On October 18, 2010, the Securities and Exchange Commission (the “SEC”) proposed rules to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) pertaining to Say-on-Pay Votes, Frequency Votes and Golden Parachute Votes (the “Proposed Rules”). On January 25, 2011, the SEC issued its final rules regarding Say-on-Pay, Frequency and Golden Parachute Votes (the “Final Rules”). Please see our previous Client Memorandum, “Dodd-Frank Say-on-Pay Proposed Rules,” for a comprehensive discussion of the proposed rules.
The Final Rules were adopted substantially as set forth in the Proposed Rules, although with some important modifications. Like the Proposed Rules, the Final Rules generally require nonbinding shareholder votes on (i) the approval of the compensation of named executive officers ("Say-on-Pay Vote"), (ii) the frequency of such votes ("Frequency Vote") and (iii) golden parachute or other payments triggered by a merger or acquisition transaction ("Golden Parachute Vote").
Below is a summary of the noteworthy changes from the Proposed Rules.
Summary of Noteworthy Changes
Issuer and Shareholder Proposals
Form of Proposal. The Final Rules do not require Issuers to use any specific language or form of resolution to be voted on by shareholders, but the shareholder vote must relate to all compensation disclosure pursuant to the SEC’s Item 402 of Regulation S-K. The SEC included in the Final Rules the following model language for an Issuer’s resolution for the Say-on-Pay Vote:
“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.”
The SEC did not provide a comparable example for the Frequency or Golden Parachute Vote.
Subsequent Shareholder Proposals. Under existing SEC rules, an Issuer must include in its annual meeting proxy statement a proposal made by an eligible shareholder. An Issuer is not required to include a shareholder’s proposal if the proposal is specifically excluded by SEC rules or the shareholder has not complied with the applicable procedural requirements. Under the Proposed Rules, the SEC sought to permit the exclusion of a shareholder proposal relating to Say-on-Pay Votes and Frequency Votes if the Issuer adopted a policy on Frequency Votes that was consistent with the plurality of votes cast in the most recent vote. Under the Final Rules, if such a policy is adopted and the most recent Frequency Vote received the support of a majority (rather than a plurality) of the votes cast, the Issuer can exclude the shareholder proposal.
Uninstructed Proxy Cards
Under the Final Rules, companies may vote uninstructed proxy cards in accordance with management’s recommendation for the Frequency Vote if (1) a recommendation for the Frequency Vote is included in the proxy statement, (2) abstention is permitted on proxy cards (as is required) and (3) language on how uninstructed shares will be voted is included in bold on proxy cards.
Form 8-K Reporting and Disclosure Requirement
8-K Reporting. Instead of requiring additional disclosure on Forms 10-Q or 10-K, as originally set forth in the Proposed Rules, the Final Rules require Issuers to disclose on Form 8-K the company’s decision on the Frequency Vote. To comply, an Issuer is required to file an amendment to its prior Form 8-K filings that discloses the preliminary and final results of the Frequency Vote. The amended Form 8-K is due within 150 days of the annual or other meeting in which the vote was required, but in no event later than 60 days prior to the deadline for the submission of shareholder proposals for the subsequent annual meeting. This timing and structure is designed to give companies time to consider the results of the Frequency Vote, including through board and committee deliberations and shareholder discussions.
- Disclosure of Impact of Say-on-Pay Votes. Issuers will now generally be required to disclose in future Compensation Discussion and Analysis sections ("CD&As") whether and how their compensation policies and decisions have taken into account only the most recent Say-on-Pay Vote.
- Disclosure of Frequency Votes. The Final Rules require disclosure in the CD&A of the result of the most recent Frequency Vote, as well as when the next Say-on-Pay Vote will occur.
Golden Parachute Disclosure and Vote
Tabular Disclosure for Golden Parachute Vote. Tabular and narrative disclosure is required in conjunction with a Golden Parachute Vote. New Item 402(t) of Regulation S-K requires quantitative disclosure of the individual elements of compensation that an executive would receive pursuant to or related to a merger, acquisition or similar transaction. Separate footnote identification is required for amounts attributable to “single-trigger” arrangements and “double-trigger” arrangements. If an Issuer is uncertain as to the amounts involved, the Issuer is required to make a reasonable estimate and disclose any material assumptions underlying such an estimate. Disclosing a range of payments is not allowed and there is no de minimus exception. Any dollar amounts based on the Issuer’s stock price are to be calculated either on the consideration per share (if fixed) or on the average closing price per share over the first 5 business days following the first public announcement of the transaction.
Golden Parachute Vote Disclosure and Annual Proxy Statements. Although Item 402(t) Golden Parachute Vote disclosure is not required in annual proxy statements, if such disclosure is voluntarily included and is subject to a Say-on-Pay Vote, then a separate Golden Parachute Vote may not be necessary in the event of a subsequent merger or similar transaction. However, if there are any changes or modifications to the amounts or arrangements underlying the Golden Parachute Vote disclosure in the interim, then a separate shareholder vote would again be required. Such changes or modifications do not include any price movements in an Issuer's securities or any reduction in the value of total compensation payable to an executive. If there have been changes or modifications in the interim, the Golden Parachute Vote need only be on the new or revised terms of the applicable arrangements. In this case, two tables must be presented: (1) a Golden Parachute Vote table including the amounts previously disclosed and any new or revised arrangements and (2) a table that discloses only the new or revised arrangements.
Summary of Final Rules
Below is a brief summary of the Final Rules as they apply to Say-on-Pay, Frequency and Golden Parachute Votes and the attendant disclosure. For a more in-depth discussion, please refer to our previous memorandum on the Say-on-Pay Proposed Rules.
Say-on-Pay Vote. The Say-on-Pay Vote must be included in the proxy statement for an Issuer’s first annual meeting occurring on or after January 21, 2011 in which proxies will be solicited for the election of directors (or a special meeting held in lieu of such annual meeting) (the “Initial Proxy Statement”), and then at least once every three years thereafter. The Say-on-Pay Vote is a non-binding advisory vote and must be a separate resolution entitling shareholders to vote on whether to approve the compensation of the Issuer’s named executive officers. The remuneration to be voted on is the compensation covered by the disclosure required by Item 402 of Regulation S-K, primarily consisting of the CD&A, the compensation tables and the narrative disclosure accompanying the tables. Issuers are required to disclose in the CD&A whether and how their compensation policies and decisions have taken into account the most recent Say-on-Pay Vote.
Frequency Vote. The Frequency Vote is required in the Initial Proxy Statement and then at least once every six years thereafter. The Frequency Vote must provide shareholders an opportunity to either abstain or to vote on whether the Say-on-Pay Vote will occur every one, two or three years. Like the Say-on-Pay Vote, the Frequency Vote is a non-binding advisory vote.
Golden Parachute Disclosure and Vote. Any merger proxy statement or similar transactional document filed on or after April 25, 2011 will require a Golden Parachute Vote and the attendant disclosure, unless the arrangements were approved in connection with a previous Say-on-Pay vote. Golden parachute arrangements must be disclosed in proxy or consent solicitation material filed when seeking the approval of an acquisition, merger, consolidation or sale or other disposition of substantially all of the assets of an Issuer. This disclosure requirement is extended to additional transactions, including third-party tender offers, going-private transactions and certain information and registration statements and proxy and consent resolutions that relate to mergers and similar transactions and/or that require similar disclosure, and would also require disclosure of any golden parachute arrangements that either the acquiring company or the target company has with its own named executive officers or with the named executive officers of the other company.
The Final Rules require disclosure of named executive officers’ golden parachute arrangements in both tabular and narrative formats.