SEC Adopts Final Rules: Say-on-Pay, Say-on-Frequency And Say-on-Golden Parachutes

Monday, February 28, 2011 - 01:00

On January 25, 2011, the U.S. Securities and Exchange Commission (the SEC) adopted final rules to implement Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), requiring public reporting companies to conduct shareholder advisory votes with respect to:

• executive compensation (say-on-pay);

• the desired frequency to conduct the say-on-pay vote (say-on-frequency); and

• compensation arrangements in connection with merger and certain other change-in-control transactions that are presented for shareholder approval (say-on-golden parachute).

The new rules will generally become effective as of April 4, 2011. Nevertheless, pursuant to the Dodd-Frank Act, the initial say-on-pay and say-on-frequency votes must be included in proxy statements for the first annual meeting of shareholders (or special meeting where directors are to be elected) that a company holds on or after January 21, 2011, except for smaller reporting companies. Smaller reporting companies are not required to implement the say-on-pay and say-on-frequency votes until their first annual meeting of shareholders (or special meeting where directors are to be elected) held on or after January 21, 2013. The say-on-golden parachute rules will apply to all public companies, including smaller reporting companies, for proxy statements and other filings initially made on or after April 25, 2011. None of the rules apply to foreign private issuers.

The final rules can be found at http://www.sec.gov/rules/final/2011/33-9178.pdf. Set forth below is a summary of some of the key provisions of these new rules.

Say-on-Pay

In accordance with the new Rule 14a-21(a) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act), at least once every three calendar years, companies will need to provide in their proxy statements a separate, non-binding advisory vote for shareholders to approve executive compensation as disclosed pursuant to Item 402 of Regulation S-K, which includes the Compensation Discussion and Analysis (other than for smaller reporting companies) as well as executive compensation tables and accompanying narratives.

The final rules require no specific language or form of resolution for a say-on-pay proposal, but the SEC did provide the following example of a resolution that could be used in the proxy statement:

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 say-on-pay advisory vote need only cover those portions of Item 402 disclosure related to the named executive officers. No vote is required for director compensation or disclosures regarding compensation policies and practices as they relate to risk management and risk-taking incentive compensation for employees generally.

In their say-on-pay proposals, companies will be required to include a brief explanation of the general effect of the vote, such as its non-binding nature. Additionally, companies must discuss in their Compensation Discussion and Analysis whether and to what extent they have taken into account the results of the most recent say-on-pay vote with respect to their compensation policies and decisions. Discussion regarding other prior say-on-pay votes should be presented only to the extent it is material to shareholders making compensation decisions.

Under the final rules, the SEC also amended Rule 14a-8 under the Exchange Act to allow companies to exclude shareholder proposals relating to say-on-pay votes if, in the most recent say-on-frequency vote, a single frequency (i.e., one, two or three years) received the support of a majority of the votes cast and the company adopted a policy consistent with that choice.

Say-on-Frequency

In accordance with the new Rule 14a-21(b) under the Exchange Act, companies will be required, at least once every six calendar years, to provide a separate shareholder advisory vote in proxy statements for annual meetings to determine whether the say-on-pay vote will occur every one, two or three years.

In their proxy statements, companies must include a brief explanation of the general effect of the vote (such as its non-binding nature) and disclosure of the then-current frequency of say-on-pay votes and when the next scheduled say-on-pay vote will occur.

With respect to proxy cards for the say-on-frequency vote, Rule 14a-4 under the Exchange Act is being amended to permit proxy cards to reflect the choice of one, two or three years or abstain. Companies will be allowed to vote uninstructed proxy cards in accordance with management's recommendation for the frequency vote as long as the proxy card:

• includes a recommendation for the frequency of say-on-pay votes in the proxy statement;

• permits abstentions; and

• includes bold-print language on the proxy card regarding how uninstructed shares will be voted.

The final rules also adopted an amendment to Form 8-K, adding a new Item 5.07 that will require companies to disclose their determination as to how frequently they will conduct their say-on-pay votes. The determination must be disclosed in the Form 8-K that sets forth the annual meeting voting results after the say-on-frequency vote has occurred. If a company chooses to do so, however, it may delay disclosure of such determination until a later date if it files an amendment to the Form 8-K indicating its determination within 150 calendar days after the shareholder meeting (but in no event later than 60 calendar days prior to the deadline for the submission of shareholder proposals under Rule 14a-8 for the next annual meeting).

Under the final rules, the SEC amended Rule 14a-8 to allow companies to exclude shareholder proposals relating to a say-on-frequency vote if, in the most recent say-on-frequency vote, a single frequency (i.e., one, two or three years) received the support of a majority of the votes cast and the company adopted a policy consistent with that choice. Last, the SEC confirmed in an amendment to Rule 14a-6 under the Exchange Act that say-on-pay and say-on-frequency votes will not trigger a requirement to file a preliminary proxy statement.

Say-on-Golden Parachutes

Disclosure. Pursuant to a newly adopted Item 402(t) of Regulation S-K, companies will be required to provide broad disclosure of golden parachute compensation arrangements with the named executive officers in proxy statements for merger and certain other change-in-control transactions.

"Golden parachutes" are broadly defined and include all agreements and understandings between the target or the acquirer and each named executive officer of the target or the acquirer that relate to the transaction. This new disclosure in Item 402(t) is required only for executive compensation that is based on or otherwise relates to the applicable change-in-control transaction. Golden parachutes do not include certain types of compensation that are deemed not related to the transaction, such as previously vested equity awards, deferred compensation and compensation from bona fide post-transaction employment agreements.

The disclosure must be provided in both tabular and narrative formats. The table required by Item 402(t) will include disclosure of the aggregate dollar value of cash severance payments (such as base salary and bonus), equity awards (such as stock awards that are accelerated or cashed out in the transaction), pension and deferred compensation enhancements, perquisites and tax gross-ups, among other compensation that relates to the transaction. All amounts reported in this table must be aggregated into a single "walkaway" dollar value for each named executive officer.

The company stock price used to calculate compensation disclosed in the Item 402(t) table will be the fixed price per share provided for in the transaction, if known. If not, it will be the average closing price of the company's stock over the first five business days following the public announcement of the transaction. If the Item 402(t) table is provided in a proxy statement for an annual meeting (for reasons described below), the company stock price used to calculate the compensation disclosed is the closing price of the company's stock on the last business day of the company's last completed fiscal year.

Shareholder Vote. In accordance with the new Rule 14a-21(c) under the Exchange Act, companies will be required to provide a separate shareholder advisory vote on golden parachute arrangements in proxy statements for merger and certain other change-in-control transactions that are presented for shareholder approval. However, companies are not required to conduct say-on-golden parachute votes if the golden parachute arrangements (as disclosed pursuant to Item 402(t)) were already voted upon in an annual say-on-pay vote and have not been modified. Nevertheless, the advantages of including the enhanced golden parachute disclosure in an annual proxy statement are limited, particularly since you will still need to have a limited say-on-golden parachute vote if these arrangements are subsequently amended following approval at an annual meeting. It should be noted, however, that changes to golden parachute arrangements that decrease the total compensation do not require a subsequent shareholder vote.

The rules also provide that if the target company is the party soliciting proxies, then agreements or understandings between the acquirer and the named executive officers of the target, while required to be disclosed, are not subject to the say-on-golden parachute vote.

Conclusion

Companies should begin to prepare now for their say-on-pay and say-on-frequency proposals for the upcoming 2011 proxy season. In connection with doing so, a number of things should be considered, including the following:

• Drafting the executive compensation disclosures as an advocate to approve the say-on-pay proposal (e.g., how compensation corresponds to financial performance and recent improvements in compensation policies and practices) in addition to ensuring compliance with the line-item requirements of Item 402 of Regulation S-K, particularly in the Compensation Discussion and Analysis.

• Whether to recommend a specific frequency for say-on-pay voting in the proxy statement, and if so, what frequency to recommend. This will vary by company, depending on the shareholder base, peer group practices and compensation policies, among other things. Please note that ISS is recommending annual say-on-pay votes for all companies. If you decide to make a recommendation, you should have persuasive arguments to support this recommendation. Making a recommendation also allows the proxy holders to vote uninstructed proxy cards in favor of the board's recommendation.

• Whether it would be beneficial to conduct a say-on-golden parachute vote at the next annual meeting to avoid having to do so in connection with a proxy solicitation to approve a merger or other change-in-control transaction.

As Chair of Stradley Ronon's publicly held companies practice group, Eric D. Schoenborn advises clients in connection with raising capital in public and private offering of securities. He also counsels publicly held companies with respect to corporate governance matters and ongoing compliance under federalsecurities laws. Lori Buchanan Goldman advises a broad range of public and private companies on securities offerings, public financing, mergers and acquisitions, and corporate organization and compliance. She has represented various governmental issuers and authorities, and underwriters in tax-exempt bond offerings and financings. She regularly counsels public and private companies on preparation and negotiation of commercial contracts and purchase agreements, formation of business entities and general corporate counseling.

Please email the authors at eschoenborn@stradley.com or lgoldman@stradley.com with questions about this article.