The Securities and Exchange Commission (SEC) has adopted a final rule (pdf) governing shareholder approval of executive compensation and “golden parachute” compensation arrangements required under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among other things, the Dodd-Frank Act requires public companies subject to the federal proxy rules to provide their shareholders with a non-binding “say-on-pay” vote on executive compensation and a separate non-binding vote on how often such votes should occur. In addition, shareholders are entitled to an advisory vote on compensation arrangements and understandings in connection with merger transactions, commonly referred to as golden parachutes.
As discussed in a SEC fact sheet, the final rule specifies that the say-on-pay vote must take place at least once every three years beginning with the first annual shareholders' meeting taking place on or after Jan. 21, 2011. A company must disclose in its Compensation Discussion and Analysis (CD&A) portion of the proxy statement whether and to what extent it has considered the results of the most recent say-on-pay vote.
A separate vote must be held at least once every six years in order to allow shareholders to decide how often they would like to be presented with the say-on-pay vote. Following this frequency vote, a company must disclose on an SEC Form 8-K how often it will hold the say-on-pay vote. Under the rule, this Form 8-K disclosure is required “no later than 150 calendar days after the date of the annual meeting in which the vote took place, but in any event no later than 60 calendar days prior to the deadline for submission of Rule 14a-8 shareholder proposals for the subsequent annual meeting.”
The final rule does not require issuers to use any specific language or form of resolution to be voted on the shareholders, although some commentators suggested that prescribed language would be helpful. However, the shareholder advisory vote must relate to all executive compensation disclosure made pursuant to Item 402 of Regulation S-K. Section 14A(a)(1) of the Exchange Act requires that the shareholder advisory vote must be “to approve the compensation of executives, as disclosed pursuant to [Item 402 of Regulation S-K] or any successor thereto.” Accordingly, the SEC has added an instruction to Rule 14a-21(a) to indicate that this language from Section 14A(a)(1) should be included in an issuer’s resolution for the say-on-pay vote and to provide a non-exclusive example of a resolution that would satisfy the applicable requirements.
To take into consideration the burden on smaller companies, the agency adopted a temporary exemption for smaller reporting companies (defined as those with public floats of less than $75 million). These qualifying smaller companies are exempt from conducting say-on-pay and frequency votes until annual meetings occurring on or after Jan. 21, 2013.
With respect to the regulations governing golden parachutes, companies are required to conduct a separate shareholder advisory vote to approve such compensation arrangements in connection with a merger, acquisition, consolidation, proposed sale or other disposition of all or substantially all assets. Disclosure is also required in connection with other transactions such as going-private transactions and third-party tender offers. This disclosure must be done in both narrative and tabular formats. Companies must comply with the shareholder advisory vote and disclosure requirements in proxy statements and other schedules and forms initially filed on or after April 25, 2011.
The SEC’s final rule is substantially similar to the proposed rule it issued in October 2010. The agency did take a number of comments into consideration, and incorporated them into the final rule. Some of the changes and clarifications from the proposed rule include the following:
- The final rule clarifies that a say-on-pay vote is required at least once every three calendar years.
- The rule adds to the mandatory CD&A topics whether and to what extent an issuer has considered the results of previous shareholder votes on executive compensation in determining compensation policies and decisions and, if so, how that consideration has affected its compensation policies and decisions. The final rule clarifies that this mandatory topic relates to the issuer’s consideration of the most recent say-on-pay vote.
- The proposed rule required issuers to provide a separate shareholder advisory vote “not less frequently than once every six years” in proxy statements for annual meetings to determine whether the shareholder vote on the compensation of executives “will occur every 1, 2, or 3 years.” The final rule clarifies that the frequency vote is required at least once during the six calendar years following the prior frequency vote. The final rule also added a requirement that issuers provide disclosure of the current frequency of say-on-pay votes and when the next scheduled say-on-pay vote will occur in their proxy materials.
- The final rule adds a note to section 14a-8(i)(10) that permits the exclusion of a shareholder proposal if, in the most recent shareholder vote on frequency of say-on-pay votes, a single frequency (i.e., one, two or three years) received the support of a majority of the votes cast and the issuer has adopted a policy on the frequency of say-on-pay votes that is consistent with that choice.
- To clarify that the frequency vote is advisory, the final rule adopts a new Item 24 of Schedule 14A to include language to require disclosure regarding the general effect of the shareholder advisory votes, such as whether the vote is non-binding
The rule takes effect 60 days after publication in the Federal Register.
For more information on this new rule, see Littler's ASAP: Mandatory Shareholder Approval of Executive Compensation: SEC Releases Final Rules on "Say on Pay" by Steven Friedman and Philip Berkowitz.
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