Tuesday, February 01, 2011

SEC Adopts Regulations Implementing Dodd-Frank Say-on-Pay Mandates

The SEC has adopted regulations implementing the provisions of the Dodd-Frank Act relating to shareholder approval of executive compensation and disclosure and shareholder approval of golden parachute compensation arrangements. New Rule 14a-21 provides for separate shareholder advisory votes to approve executive compensation, to approve the frequency of such votes on executive compensation, and to approve golden parachute compensation arrangements. The SEC rules specify that say-on-pay votes must occur at least once every three years beginning with the first annual shareholders' meeting taking place on or after Jan. 21, 2011. Companies also are required to hold a non-binding frequency vote 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 the frequency vote, a company must disclose on a Form 8-K how often it will hold the say-on-pay vote.

The Commission also adopted a temporary exemption for smaller reporting companies with a public float of less than $75 million. These smaller companies are not required to conduct say-on-pay and frequency votes until annual meetings occurring on or after Jan. 21, 2013. The Dodd-Frank Act authorizes the Commission to exempt an issuer or class of issuers, but only after considering a number of factors including whether this disproportionate burden exists. SEC Chairman Mary Schapiro said that the two-year deferral period is designed to assist the Commission in its consideration of these factors and will enable adjustment of the rule if appropriate before it applies to smaller issuers.

The SEC amended Rule 14a-4, which relates to the form of proxy that companies are required to include with their proxy materials to require that issuers present four choices to their shareholders in connection with the advisory vote on frequency. Shareholders must be provided the opportunity to cast an advisory vote on whether the shareholder vote on executive compensation will occur every 1, 2, or 3 years, or to abstain from voting on the matter. Those are the four choices shareholders will be offered. Because the shareholder vote on the frequency of voting on executive compensation is advisory, the SEC did not believe it necessary to prescribe a standard for determining which frequency has been “adopted” by the shareholders.

The rules also require additional disclosure in the Compensation Discussion and Analysis regarding whether, and if so how, companies have considered the results of the most recent say-on-pay vote. Other changes to Item 402 of Regulation S-K require additional CD&A disclosure about the company’s response to the shareholder vote on executive compensation and to provide additional disclosure about golden parachute compensation arrangements. Form 8-K was also amended to require disclosure regarding the company’s action as a result of the shareholder advisory vote on the frequency of shareholder votes on executive compensation

Item 402 of Regulation S-K was also ed to require companies to discuss in CD&A whether and, if so, how their compensation policies and decisions have taken into account the result of the most recent shareholder advisory vote on executive compensation. Although it is not mandated by Dodd-Frank, the SEC believe that including this mandatory topic in CD&A will facilitate better investor understanding of issuers’ compensation decisions. Because the shareholder advisory vote will apply to all issuers, the SEC views formation about how issuers have responded to such votes as more in the nature of a mandatory principles-based topic than an example. The manner in which individual companies may respond to such votes in determining executive compensation policies and decisions will likely vary depending upon facts and circumstances. The SEC expects that this variation will be reflected in the CD&A disclosures.

New Item 402(t) of Regulation S-K implements and supplements the statutory requirement in Section 14A(b)(1) to promulgate rules for the clear and simple disclosure of golden parachute compensation arrangements that the soliciting person has with its named executive officers (if the acquiring issuer is not the soliciting person) or that it has with the named executive officers of the acquiring issuer that relate to the merger transaction. In addition, Item 402(t), will supplement the requirements of Section 14A(b)(1) by requiring disclosure of golden parachute compensation arrangements between the acquiring company and the named executive officers of the target company if the target company is the soliciting person.

The golden parachute disclosure also is required in connection with other transactions, including going-private transactions and third-party tender offers, so that the information is available for shareholders no matter the structure of the transaction.

Because a company should be permitted to exclude subsequent shareholder proposals that seek a vote on the same matters as the shareholder advisory votes on say-on-pay and frequency, the SEC added a note to Rule 14a-8(i)(10) to permit the exclusion of a shareholder proposal that would provide a say-on-pay vote, seeks future say-on-pay votes, or relates to the frequency of say-on-pay votes. Specifically, the note will permit exclusion of such 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. For purposes of this analysis, an abstention would not count as a vote cast.

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