To implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), on January 25, 2011, the SEC issued its final rules requiring:
- shareholder approval of executive compensation (“say on pay”) every one, two or three years
- shareholder approval of the frequency of the say on pay vote (“say on frequency”) every six years
- shareholder approval of golden parachute arrangements (“say on golden parachutes”) in merger and acquisition transactions
Public companies must include say on pay and say on frequency votes in their proxy materials for annual meetings to be held after January 21, 2011, even though the SEC’s final rules are not effective until 60 days after publication in the Federal Register. The say on golden parachutes vote is required for proxy statements and other transactional documents relating to mergers and acquisitions filed after April 25, 2011.
The final rules are substantially similar to the proposed rules that the SEC issued on October 18, 2010, that we discussed in the October 25, 2010 issue of Securities & Financial News to Note. Notable changes from the proposed rules include the following:
- Smaller Reporting Companies. The final rules provide an exemption from the say on pay and say on frequency requirements for smaller reporting companies until their first annual or other meeting of shareholders occurring on or after January 21, 2013.
- CD&A Disclosure. As proposed, the rules required a company to discuss in its CD&A how the company determined compensation policies in light of the results of previous say on pay votes. The final rules only require companies to discuss whether, and if so, how the company has considered the results of the most recent say on pay vote.
- Form of Resolution. Like the proposed rules, the final rules do not specify the form of a say on pay resolution. However, an instruction to the final say on pay rules includes the following non-exclusive example of a resolution that would satisfy the rule:
“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.”
- Exclusion of Shareholder Proposals. The proposed rules allowed a company to exclude shareholder proposals that sought a vote on the same matters covered by say on pay and say on frequency votes if the company adopted a policy on the say on frequency vote consistent with a plurality of the votes cast. In the final rules, the SEC has changed the threshold for exclusion of shareholder proposals from a plurality to a majority.
- Disclosure of Frequency. Instead of requiring disclosure of a company’s determination regarding the frequency of say on pay in the next Form 10-Q or Form 10-K, as proposed, the final rules require the disclosure to be made in an amended Form 8-K within 150 calendar days after the annual meeting, but no later than 60 days before the deadline for shareholder submissions under Rule 14a-8.
- Uninstructed Proxy Cards. The final rules clarify that management may vote uninstructed proxy cards in accordance with the board’s recommendations for the say on frequency vote if the board’s recommendation is included, abstentions are permitted and language is included on the proxy card regarding how uninstructed shares will be voted.
- Schedule TO. Unlike the proposed rules, the final rules do not require golden parachute compensation disclosure in third-party tender offers on Schedule TO.