Washington D.C. Employment Law Update : Washington D.C. Employment Lawyer & Attorney : Littler Mendelson Law Firm : Virginia, Tyson's Corner

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.

Photo credit: MBPHOTO, Inc.
 

Say-on-Pay

The regulations would require public companies subject to the federal proxy rules to provide their shareholders with a non-binding vote on executive compensation and a separate non-binding vote on how often such votes should occur. The Act requires these votes to take place at least once every three years beginning with the first annual shareholders’ meeting conducted on or after January 21, 2011. Shareholders would be permitted to vote at least once every six years starting with the first shareholder meeting held on or after January 21, 2011 to determine how often these say-on-pay votes should take place. The Act requires separate resolutions subject to shareholder vote to approve executive compensation and to approve the frequency of say-on-pay votes for proxy statements relating to an issuer’s annual or other meeting of the shareholders occurring on or after January 21, 2011, whether or not the SEC has adopted final rules to implement these provisions by that date.

Under the SEC proposed rules, companies must provide disclosure of the say-on-pay and frequency votes in the annual proxy statement and explain the non-binding nature of the votes. The proposal would amend Form 10-K and Form 10-Q to require additional disclosure regarding the company’s action as a result of the shareholder vote on the frequency of shareholder votes on executive compensation. The proposed rule does not require companies to use any specific information or form of resolution to be voted on by the shareholders. However, the SEC is soliciting comments on whether the SEC should designate the specific language to be used and/or require issuers to frame the shareholder vote to approve executive compensation in the form of a resolution.

The proposed regulations require a company to explain in the CD&A whether and how it has applied the results of previous say-on-pay votes. The SEC is soliciting comments on whether the proposed requirement for CD&A discussion of the issuer’s application of previous shareholder advisory votes be revised to relate only to application of the most recent shareholder advisory votes.

Golden Parachutes

Shareholders would be entitled to an advisory vote on compensation arrangements and understandings in connection with merger transactions, commonly referred to as “golden parachutes.” Moreover, under the proposed regulations, companies would be required to provide additional information to shareholders regarding such arrangements in their merger proxy statements. Because the Act requires such disclosure “in accordance with regulations to be promulgated by the Commission,” the golden parachute disclosure and vote would not be required until the SEC has issued final rules on this provision.

Disclosure of any golden parachute arrangements would be required of all agreements and understandings that the acquiring and target companies have with the named executive of both entities, and in connection with going-private transactions and third-party tender offers. The proposed rule would require disclosure of named executive officers’ golden parachute arrangements in both tabular and narrative formats. Issuers must describe any material conditions or obligations applicable to the receipt of payment, including but not limited to non-compete, non-solicitation, non-disparagement or confidentiality agreements, their duration, and provisions regarding waiver or breach. The SEC proposal also requires issuers to provide a description of the specific circumstances that would trigger payment of the golden parachute, whether the payments would or could be lump sum, or annual, and their duration, and by whom the payments would be provided, and any material factors regarding each agreement.

Institutional Investment Manager Reporting

All institutional investment managers that manage certain equity securities of at least $100 million in fair market value must report to the SEC their votes on executive compensation and golden parachutes at least once a year, unless their votes are already required to be reported publicly. As discussed in an SEC press release, such managers must identify and describe the securities and executive compensation matters voted on, “disclose the number of shares over which the manager held voting power and the number of shares voted, and indicate how the manager voted.” These reports must be disclosed by August 31 of each year for the prior 12-month period ending June 30.

Smaller Companies

The proposed rule does not exempt smaller reporting companies from the say-on-pay vote, frequency of say-on-pay votes, and golden parachute disclosure and vote. According to the preamble to the proposed rule, the SEC “believe[s] investors have the same interest in voting on the compensation of smaller reporting companies and in clear and simple disclosure of golden parachute compensation in connection with mergers and similar transactions as they have for other issuers.” The SEC is also soliciting comments on whether it would be appropriate to exempt smaller reporting companies from the shareholder vote to approve executive compensation.

Comments on these proposed regulations must be received on or before November 18, 2010, and contain the file number S7-30-10 for comments on the regulations governing the reporting of proxy votes on executive compensation, and file number S7-31-10 for comments on the regulations governing the shareholder approval of executive compensation and golden parachutes. Comments may be made electronically using the SEC’s Internet comment form; via email: rule-comments@sec.gov (include the appropriate file number on the subject line); or through the federal eRulemaking portal: http://www.regulations.gov. Written comments should be sent in triplicate to: Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.

For more information on the executive compensation provisions contained in the Dodd-Frank Act, see Littler's ASAP: Executive Compensation and the Wall Street Reform and Consumer Protection Act by Nick Linn, Ilyse Schuman, and Ellen Sueda.

Photo credit: DigitalZombie

Speaking on behalf of the Society of Corporate Secretaries and Governance Professionals, Darla Stuckey (pdf) generally agreed that the changes imposed by the Dodd-Frank Act would help companies manage and oversee risk, but laid out a number of concerns she had with certain sections of the Act. Stuckey’s concerns and suggestions include the following:

• The “say-on-pay” provision of the Act, Section 951, requires companies to provide their shareholders with a non-binding vote on the compensation of their executives. The Act also mandates that employers provide their shareholders with a non-binding vote on how often the say-on-pay vote should occur. Such votes are required for all shareholder meetings held after January 21, 2011. The Securities Exchange Commission (SEC) intends to issue rules implementing these provisions between January and March or 2011. Stuckey testified that the SEC should instead issue its proposed rules in October of 2010 so that the final rules can be implemented before the 2011 proxy season. In addition, she argued that when the say-on-pay votes should be held should be influenced by the company’s board of directors’ recommendation, as members of the board “are in the best position to recommend the frequency of the vote, to ensure that the timing of the vote is aligned with the compensation program and the duration of the incentive structure.”
• Section 953(a) requires that companies disclose the relationship between executive compensation paid and financial performance. Stuckey urged the SEC to issue rules “with enough flexibility to allow compensation committees to explain their decisions, to explain when compensation is ‘actually paid,’ over which period performance is measured, and how performance is measured.”
• Section 953(b) mandates that companies disclose the median of the annual total compensation of all employees (other than the CEO) of the company, the compensation of the CEO, and a comparative ratio. The witness testified that the SEC should clarify that the calculation should take into consideration only U.S.-based, full-time employees, and that “total compensation” should exclude pension accrual.
• Section 954 requires certain companies to develop policies to recapture (“clawback”) excessive incentive compensation that should not have been awarded in light of the company’s financial situation. The witness claimed that company boards should have the discretion to determine whether to “claw back” and how to recoup funds.
• Finally, with respect to the whistleblower provisions contained in Section 922 of the Act that create a financial incentive program to encourage individuals to report SEC violations, Stuckey expressed concern that these provisions “will so significantly incentivize and encourage employees to report concerns of potentially improper conduct directly to the SEC that employees will bypass the extensive compliance programs that companies already have in place, and thus undermine their effectiveness. The unintended consequence of the Act may be that companies will have a more difficult time detecting and investigating misconduct and taking prompt corrective action when violations are found.”

A complete list of panelists and copies of their written testimony, in addition to a link to the hearing’s webcast, can be found here.

For more information on the Dodd-Frank Act’s executive compensation provisions, see Littler’s ASAP: Executive Compensation and the Wall Street Reform and Consumer Protection Act by Nick Linn, Ilyse Schuman, and Ellen Sueda.

Photo credit:  MBPHOTO, Inc.

Specifically, section 951 of the bill provides that any proxy, consent, or authorization for an annual or other meeting of shareholders must include a separate resolution subject to a shareholder advisory vote to approve the compensation of the organization’s executives. The result of this vote would not be binding on the board of directors or management. According to a section-by-section summary of the bill, (pdf) this legislation “would not preclude an issuer from seeking more specific shareholder opinion through separate votes on cash compensation, golden parachute policy, severance or other aspects of compensation.”

Section 952 of the legislation requires members of the compensation committees of the company’s board of directors be a member of the board, and be independent so as to avoid conflicts of interest. Specifically, this section would amend the Securities Exchange Act of 1934 to prohibit the listing of any company’s stock if that company does not comply with independent compensation committee standards. In determining whether a director is independent, the national securities exchanges are directed to consider the source of compensation of a member of the board of directors, including any consulting, advisory, or other compensatory fee paid by the company to such member of the board of directors; and whether a member of the board of directors is affiliated with the company, a subsidiary of the company, or an affiliate of a subsidiary of the company. Additionally, any compensation counsel or adviser is required to be independent. The company’s proxy or consent materials must disclose whether the compensation committee has relied on the advice of a compensation consultant and whether the committee has raised any conflict of interest.

Another provision of the financial reform bill would require annual proxy statement disclosure of any compensation required to be disclosed under the Securities and Exchange Commission (SEC) executive compensation forms and any information that indicates a relationship between the executive compensation and the financial performance of the company, “taking into account the change in the value of the shares, dividends and distributions.” According to the bill summary, “[i]t has become apparent that a significant concern of shareholders is the relationship between executive pay and the company‘s financial performance for the benefit of shareholders. Shareholders are keenly interested when executive compensation is increasing sharply at the same time as financial performance is falling.”

Section 954 requires public companies to have a policy in place for the purposes of recovering money that was erroneously paid in incentive compensation to executives as a result of material noncompliance with accounting rules.

On Wednesday, the Senate by unanimous consent agreed to proceed with consideration of the financial reform bill after three failed cloture votes. Debate on the measure began on Thursday.

Photo credit:  MBPHOTO, INC.

According to a summary, (pdf) this legislation would:

• Give shareholders a say on pay with the right to a non-binding vote on executive pay.
• Give the Securities and Exchange Commission (SEC) authority to grant shareholders proxy access to nominate directors. It would also require directors to win by a majority vote in uncontested elections.
• Require that compensation committees include only independent directors and have the authority to hire compensation consultants in order to be listed on an exchange.
• Require that public companies set policies to take back executive compensation if it was based on inaccurate financial statements that do not comply with accounting standards.
• Direct the SEC to clarify disclosures relating to compensation, including requiring companies to provide charts that compare their executive compensation with stock performance over a five-year period.

The bill would also give the Federal Reserve the power to regulate the largest financial institutions including insurance companies and investment and commercial banks. The bill also includes amendments to the Sarbanes-Oxley Act whistleblower-protection provision. Any movement on financial overhaul, however, will likely come after this week’s push for health care reform.
 

Photo credit:  MBPHOTO, INC.

With regard to shareholder approval, the shareholders’ annual vote would be non-binding on the corporation or board of directors, and “shall not be construed as overruling a decision by such board, nor to create or imply any additional fiduciary duty by such board.”

As noted above, in addition to mandating a shareholder approval vote, the bill, known colloquially as the “Say-on-Pay” bill, directs appropriate federal agencies to establish regulations requiring covered financial institutions to disclose the structures of their incentive-based compensation arrangements “sufficient to determine whether the compensation structure--

(1) is aligned with sound risk management;

(2) is structured to account for the time horizon of risks; and

(3) meets such other criteria as the appropriate federal regulators jointly may determine to be appropriate to reduce unreasonable incentives for officers and employees to take undue risks that--

(A) could threaten the safety and soundness of covered financial institutions; or

(B) could have serious adverse effects on economic conditions or financial stability.”

After the above information on compensation is provided, federal regulators would draft regulations prohibiting the regulated financial institutions from awarding their executives with these compensation arrangements or incentive-based payments that are deemed to encourage such risky behavior.

The financial institutions covered by the preceding provisions include: depository institutions or depository institution holding companies, broker-dealers, credit unions, investment advisors, and any other financial institution that the appropriate federal regulators determine should included.

The entire House of Representatives is expected to consider the bill as early as Friday.