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

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.