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SEC finalises rules on say-on-pay voting and disclosures
Practical Law UK Legal Update 7-504-8692 (Approx. 4 pages)
SEC finalises rules on say-on-pay voting and disclosures
by Doreen Lilienfeld, Amy B. GitlitzShearman & Sterling LLP
| Published on 28 Feb 2011 • USA (National/Federal) |
This article is part of the PLC Global Finance February 2011 e-mail update for the United States.
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On 25 January 2011, the Securities and Exchange Commission (SEC) issued final rules implementing the say-on-pay provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
On 25 January 2011, the Securities and Exchange Commission (SEC) issued final rules implementing the say-on-pay provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
The Dodd-Frank Act requires:
- A non-binding shareholder vote on executive compensation at least once every three years.
- A non-binding shareholder vote on the frequency of the say-on-pay vote.
- Disclosure of "golden parachute" arrangements in connection with specified change-in-control transactions.
- A non-binding shareholder vote on golden parachute arrangements in connection with these change-in-control transactions.
In October 2010, the SEC issued proposed rules implementing these provisions. The final rules are largely consistent with the proposed rules. The following summarises the key provisions of the final rules.
Say-on-pay vote
The say-on-pay vote covers the compensation of the issuer's named executive officers as disclosed in the annual proxy statement. The final rules did not specify the format or wording for the proposal; however, the resolution must clearly indicate that the say-on-pay vote is to approve the compensation of executives, as disclosed pursuant to Item 402 of Regulation S-K. The final rules do provide an example of a compliant resolution. In addition, issuers must:
- Disclose that they are holding a separate shareholder vote on executive compensation.
- Briefly explain the general effect of the vote.
- Disclose the current frequency of the vote and when the next frequency vote will be held. The rules clarify that the say-on-pay vote is required at least once every three “calendar” years.
Say-on-pay frequency vote
The final rules also did not specify the format or wording for the frequency vote, but do require issuers to:
- State that they are holding a separate shareholder advisory vote on the frequency of the say-on-pay vote.
- Briefly explain the general effect of the vote.
- Disclose the current frequency of the vote and when the next frequency vote will be held.
If an issuer's board of directors includes a recommendation on the frequency of the vote, the proxy statement must clearly state that shareholders are voting to approve the actual frequency and not the board of directors' recommendation. The proposed rules specify a format for the proxy card with respect to the frequency vote.
Additional say-on-pay matters
- Say-on-pay and frequency votes are only required at annual or special meetings at which directors are to be elected.
- Issuers are required to address in their subsequent proxy statement whether and, if so, how their compensation policies and decisions have taken into account the results of the most recent say-on-pay vote.
- Issuers may vote uninstructed proxies in accordance with management's recommendation on the frequency vote only if they:
- include a recommendation for the frequency vote;
- permit abstentions on the proxy card; and
- include language as to how uninstructed shares will be voted.
- Issuers must disclose their decision as to how frequently they will conduct their say-on-pay votes on an amendment to the Form 8-K, disclosing the results of the frequency vote. The amendment must be filed within 150 calendar days following the meeting, but in no event later than 60 calendar days prior to the deadline for submitting shareholder proposals for the next annual meeting.
- TARP entities and foreign private issuers are exempted from the say-on-pay and frequency votes.
- Say-on-pay and frequency votes are executive compensation matters and brokers therefore may not vote uninstructed shares on these matters.
Disclosure of golden parachutes
Proposed new Item 402(t) to Regulation S-K specifies a tabular format for the golden parachute disclosure. The aggregate dollar values of the following elements of compensation separately must be quantified in the seven columns of the table:
- Cash severance payments.
- Stock awards for which vesting is accelerated; in-the-money stock options for which vesting is accelerated; and cash payments made upon cancellation of stock and option awards.
- Pension and nonqualified deferred compensation benefit enhancements.
- Perquisites and other personal benefits (for example, health and welfare), even if de minimis.
- Tax gross-ups.
- Other compensation.
- The total amount payable in connection with the transaction.
Issuers may add additional columns or rows to the table to distinguish forms of compensation as long as the disclosure is not misleading. The disclosure is required with respect to all named executive officers in the most recent SEC filing, although issuers are permitted to add additional officers. The disclosure is required for all initial filings made on or after 25 April 2011.
The Item 402(t) table is to be accompanied by narrative and footnote disclosure describing:
- Any material conditions or obligations to receipt, including restrictive covenants.
- The specific circumstances that trigger payment.
- Whether the payments will be made in a lump sum or instalments, and the duration of the payments.
- What party will make the payments.
- Any other material factors.
This disclosure is required in proxy and consent solicitations, registration statements on Forms S-4 and F-4, going private transactions, third-party tender offers and similar transactions. If the target company is a foreign private issuer, no disclosure is required.
Vote on golden parachutes
The golden parachute vote is only applicable for proxy and consent solicitations and not the additional transactions described above. Moreover, the vote is only required when the actual transaction is up for approval, as opposed to other proposals in connection with transaction (for example; an increase in the number of shares or a reverse stock split). The vote is required for all initial filings on and after 25 April 2011.
Compensation and arrangements are not subject to the golden parachute vote if they were subject to a prior general say-on-pay vote. In order to take advantage of this exemption, an issuer must have voluntarily included disclosure regarding the change-in-control arrangements in its annual meeting proxy statement in accordance with Item 402(t). In the event that compensation arrangements that were not subject to a prior say-on-pay vote were in place at the time of a transaction, issuers would need to segregate the required disclosure into two tables meeting the requirements of Item 402(t) showing the total amounts payable under all arrangements and just those amounts payable under new arrangements subject to the current vote. The final rules clarified that changes in compensation previously approved:
- To reflect price movement in the issuer’s common stock.
- That result in a reduction in the value of the total compensation will not trigger a new advisory vote.
Subsequent changes in compensation due to the addition of a new named executive officer, additional equity grants and salary increases must be subject to the golden parachute vote.
Additional information regarding the final rules can be found here.