On October 18, 2010, the Securities and Exchange Commission (“SEC”) proposed rules that would enable shareholders to cast advisory votes on executive compensation and golden parachute arrangements.1 These proposed rules would implement Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), which seeks to provide shareholders with a say on pay and corporate affairs through nonbinding votes on executive compensation and golden parachutes.
In a companion release, the SEC sought public comment on proposed rules which would require institutional investment managers to annually file a record of their executive compensation-related shareholder votes under Section 14A(a) and (b) (“Section 14A Votes”) with the SEC on Form N-PX. The companion release is addressed in our October 2010 Securities Law Update: SEC Proposes Rules Requiring Reporting of Proxy Votes on Executive Compensation.
SHAREHOLDER ADVISORY VOTE ON EXECUTIVE COMPENSATION
New Section 14A requires companies to conduct a separate shareholder advisory vote to approve the compensation of executives (a “Say-on-Pay Vote”). Proposed Rule 14a-21(a) would specify that the Say-on-Pay Vote is required only when proxies are solicited for a meeting of security holders for which disclosure of executive compensation is required by Item 402 of Regulation S-K. This Say-on-Pay Vote would have to occur at least once every three years. According to the proposed rule, the issuer would have to briefly explain the vote, including that it is not binding on the issuer or the board of directors of the issuer. The SEC proposes a corresponding amendment to Item 402(b) which would require issuers to address in the Compensation Discussion and Analysis section of a proxy solicitation whether and how the previous Say-on-Pay Votes have affected compensation policies and decisions. For smaller reporting companies (generally companies with a public float of less than $75 million), shareholders would vote to approve the compensation of the named executive officers as disclosed under Items 402(m) through 402(q), leaving the reporting requirements of smaller reporting companies unchanged.
SHAREHOLDER ADVISORY VOTE ON SAY-ON-PAY VOTE FREQUENCY
Proposed Rule 14a-21(b) would require issuers to provide a separate shareholder advisory vote to determine how often (every one, two, or three years) an issuer will conduct a Say-onPay Vote (a “Say-When-on-Pay Vote”). Shareholders must be given four choices in the Say-When-on-Pay Vote: every one, two, or three years, or abstain. Issuers would be required to conduct a Say-When-on-Pay Vote at least once every six years. Again, the issuer would have to briefly explain the vote, including that it is not binding on the issuer or the board of directors of the issuer. The SEC gives the Say-When-on-Pay Vote weight by proposing to allow an issuer to exclude shareholder proposals that propose a Say-onPay Vote or Say-When-on-Pay Vote, so long as the issuer has adopted a policy on the frequency of Say-on-Pay Votes that is consistent with the plurality of votes cast in the most recent Say-When-on-Pay Vote. As an example, if in the first Say-When-on-Pay Vote the shareholders chose a two-year frequency for future shareholder Say-on-Pay Votes, and the issuer discloses that it has approved a policy to hold the Say-on-Pay Vote every two years, a shareholder proposal seeking a different frequency could be excluded so long as the issuer seeks Say-on-Pay Votes every two years and provides a Say-When-on-Pay Vote at least every six years.
Under the proposed rules, neither the Say-onPay Vote nor the Say-When-on-Pay Vote would trigger the requirement to file a preliminary proxy statement. Additionally, neither vote would be required for issuers already subject to the requirement to conduct an annual shareholder vote to approve executive compensation due to participation in the Troubled Asset Relief Program.
DISCLOSURE OF GOLDEN PARACHUTE ARRANGEMENTS
Current SEC rules require certain disclosures about golden parachute arrangements, but they do not include detailed requirements for such disclosures that are applicable to proxy or consent solicitations to approve a merger or similar transaction, which is required by new Section 14A(b)(1) of the Exchange Act. In response, the SEC proposes new Item 402(t) of Regulation S-K (“Item 402(t)”) to require disclosure of golden parachute arrangements among the target and acquiring companies and the named executive officers of each in proxy or consent solicitations in connection with an acquisition, merger, consolidation, or sale or distribution of all or substantially all of the issuer’s assets. Corresponding amendments to the Exchange Act would require the Item 402(t) disclosure in whatever form the transaction takes, whether a merger, acquisition, a Rule 13e-3 going private transaction or a tender offer.2 Item 402(t) would require disclosure of named executive officers’ golden parachute arrangements in proxy or consent solicitations to approve a merger or similar transaction, in both tabular and narrative formats. The disclosure would include the aggregate total of all such compensation that may be paid or become payable to or on behalf of such named executive officers, and the conditions (such as non-compete or confidentiality provisions) upon which it may be paid or become payable.
SHAREHOLDER ADVISORY VOTE ON GOLDEN PARACHUTES
Under proposed Rule 14a-21(c), issuers would be required to provide a separate shareholder advisory vote with respect to golden parachute agreements (for which Section 14A(b)(1) requires disclosure and Section 14A(b)(2) requires a shareholder vote) in proxy statements for meetings at which shareholders are asked to approve a merger or similar transaction (a “Say-onGolden-Parachute Vote”).3 Like a Say-on-Pay Vote or Say-When-on-Pay Vote, a Say-onGolden-Parachute Vote would not be binding on the issuer or the board of directors of an issuer. A Say-on-Golden-Parachute Vote would not be required if full disclosure of the golden parachute arrangement was included in the executive compensation disclosure subject to a prior Say-on-Pay Vote.
The proposing release states that the proposed rules would not create or imply any change or enlargement of the fiduciary duties of issuers or the boards of directors of issuers. Nonetheless, companies will want to avoid the adverse publicity associated with a negative vote on compensation. Furthermore, a company could suffer adverse recommendations from the proxy voting advisory services if its board of directors does not respond to a negative vote in a manner deemed appropriate.
COMPLIANCE DATE
New Section 14A(a) applies to shareholder meetings taking place on or after January 21, 2011. Any proxy statements, whether in preliminary or definitive form, for meetings taking place on or after January 21, 2011, even if filed prior to this date, must include the separate resolutions for Say-on-Pay Votes and Say-When-on-Pay Votes as required by Section 14A(a). Accordingly, issuers will have to address and react to the final rules quickly.
COMMENT PERIOD
Public comments on the proposed rules may be submitted to the SEC on or before November 18, 2010. The full text of the proposed rules, including instructions for submitting comments, is available at http://www.sec.gov/rules/proposed/2010/33- 9153.pdf.
[1] The term “golden parachute” refers to an agreement between a company and an employee (usually an upper level executive) specifying that the employee will receive certain significant benefits if employment is terminated.
[2] An exception would be created for agreements with senior management of foreign private issuers where the target or acquirer is a foreign private issuer, consistent with long-standing SEC policy.
[3] Post-merger employment or similar agreements between a soliciting target company’s named executive officers and the acquiring company would be beyond the scope of the disclosure required by Section 14A(b)(1), and therefore would not be subject to a Say-onGolden-Parachute Vote.