Proxy Materials

SEC’s New C&DI: How to Describe A Say on Pay Proposal on Your Proxy Card

by Vanessa Schoenthaler on February 13, 2012

The Division of Corporation Finance issued new a Compliance and Disclosure Interpretation (C&DI) today (Exchange Act Rule Question 169.07), addressing how shareholder advisory votes on executive compensation should be presented on proxy cards and voting instruction forms:

Question: On its proxy card and voting instruction form, how should a company describe the advisory vote to approve executive compensation that is required by Exchange Act Rule 14a-21?

Answer: The following are examples of advisory vote descriptions that would be consistent with Rule 14a-21’s requirement for shareholders to be given an advisory vote to approve the compensation paid to a company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K.

  • To approve the company’s executive compensation
  • Advisory approval of the company’s executive compensation
  • Advisory resolution to approve executive compensation
  • Advisory vote to approve named executive officer compensation

The following is an example of an advisory vote description that would not be consistent with Rule 14a-21 because it is not clear from the description as to what shareholders are being asked to vote on. Shareholders could interpret this example as asking them to vote on whether or not the company should hold an advisory vote on executive compensation, rather than asking shareholders to actually approve, on an advisory basis, the compensation paid to the company’s named executive officers.

  • To hold an advisory vote on executive compensation

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An Update on Shareholder Advisory Votes in Graphs

by Vanessa Schoenthaler on February 24, 2011

As of February 22, 2011 250 non-TARP participating companies have filed preliminary or definitive proxy materials containing shareholder advisory votes on executive compensation (Say on Pay) and shareholder advisory votes on the frequency of Say on Pay votes (Say on Frequency).  The following is a brief update on the initial filings and results:

Shareholder Advisory Vote on Executive CompensationShareholder Advisory Vote on the Frequency of Executive CompensationShareholder Advisory Vote on the Frequency of Executive Compensation

Also as of February 22, 2011, 87 companies have disclosed the results of their initial Say on Pay vote and 88 have disclosed the results of their initial Say on Frequency vote (one smaller reporting company voluntarily complied with the Say on Frequency vote, but not the Say on Pay vote, accounting for the difference in the number of reported results).  Of the companies that have disclosed results, 86% have considered their Say on Pay vote successful if approved by a majority of shareholders and 68% have considered the Say on Frequency choice that has received a plurality of votes to be the Say on Frequency choice of their shareholders.

Shareholder Advisory Vote on Executive CompensationShareholder Advisory Vote on Executive Compensation

Of the companies have disclosed the results of their initial Say on Frequency vote 68% have reported that their shareholders have voted to approve either the same Say on Frequency choice as recommended by their board of directors or, where their board of directors has not made a recommendation, an annual, biennial or triennial choice. The remaining 32% have reported that their shareholders have voted to approve an annual Say on Frequency choice as opposed to the biennial or triennial choice recommended by their board of directors.

Shareholder Advisory Vote on Executive Compensation

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The Anatomy of a Shareholder Vote Calculation

by Vanessa Schoenthaler on February 11, 2011

Shareholder Meeting - Tabulating and Calculating Votes

(Note: I’ve since updated this post here)

Counting up the votes from a shareholder meeting is not as easy as one might think.

First off, there are four different sources that dictate how the votes are tabulated: the federal securities laws, the corporate laws of the state in which a company is organized, the rules of the national securities exchanges and a company’s charter documents.

On top of that there are five different categories of votes to consider: votes for and against a proposal, which are self-explanatory, broker non-votes, abstentions and withheld votes (more on these latter three in a second).

Then there’s a quorum requirement to be met, and, finally, the approval threshold for each proposal has to be considered, which can range from a plurality of the votes cast to a super majority of the votes present and entitled to vote, and anything in between.

Broker Non-Votes

A broker non-vote occurs when a broker has not received voting instructions from the beneficial owner of shares held in street name and the broker does not have, or declines to exercise, discretionary authority to vote the shares. Brokers only have discretionary authority to vote uninstructed shares on routine matters, such as the ratification of a company’s auditing firm.

Under the laws of most states broker non-votes are considered present at a meeting, and, as such, are included in the calculation of whether a quorum exists, however, they are not considered entitled to vote, and so have no effect on the outcome of a proposal.

The Dodd-Frank Changes to Broker Non-Votes

Following enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, national securities exchanges were required to adopt rules prohibiting members from voting uninstructed shares on matters related to the election of directors, executive compensation and other significant matters as determined by the rules of the Securities and Exchange Commission.

In September 2010, the Commission approved amendments to New York Stock Exchange Rule 452, and corresponding Section 402.08 of the Listed Company Manual, and Nasdaq Stock Market Rule 2251, to implement the Dodd-Frank Act’s requirements. At present, the Commission anticipates proposing rules to define “other significant matters” sometime between April and July of 2011.

Among other things, the NYSE and Nasdaq Dodd-Frank-imposed rule changes have added uncontested director elections (formerly considered a routine matter), shareholder advisory votes on executive compensation and shareholder advisory votes on the frequency of advisory votes on executive compensation to the category of non-routine matters.

It is also worth noting that these rule changes relate to NYSE and Nasdaq member firms, not to the companies whose securities are listed on the NYSE or Nasdaq markets, so the changes effect all companies, even those with securities quoted in over the counter markets like the OTC Bulletin Board and the reporting tiers of the OTC Pink Markets.

Abstentions

An abstention occurs when a shareholder affirmatively chooses not to vote on a proposal.

Under the laws of most states abstentions are considered present and entitled to vote at a meeting, and, as such, are included in the calculation of whether a quorum exists. However, abstentions are not generally considered votes cast, meaning that where a proposal requires the approval of “a majority of the votes cast” abstentions will have no effect, but, where a proposal requires the approval of “a majority of the votes present” or “a majority of the votes present and entitled to vote” abstentions will have the same effect as votes cast against the proposal.

Withheld Votes

A withheld vote is a category of vote that has come about as a result of the Commission’s proxy rules.

Securities Exchange Act Rule 14a-4 requires that a proxy for the election of directors include an option for shareholders to withhold authority to vote for a director nominee.  The rule does not, however, require that a proxy include an option for shareholders to vote against a director nominee, unless the laws of the state in which the company is organized give effect to such a vote (most don’t).

Under the laws of most states directors are elected by a plurality vote, meaning that the director nominee receiving the highest number of votes, regardless of the number of votes withheld, is elected (i.e., a  director nominee can receive 1 for vote, while 999 votes are withheld, and still be elected).  As a consequence, over the last half dozen or so years, companies have started to amend their charter documents and implement governance policies to give effect to withheld votes.  For example, one approach has been to require a director to tender their resignation, which may or may not be accepted, if they receive a greater number of withheld votes than for votes.  Another approach has been to simply adopt a majority voting standard for the election of directors.

Tallying it All Up

Has the quorum requirement been satisfied?

Before any business can be transacted at a shareholder meeting there must be a quorum present.

By default most states define a quorum as the presence of a majority of the shares entitled to vote in person or by proxy.  A company can modify the default requirement in its charter documents, subject to certain limitations imposed by state law (e.g., in Delaware a quorum cannot be less than one-third of the shares entitled to vote) and by the rules of the exchange on which the company’s securities are listed (e.g., Nasdaq requires a quorum of at least 33.33% of a company’s outstanding common voting stock; NYSE generally requires a quorum of not less than a majority of a company’s outstanding shares).Quorum Requirement - Shareholder MeetingOnce it is established that a quorum exists, the approval thresholds applicable to each proposal have to be considered and the related votes tabulated and counted. Let’s look at this in the context of the shareholder advisory vote on executive compensation and the shareholder advisory vote on the frequency of advisory votes on executive compensation.  Remember these are non-routine matters for which brokers do not have discretionary voting authority, so shares represented by broker non-votes count as present for purposes of establishing a quorum but not as shares entitled to vote on the proposals.

What approval threshold is applicable to the shareholder advisory vote on executive compensation?

There is no approval threshold required for the shareholder advisory vote on executive compensation.  As of this writing, of the companies that have reported results for their advisory votes on executive compensation, most have considered the proposal approved if it received the affirmative vote of a majority of the shares present and entitled to vote, with abstentions having the same effect as a vote cast against the proposal, though in three instances companies have specified that both abstentions and broker non-votes have the same effect as votes cast against the proposal.

Shareholder Meeting Vote

Most of the remaining companies have considered the proposal approved if it received the affirmative vote of a majority of the votes cast, with abstentions having no effect.Shareholder Meeting VoteIn a few cases companies have not disclosed an approval threshold at all, though in each a majority of the shares present and entitled to vote did approve the proposal.

What approval threshold is applicable to the shareholder advisory vote on the frequency of advisory votes on executive compensation?

There is no approval threshold required for the shareholder advisory vote on the frequency of advisory votes on executive compensation. However, if a company wishes to exclude certain shareholder proposals that seek advisory votes on executive compensation or that relate to the frequency of advisory votes on executive compensation, then its shareholders must approve a single frequency choice by a majority of the votes cast, with abstentions having no effect, and the company must adopt a policy that is consistent with that shareholder choice.

As of this writing, of the companies that have reported results for their advisory votes on the frequency of votes on executive compensation, most have considered the frequency receiving a plurality of the votes cast as the frequency approved by shareholders.  Though, there have been a handful of companies that have considered the frequency receiving a majority of the votes cast as the frequency approved by shareholders. If companies in this latter group then adopt policies that are consistent with their shareholders’ vote, they may exclude future shareholder proposals related to advisory votes on executive compensation or the frequency of advisory votes on executive compensation.

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Shareholder Advisory Votes on Executive Compensation: What’s in the Final Rules

by Vanessa Schoenthaler on January 26, 2011

Say on Pay, Say on Frequency and Say on Golden ParachutesYesterday, 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.

Supplemental Disclosure

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.

Golden Parachute Compensation TableSay on Golden Parachute Compensation

Exclusion of Say on Pay and Say on Frequency Shareholder Proposals

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. 

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The SEC Proposes New Rules for Shareholder Advisory Votes on Say-on-Pay and Golden Parachutes

by Vanessa Schoenthaler on October 19, 2010

Yesterday the Securities and Exchange Commission proposed a new set of rule amendments designed to implement the say-on-pay and golden parachutes provisions of Section 951 of the Dodd-Frank Act.

The proposed rules would require companies subject to the Commission’s proxy rules (which includes U.S. issuers, non-U.S. issuers that do not qualify as foreign private issuers and foreign private issuers that voluntarily subject themselves to the Commission’s proxy rules) to provide their shareholders:

  • at the first annual or other shareholder meeting taking place on or after January 21, 2011, and at least once every three years thereafter, with a separate advisory vote on the compensation of those executive officers for whom compensation disclosure is required in the company’s proxy solicitation materials;
  • at the first annual or other shareholder meeting taking place on or after January 21, 2011, and at least once every six years thereafter, with a separate advisory vote on the frequency of the advisory vote on executive compensation, to determine whether it should take place every year, every other year or every three years; and
  • in any proxy or consent solicitation materials to approve a  merger, acquisition or similar transaction, with a separate advisory vote on golden parachute compensation for executive officers, with disclosure in both tabular and narrative formats.

Importantly: the initial shareholder advisory vote on executive compensation and the initial shareholder advisory vote on the frequency of the vote on executive compensation must be included in a company’s proxy statement for the first annual or other shareholder meeting taking place on or after January 21, 2011, regardless of the Commission’s adoption of the proposed implementing rules.

Therefore any proxy solicitation materials, whether preliminary or definitive, for a shareholder meeting taking place on or after January 21, 2011, even if filed prior to that date, must include separate resolutions for shareholders to vote on executive compensation and the frequency of future executive compensation votes.

This is not the case for the advisory vote on golden parachutes; shareholder resolutions for shareholders to vote on golden parachutes are not required to be included in a merger or acquisition proxy statement until after the Commission adopts implementing rules.

The Commission made clear its view that a proxy card for any shareholder advisory vote on the frequency of executive compensation votes should only provide a shareholder with four choices: (1) that the shareholder advisory vote on executive compensation should occur every year; (2) that the shareholder advisory vote on executive compensation should occur every two years; (3) that the shareholder advisory vote on executive compensation should occur every three years; or (4) that the shareholder is abstaining from voting on the matter.

The Commission also pointed out that under the amended exchange rules, for issuers listed on a national securities exchange, broker discretionary voting of uninstructed shares would not be permitted for shareholder advisory votes on executive compensation and shareholder advisory votes on the frequency of votes on executive compensation

On the first read-through, other notable proposals in the Commission’s release include recommendations that:

  • shareholder advisory votes on executive compensation and shareholder advisory votes on the frequency of votes on executive compensation not trigger the required filing of a preliminary proxy statement;
  • smaller reporting companies not be exempt from the proposed shareholder advisory votes or additional disclosure requirements (but without altering existing scaled disclosure requirements related to compensation disclosure) ; and
  • registration statements containing disclosure relating to mergers and similar transactions, going-private transactions and tender-offers include both tabular and narrative disclosure regarding golden parachute compensation for executive officers.

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The New Proxy Access Rules Are On Hold … For Now

by Vanessa Schoenthaler on October 4, 2010

Last week the U.S. Chamber of Commerce and the Business Roundtable announced the filing of a joint lawsuit challenging the Securities and Exchange Commission’s adoption of proxy access Rule 14a-11. The groups also filed a motion requesting that the Commission stay the effect of the Rule pending resolution of the suit.

Today the Commission did just that; staying not only the effect of Rule 14a-11, but also of the amendments to Rule 14a-8. The groups’ motion didn’t actually request a stay of the effect of the amendments to Rule 14a-8, but the Commission reasoned that the amendments, “designed to complement” Rule 14a-11, were so “intertwined” that allowing them to become effective while staying Rule 14a-11 could potentially be confusing.

At this point the Commission and the groups will file a joint motion with the U.S. Court of Appeals for the District of Columbia Circuit requesting an expedited review of the suit.  However, as reported by Bloomberg, the Commission doesn’t expect the suit to be resolved until “late spring”.  So, even if the Commission prevails, it now looks like the new proxy access rules will not affect most issuers before the 2012 proxy season.

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The Battle for Proxy Access Isn’t Over Yet

by Vanessa Schoenthaler on September 30, 2010

Yesterday the U.S. Chamber of Commerce and the Business Roundtable announced the filing of a joint lawsuit challenging the Securities and Exchange Commission’s adoption of proxy access Rule 14a-11 as, among other things, arbitrary and capricious and in excess of the Commission’s authority.  In a joint press release, members of the Chamber of Commerce assert that:

The SEC’s proxy access rule empowers unions and other special interests at the expense of the vast majority of retail shareholders … [and] will give small groups of special interest activist investors significant leverage over a business’ activities. …  The SEC failed to engage in evidence-based rulemaking, and we intend to hold the SEC to its statutory obligation to conduct a thorough cost-benefit analysis.

The groups also filed a motion requesting that the Commission stay Rule 14a-11, including its November 15, 2010 effective date, pending resolution of the suit.  The Commission has until October 5, 2010 to respond, but in a preliminary statement, as reported by Bloomberg News, a spokesman for the Commission stated that:

We believe that the commission’s proxy-access rules are both lawful and in the best interests of the public and shareholders. The commission will, of course, carefully consider and timely respond to the motion for a stay.

So, unless and until the Commission or the Court of Appeals stays the effective date, if you mailed your proxy materials out on or after March 15, 2010 you should continue to anticipate Rule 14a-11 affecting your 2011 proxy season.  Also of note, the motion is not seeking a stay of the amendments to Rule 14a-8 so, regardless of its outcome, those amendments will be effective on November 15, 2010.

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The SEC’s New Proxy Access Rule is Set to Take Effect

by Vanessa Schoenthaler on September 16, 2010

The Securities and Exchange Commission’s new proxy access rule was published in the Federal Register today.  The rule is effective on November 15, 2010 for all companies except smaller reporting companies, which have a three-year deferral.  That means if you mailed your proxy materials out on or before March 14, 2010, the 2011 window for shareholder submissions will have already lapsed by the November 15, 2010 effective date (with November 14, 2010 being the 120th calendar day before the one year anniversary of a March 14, 2010 mailing date) and the rule will not effect you until the 2012 proxy season.  If you mailed your proxy materials out on or after March 15, 2010 the rule will affect your 2011 proxy season (although for companies that mailed their proxy materials out between March 15, 2010 and April 12, 2010, the 2011 window for shareholder submissions will vary in length between 1 and 29 days, rather than the full 30 days prescribed in the new rule).

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SEC Adopts New Proxy Access Rule

by Vanessa Schoenthaler on August 26, 2010

Yesterday the Securities and Exchange Commission adopted Exchange Act Rule 14a-11, a new proxy access rule requiring public companies to include the director nominees of certain shareholders in their proxy materials.

The new rule is effective for all companies except smaller reporting companies 60 days after its publication in the federal register.  The rule is effective for smaller reporting companies after a three year deferral period.  The rule does not effect foreign private issuers, which are exempt from the Exchange Act proxy rules altogether.

Under the new rule a company is required to include a shareholder’s director nominee in its proxy materials if the nominating shareholder:

  • owns a minimum of 3% of the total voting power of the company’s securities (groups of shareholders can aggregate their shares to meet this minimum threshold);
  • has held the minimum number of shares for at least three years;
  • certifies that they will continue to hold the minimum number of shares through the date of the shareholder meeting; and
  • certifies that they are not holding the shares for purposes of effecting a change in control or to gain a number of board seats in excess of the maximum permitted under the rule.

A nominating shareholder must provide notice to the Commission and the company of their director nominees between 150 and 120 days before the date on which the company’s proxy materials were mailed the year before.  To be eligible, a shareholder nominee must meet the requirements of applicable federal, state and foreign laws and the national securities exchange or association rules.

The new rule also limits the number of shareholder nominees to the greater of one nominee or up to 25% of the total number of board seats.  If more shareholder nominees are put forth than seats are available, only the nominees of the shareholder or shareholder group with the largest percentage of qualifying voting power must be included in the company’s proxy materials.

The Commission also amended Exchange Act Rule 14a-8(i)(8) to allow shareholders to propose amendments to a company’s governing documents that would establish procedures for the inclusion of shareholder director nominees in the company’s proxy materials.

The Commission’s full adopting release (all 451 pages) is available here.

of their intent to have a director nominee included in a company’s annual proxy materials between 150 and 120 days before the date on which the prior year’s proxy materials were mailed

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Dodd-Frank Act Changes to Executive Compensation and Corporate Governance

by Vanessa Schoenthaler on August 9, 2010

Beyond the straight-forward self-executing provisions of the Dodd-Frank Act, like the amendments to the definition of accredited investor or the exemption of non-accelerated filers from SOX Section 404(b), there are several other provisions effecting non-financial institutions that will require additional regulatory rulemaking. Included among these are the following sections effecting executive compensation and corporate governance:

Enhanced Voting Requirements

Executive Compensation (Sec. 951)

Beginning with the first annual or other shareholder meeting taking place on or after January 21, 2011, and at least once every three years thereafter, a company will have to provide its shareholders with an opportunity to vote to approve the compensation of those executive officers for whom it is required to make compensation discloses pursuant to the Securities and Exchange Commission’s proxy rules.  At least once every six years, a company will also have to provide its shareholders with an opportunity to determine whether the vote to approve executive compensation should take place every year, every other year or every three years.  Any shareholder vote to approve executive compensation is non-binding.

Golden Parachutes (Sec. 951)

For any proxy or consent solicitation for a shareholder meeting taking place on or after January 21, 2011, in which shareholders are asked to vote to approve a merger, acquisition or similar transaction, the shareholders must also be provided with an opportunity to vote to approve any agreements or understandings regarding compensation that may be paid to a named executive officer in relation to the transaction.  Any shareholder vote to approve golden parachute compensation is also non-binding.

Possible Exemptions (Sec. 951)

The Dodd-Frank Act also provides that the Commission may exempt a company or entire class of companies from these non-binding shareholder approval requirements, taking into consideration whether smaller issuers are disproportionately burdened by the requirements.

Enhanced Disclosure Requirements

Pay Versus Performance (Sec. 953)

The Commission will be adopting rules requiring a company to disclose the relationship between its executives’ compensation and  its financial performance.

Internal Pay Equity (Sec. 953)

The Commission will be adopting rules requiring a company to disclose the median annual compensation of all employees, except for the chief executive officer, the total annual compensation of the chief executive officer and the ratio of the median annual compensation of all employees to the total annual compensation of the chief executive officer.

Hedging by Employees and Directors (Sec. 955)

The Commission will be adopting rules requiring a company to disclose whether any of its employees or directors are permitted to purchase hedging instruments to offset the value of securities they hold or that have been granted to them as compensation.

Chairman and CEO Structures (Sec. 972)

By January 17, 2011 the Commission will be adopting rules requiring a company to disclose why it has chosen either the same person or two different people to serve as chairman of the board of directors and chief executive officer.

Compensation Committees (Sec. 952)

For any proxy or consent solicitation for a shareholder meeting taking place on or after July 16, 2011, a company will have to disclose whether its compensation committee retained a compensation consultant, whether the consultant’s work raised any conflict of interest, and, if so, the nature of the conflict and how it is being addressed.

Enhanced Listing Requirements

Compensation Committees (Sec. 952)

By July 16, 2011 the Commission will be adopting rules directing national securities exchanges and associations to prohibit the listing of a company that does not maintain an independent compensation committee with sole discretion in selecting compensation consultants, independent legal counsel and other advisors.  The rules will provide for a reasonable cure period, may allow for the exemption of certain categories of companies, taking into consideration their potential impact on smaller issuers, and will not apply to certain foreign private issuers, controlled companies or limited partnerships, among other entities.

Compensation Clawbacks (Sec. 954)

The Commission will be adopting rules directing national securities exchanges and associations to prohibit the listing of a company that does not implement a policy for:

  • disclosing incentive-based compensation that is based on reported financial information; and
  • recovering such compensation following a restatement based on material noncompliance with financial reporting requirements.

The policy must cover any current or former executive officer who receives incentive-based compensation during the 3 year period preceding a restatement and the amount of compensation recovered must be the excess of what was paid, including stock options, over what would have been paid based on the restatements.

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