed rules, the final rules regarding Say on Frequency do not provide a specific standard for determining how a frequency choice "wins" - by receiving a plurality, majority or super-majority vote, or otherwise. However, if the company adopts a frequency policy consistent with the choice selected by a majority of the votes cast, then it may exclude any future shareholder proposals seeking a more-frequent (or less-frequent) Say on Pay vote. This is a significant departure from the proposed rules, which set a plurality vote standard, permitting exclusion of shareholder proposals if the company adopted a frequency policy consistent with the choice selected by simply a plurality of the votes cast.

Disclosure Requirements – Form 8-K Requirement Replaces Form 10-Q/Form 10-K Disclosure

One significant change from the proposed rules involves a company's disclosure requirements regarding the frequency policy it adopts in light of the Say on Frequency advisory vote. The proposed rules would have required that the company disclose its decision regarding Say on Pay vote frequency in its Form 10-Q covering the period during which the shareholder meeting took place (or in its Form 10-K if the vote was held during the company's fourth quarter). In response to comments received on this part of the proposed rules, the SEC eliminated the Form 10-Q/Form 10-K disclosure requirement and replaced it with an enhanced Form 8-K disclosure requirement.

Under the final rules, companies will be required to make this disclosure in a Form 8-K filing within 150 calendar days after the shareholder meeting at which the Say on Frequency advisory vote was taken (but in no event later than 60 calendar days prior to the deadline for submission of Rule 14a-8 shareholder proposals for the next annual meeting). This required Form 8-K will take the form of an amendment to the Form 8-K the company initially files under Item 5.07 to disclose the results of the shareholder vote on the Say on Pay and Say on Frequency proposals.

Good News For Smaller Reporting Companies – Two Year Exemption

Smaller reporting companies – meaning those with a public float of less than $75 million – received a break, albeit temporary, from the new Say on Pay and Say on Frequency requirements. Under a temporary exemption adopted by the SEC, these companies will not have to submit Say on Pay or Say on Frequency proposals for a shareholder advisory vote until their first annual meetings taking place on or after January 21, 2013. Smaller reporting companies do not get the same break with respect to Say on Golden Parachutes – they will be obligated to comply with the Say on Golden Parachute rules on the same timetable as other public companies.

Say On Golden Parachutes – Advisory Vote and Disclosure Requirements

The final rules also require public companies to submit a separate, non-binding, proposal for a shareholder vote with respect to golden parachute arrangements in proxy or consent solicitation statements for meetings at which shareholders will be voting on mergers, acquisitions, consolidations or asset sales. In addition, the final rules impose additional disclosure requirements relating to these arrangements in those types of proxy or consent solicitation statements. As is the case with Say on Pay and Say on Frequency, this Say on Golden Parachutes vote applies to arrangements with the company's named executive officers and is an advisory vote only and is not binding on the company. The Say on Golden Parachutes advisory vote and enhanced disclosure requirements will apply to proxy statements filed on or after April 25, 2011. As noted above, these requirements will apply to public companies generally on that date – there is no exemption or delayed implementation of the Say on Golden Parachutes rules for smaller reporting companies.

The advisory vote rules do provide an important exemption – no separate shareholder vote on a company's golden parachute arrangements will be required in connection with a vote on mergers, acquisitions, consolidations or asset sales if those arrangements were previously considered and approved as part of a Say on Pay vote held at a prior shareholder meeting. However, this exemption is limited and will not eliminate the need for a shareholder advisory vote if the previously-approved golden parachute arrangements have been modified subsequent to that prior vote. In that case, a company would be obligated to provide a comparison of the previously-approved and modified arrangements and shareholders would be entitled to vote on those modifications.

The disclosure requirements adopted as part of the new rules are embodied in Regulation S-K Item 402(t). These requirements apply to proxy and consent solicitations and related filings made in connection with mergers, acquisitions, consolidations or asset sales. Companies must disclose any compensation agreements, arrangements or understandings with any named executive officer (whether the arrangement is with the target company or the acquiror) that are based on or related to the transaction being submitted to shareholders for their vote. The disclosure must cover any type of compensation – present, deferred or contingent – and individual elements of compensation must be quantified, including:

  • cash severance payments;
  • dollar value of accelerated stock awards, option awards for options subject to accelerated vesting and any payments to be made for canceled stock or options;
  • tax reimbursements, like Section 280G gross-ups;
  • pension and nonqualified deferred compensation enhancements;
  • perquisites and other personal benefits; and
  • any other compensation relating to the transaction.

The advisory vote and disclosure requirements also apply to going private transactions and third party tender offers. The bidder in a third party tender offer, however, is not required to provide the disclosure in its own tender offer statement unless the transaction also is a going private transaction under Rule 13e-3.