The U.S. Securities and Exchange Commission (SEC) has adopted final rules on shareholder approval of executive compensation, as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Canadian and other foreign private issuers are exempt from the new rules. A non-binding say-on-pay vote must occur at least once every three years, beginning with the first annual shareholders’ meeting held on or after January 21, 2011. Companies are also required to hold a “frequency vote” at least once every six years to allow shareholders to decide how often they would like to be presented with a say-on-pay vote.

Companies will also have to provide a non-binding shareholder vote on certain “golden parachute” compensation arrangements in connection with changes of control, if the transaction is otherwise subject to shareholder approval (i.e., tender offers will not require a vote). These voting requirements will apply to meetings for which proxy materials are filed on or after April 25, 2011. Exemptions apply when the compensation arrangements involve executive officers of foreign private issuers.

Although say-on-pay is not mandatory under Canadian law, it has already been adopted voluntarily by approximately 45 Canadian companies. The practice is also supported by Canadian institutional investors, and the Canadian Coalition for Good Governance (CCGG) has published a model say-on-pay policy for boards of directors. The OSC is currently seeking comment, as part of its shareholder democracy initiative discussed further below, on whether say-on-pay should be mandatory in Canada.

Notably, during the 2010 proxy season there were three high-profile instances in which shareholders of U.S. companies expressed their dissatisfaction with executives’ compensation by voting “no” in the say-on-pay vote. Although say-on-pay votes are not binding, most companies will certainly want to avoid a negative outcome by engaging with shareholders to hear and address their concerns before the annual meeting. To this end, we believe that the most significant aspect of say-on-pay is not the outcome of the vote per se, but the incentive it creates for companies both to engage in this dialogue with shareholders and to improve their executive compensation disclosure to ensure that shareholders have a good understanding of every element of the compensation program.