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 (the "Proposed Rules"). The Proposed Rules require that:
- At least once every three years, U.S. public companies ("Issuers") must seek a nonbinding shareholder vote to approve the compensation of named executive officers (the “Say-on-Pay Vote”);
- At least once every six years, Issuers must seek a nonbinding shareholder vote on whether the Say-on-Pay Vote should be held every one, two or three years (the “Frequency Vote”);
- Upon certain merger or acquisition transactions voted on by shareholders, Issuers must seek a separate nonbinding vote on golden parachutes or other payments triggered by the transaction, unless such payments have previously been approved in a Say-on-Pay resolution (the “Golden Parachute Vote”); and
- Additional disclosure must be provided in conjunction with these shareholder votes.
The Say-on-Pay Vote and Frequency Vote are generally required for proxy statements with respect to shareholder meetings occurring on or after January 21, 2011. The Golden Parachute Vote will not be required until the SEC's final rules become effective. In a companion release issued on October 18, 2010, the SEC also proposed rules implementing the Dodd-Frank provision requiring investment managers to disclose how they voted on each of these three mandatory shareholder advisory votes.
SHAREHOLDER VOTES ON EXECUTIVE COMPENSATION
In accordance with the Dodd-Frank Act, the Proposed Rules require that 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”). The Say-on-Pay Vote 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, which consists primarily of the compensation discussion and analysis section (the “CD&A”), the compensation tables and the narrative disclosure accompanying the tables found in proxy statements. This vote does not apply to director compensation.
In addition, Issuers are required to disclose in the proxy statement that they are seeking a Say-on-Pay Vote and to briefly disclose the general effect of the vote, such as whether the vote is nonbinding. In future CD&As, Issuers would be required to disclose how, if at all, their compensation policies and decisions have taken into account the results of previous Say-on-Pay Votes.
The Frequency Vote would be 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. While the board may make a recommendation as to how frequently the Say-on-Pay Vote should occur, the shareholders must clearly be provided these four choices (as opposed to voting whether or not to approve the board’s recommendation). Similar to the Say-on-Pay Vote, Issuers would be required to disclose in the relevant proxy statement that they are seeking a Frequency Vote and to disclose the general effect of the vote, such as whether the vote is nonbinding.
If the Issuer adopts a policy on the frequency of Say-on-Pay Votes that is consistent with the plurality of votes cast in the most recent Frequency Vote, then it is permitted to exclude any shareholder proposal that would provide a Say-on-Pay Vote or is related to the frequency of Say-on-Pay Votes. However, regardless of whether a policy is adopted, Issuers must continue to hold a Frequency Vote at least once every six years.
Additionally, the Proposed Rules would amend Form 10-K and Form 10-Q to require the Issuer to disclose its decision regarding how frequently it will conduct Say-on-Pay Votes in light of the Frequency Vote. This disclosure would occur in the quarterly report on Form 10-Q covering the period during which the Frequency Vote occurs or in the annual report on Form 10-K if the Frequency Vote occurs during the Issuer’s fourth quarter.
General Matters Relating to the Say-on-Pay Vote and the Frequency Vote
Say-on-Pay and Frequency Votes are required in the Initial Proxy Statement, regardless of whether final rules have been adopted or whether the Initial Proxy Statement is in preliminary form. However, as a transition matter, Issuers are not required to file a preliminary proxy statement solely as a result of including a Say-on-Pay and Frequency Vote in their Initial Proxy Statement. Going forward, the Proposed Rules would amend existing regulations so that Say-on-Pay Votes and Frequency Votes do not, by themselves, trigger a preliminary filing.
Furthermore, the SEC did not mandate specific language or provide a form of resolution for the Say-on-Pay or the Frequency Vote, and shareholders generally retain the right to make other proposals relating to executive compensation for inclusion in proxy materials.
DISCLOSURE AND SHAREHOLDER APPROVAL OF GOLDEN PARACUTE ARRANGEMENTS
Golden Parachute Disclosure
In accordance with the Dodd-Frank Act, the Proposed Rules would require disclosure of “golden parachute” arrangements to be made in any proxy or consent solicitation material seeking the approval of an acquisition, merger, consolidation or sale or other disposition of substantially all of the assets of an issuer (a “Covered Transaction”). The Proposed Rules would generally extend this disclosure requirement 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.
The Proposed Rules would require more detailed disclosure of golden parachute arrangements than is currently required to be included in annual meeting proxy statements (for which the SEC is not proposing any changes). The Proposed Rules would require the following to be disclosed for each named executive officer in tabular format: the aggregate dollar value of any (i) cash severance payments, (ii) accelerated vesting of stock awards, (iii) accelerated vesting of in-the-money option awards, (iv) payments in cancellation of stock and option awards, (v) pension and nonqualified deferred compensation enhancements, (vi) any perquisites and other personal benefits or property and health care and welfare benefits, (vii) tax reimbursements and (viii) other compensation that otherwise relates to the transaction. For each of these items, the Proposed Rules would require footnote disclosure quantifying each separate form of compensation included in the aggregate dollar values reported. Where some disclosed arrangements are subject to an advisory vote and others are not, the Proposed Rules would require separate tables for each of these categories.
The disclosure above is required not only for payments or benefits triggered by the transaction (“single trigger” payments), but also for amounts that may be subject to an event occurring after the transaction (“double trigger” payments), such as termination of employment. The Proposed Rules would require footnote disclosure that separately quantifies the single trigger payments and the double trigger payments.
Finally, the Proposed Rules would require a succinct narrative description of any material factors necessary to an understanding of each arrangement quantified in the tables.
Golden Parachute Vote
The Proposed Rules would also implement the Golden Parachute Vote required under the Dodd-Frank Act, requiring that unless the arrangements were previously approved pursuant to a Say-on-Pay Vote, any proxy or consent solicitation to approve a Covered Transaction must include a separate nonbinding advisory vote. In general, the Golden Parachute Vote would be required for any golden parachute arrangements in connection with Covered Transactions. Therefore, additional transactions for which disclosure is required (such as third-party tender offers and going-private transactions) would not require a Golden Parachute Vote. In addition, the arrangements between the acquiring company and the target company’s named executive officers, where the target company is seeking approval of the Covered Transaction, would not be required to be subject to the advisory vote, even though, in both aforementioned circumstances, the Proposed Rules would require the disclosure of the relevant arrangements in the applicable SEC filings.