The proposed rules on say-on-pay under Section 951 of the Dodd-Frank Act permit issuers to include an optional advisory vote on golden parachute arrangements in proxy statements for annual meetings. The advantage of doing so is that in certain circumstances the issuer will not have to include an optional advisory vote on the golden parachute arrangements in connection with a subsequent acquisition, as required by the Dodd-Frank Act, if the parachute arrangements were previously approved in connection with an annual meeting. The question remains whether issuers should elect such an option. There are no hard and fast answers here, just advantages and disadvantages to weigh, and we have difficulty identifying decisive advantages.
For starters, unless the SEC finalizes the proposed rules in time to prepare your proxy statement, there seems to be little benefit in including the optional advisory vote. The SEC could amend the rules before going final, and nothing would be accomplished.
It may make little sense to include an optional advisory vote on golden parachutes unless the issuer intends to include an annual advisory vote on other executive compensation. The reason is if golden parachutes arrangements have changed since they were approved, the new items are still subject to an advisory vote in connection with the subsequent acquisition under proposed Instruction 6 to Item 402(t)(2) to Regulation S-K. So little may have been accomplished. There is the added risk that if the changes are immaterial they will be blown out of proportion by the fact that they are put to a separate vote.
In addition, the SEC could challenge a disclosure of the golden parachute arrangements in a routine review. The end result may be the issuer has to agree that the disclosure might not have complied with the rule and therefore include the optional advisory vote upon a subsequent acquisition.
Even with an annual advisory vote, there are other considerations. Golden parachute arrangements may change during the course of a year, meaning in any event new or changed items will have to be put to a vote in connection with an acquisition. Its unclear (at least to us) when a change in base salary that affects severance pay would be considered a revision that would require a new vote. The release implies any options granted that vest upon a change of control would be another new item. It is unclear to us whether vesting of options, that would previously have vested upon a change of control, would be considered a new item. Such vesting would certainly change the tabular disclosure required by proposed Item 402(t).
And the disclosure will not be easy to prepare. The proposed rules require tabular disclosure of the parachute arrangements, with extensive explanations, and like the other compensation-related tables, numerous interpretive and computational difficulties may be encountered. In addition, under Item 402(b)(ii), as presently written, issuers generally need not make disclosures of group life, health, hospitalization or medical reimbursement plans that do not discriminate in scope terms or operation, in favor of executive officers or directors of the registrant that are generally available to all salaried employees. However, that will not be the case with respect to the disclosures required by proposed Item 402(t). One might question if those non-discriminatory items relate to an acquisition but it will be more minutia to be considered.
Finally, issuers should consider whether an advisory vote on golden parachute matters will pass if included in a proxy statement for an annual meeting. ISS’s draft policies for comment on golden parachute arrangements provide “Features that may lead to a recommendation against include:
- Recently adopted or amended agreements that include excise tax gross-up provisions (since prior annual meeting)
- Recently adopted or amended agreements that include modified single trigger agreements (since prior annual meeting)
- Single trigger payments that will happen immediately upon a change in control, including cash payment and such items as the acceleration of performance-based equity despite the failure to achieve performance measures
- Single-trigger vesting of equity based on a definition of change in control that requires only shareholder approval of the transaction (rather than consummation)
- Potentially excessive severance payments
- Recent amendments or other changes that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders
- In the case of a substantial gross-up from pre-existing/grandfathered contract: what triggered the gross-up (i.e. option mega-grants at low point in stock price, unusual or outsized payments in cash or equity made or negotiated prior to the merger)
- The company’s assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute advisory vote. ISS would view this as problematic from a corporate governance perspective.”
Even if you are not a big fan of ISS, common sense indicates that many of the items would be disfavored by investors and impair passage of an optional advisory vote on golden parachutes. As a result, issuers should compare their golden parachute arrangements to the above list to assess likelihood of passage of an optional advisory vote.