Yesterday, in an open meeting, the Securities and Exchange Commission voted by a margin 3-2 to adopt final rules and amendments to implement Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which addresses shareholder advisory votes on executive compensation (“Say on Pay”), the frequency of shareholder advisory votes on executive compensation (“Say on Frequency”) and shareholder advisory votes on golden parachute compensation (“Say on Golden Parachute”). Chairman Schapiro and Commissioners Walter and Aguilar voted in favor of adopting the rules and amendments, and Commissioners Casey and Paredes voted against adopting them.
The Effective Date
The new rules and amendments take effect on April 4, 2011, however, the Dodd-Frank Act requires that any company holding a shareholder meeting on or after January 21, 2011 include in their proxy solicitation materials separate Say on Pay and Say on Frequency votes.
One notable departure from the rules and amendments as initially proposed is the temporary exemption for smaller reporting companies from Say on Pay and Say on Frequency votes until their first annual or other shareholder meeting occurring on or after January 21, 2013.
The following is a summary of the most widely applicable provisions of the new rules and amendments:
Say on Pay Votes
New Exchange Act Rule 14a-21(a) requires that a company hold a separate Say on Pay vote in its first annual or other shareholder meeting occurring on or after January 21, 2011 (or, in the case of a smaller reporting company, on or after January 21, 2013) and, thereafter, at least once every three calendar years. A Say on Pay vote is only required with respect to an annual or other shareholder meeting at which proxies will be solicited for the election of directors.
The Say on Pay vote must relate to all executive compensation disclosed pursuant to Item 402 of Regulation S-K, however, compensation policies and practices related to risk management and risk-taking incentives, as required to be disclosed by Item 402, are only subject to the Say on Pay vote to the extent they are a material part of a company’s compensation policies or decisions for named executive officers, as opposed to compensation policies or decisions for all employees generally.
In the instructions to new Rule 14a-21(a) the Commission gives the following example of a Say on Pay resolution that would satisfy the requirements of Exchange Act Section 14A(a)(1) and Rule 14a-21(a):
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.
This is a non-exclusive example (and in the case of a smaller reporting company would have to be revised to reflect applicable scaled disclosure requirements, rather than a Compensation Disclosure and Analysis (“CD&A”)). Rule 14a-21(a) does not require a company to use any specific language or form of shareholder resolution.
Also of note, any disclosure of director compensation as required by Item 402 of Regulation S-K is not subject to the Say on Pay vote.
In the adopting release, the Commission notes that Rule 14a-21 does not change the scaled disclosure requirements applicable to smaller reporting companies, but that such companies may wish to include additional disclosure in connection with a Say on Pay vote to facilitate shareholder understanding of their compensation arrangements.
The Commission notes that, while not required, the Rule also does not preclude a company from soliciting shareholder approval on specific Say on Pay votes, such as separate votes on cash and other components of compensation.
Say on Frequency Votes
New Exchange Act Rule 14a-21(b) requires that a company hold a separate Say on Frequency vote for the first annual or other shareholder meeting occurring on or after January 21, 2011 (or, in the case of a smaller reporting company, on or after January 21, 2013) and, thereafter, not less than once every six calendar years, to determine whether a Say on Pay vote should be held annually, biennially or triennially. A Say on Frequency vote is only required with respect to an annual or other shareholder meeting at which proxies will be solicited for the election of directors.
Amended Exchange Act Rule 14a-4 requires that proxy cards reflect Say on Frequency choices of 1, 2 or 3 years, or abstain. A company can vote uninstructed proxies in accordance with management’s recommendation if it follows the existing Rule 14a-4 requirements to include a recommendation for Say on Frequency votes in its proxy materials, permits abstentions and includes language regarding how uninstructed shares will be voted in bold typeface on its proxy cards.
Say on Golden Parachute Votes
New Exchange Act Rule 14a-21(c) requires that a company hold a separate Say on Golden Parachute vote in connection with the solicitation of proxies for approval of an acquisition, merger, consolidation or proposed sale or other disposition of all or substantially all of the company’s assets. Rule 14a-21(c) also offers an exemption from the Say on Golden Parachute vote if a company’s golden parachute compensation has already been disclosed in connection with its annual executive compensation disclosures and has been subject to a prior Say on Pay vote, but only to the extent that the golden parachute compensation arrangements do not change after the Say on Pay vote (other than changes that reflect price movements in a company’s securities or that result in an overall reduction in the value of the total golden parachute compensation).
New Proxy Disclosure Requirements
For Say on Pay and Say on Frequency Votes
New Item 24 has been added to Schedule 14A to require that a company disclose in its proxy solicitation materials that it is providing separate Say on Pay and Say on Frequency votes and explain the general effect of the votes, such as whether they are binding, the current frequency of the Say on Pay vote as determined by the board following the most recent Say on Frequency vote and when the next scheduled Say on Pay vote will occur.
Amendments to Item 402(b) of Regulation S-K require that a company address in its CD&A whether and, if so, how, its compensation policies and decisions have taken into account the results of the most recent Say on Pay vote. A smaller reporting company, which is subject to scaled disclosure requirements under Item 402, rather a CD&A, does not have to make a similar disclosure.
Amendments to Exchange Act Rule 14a-6 add Say on Pay and Say on Frequency votes to the list of items that do not trigger the need to file preliminary proxy materials with the Commission.
For Say on Golden Parachute Votes
New Item 402(t) of Regulation S-K requires that a company disclose golden parachute compensation arrangements, whether written or unwritten, in both tabular and narrative formats. The new golden parachute compensation table requires quantitative disclosure of individual elements of compensation as well as footnote disclosure regarding amounts of compensation attributable to “single-trigger” and “double-trigger” arrangements.
An amendment to Exchange Act Rule 14a-8 permits a company to exclude shareholder proposals that would provide for or seek future Say on Pay or Say on Frequency votes if, in the company’s most recent Say on Frequency vote one of the choices (an annual, biennial or triennial frequency) received a majority vote and the company has adopted a policy that is consistent with that choice. Abstentions would not count in the determination of whether a particular Say on Frequency choice has received a majority of votes cast. If, however, no Say on Frequency choice receives a majority of votes cast, then even if a company adopts a policy that is consistent with the choice having received a plurality of votes, it may not be able to exclude shareholder proposals that relate to Say on Pay and Say on Frequency votes.
Disclosing the Results
Amendments to Item 5.07 of Form 8-K require that a company report the results of its Say on Pay and Say on Frequency vote within four business days of the date on which its shareholder meeting ended. New subsection (d) to Item 5.07 also requires that a company file an amended Form 8-K within 150 days of the date on which its shareholder meeting ended (but in no event later than 60 days before the deadline for submission of shareholder proposals for its next annual meeting) to disclose its decision regarding how frequently to conduct future Say on Pay votes. A company that fails to file a timely report under Section 5.07 will lose its Form S-3 eligibility.
Smaller Reporting Companies
The new rules temporarily exempt smaller reporting companies from holding Say on Pay and Say on Frequency votes until their first annual or other shareholder meeting occurring on or after January 21, 2013. This temporary exemption does not, however, extend to Say on Golden Parachute votes.
Newly Public Companies
A newly public company is required to include separate resolutions for Say on Pay and Say on Frequency votes in the proxy statement for its first annual shareholder meeting after its initial public offering.