Securities Alert
October 2010
Author:
Jeffrey W. Acre
jeffrey.acre@klgates.com
+1.412.355.6506
SEC Proposes Rules to Implement DoddFrank’s Say-on-Pay and Golden Parachute
Provisions
Introduction
K&L Gates includes lawyers practicing out
of 36 offices located in North America,
Europe, Asia and the Middle East, and
represents numerous GLOBAL 500,
FORTUNE 100, and FTSE 100
corporations, in addition to growth and
middle market companies, entrepreneurs,
capital market participants and public
sector entities. For more information,
visit www.klgates.com.
On October 18, 2010, the Securities and Exchange Commission (the “SEC”)
proposed various new rules and amendments to existing rules (collectively, the
“Proposed Rules”) to implement controversial provisions of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) dealing with
shareholder approval of a company’s executive compensation (commonly referred to
as “say-on-pay”) and compensation arrangements between named executive officers1
and companies involved in certain significant transactions (commonly referred to as
“golden parachute” compensation).2 This alert summarizes the key aspects of the
Proposed Rules, including timing and transition matters.
Many practitioners and executives, particularly at companies with September 30
fiscal year ends, eagerly had awaited the Proposed Rules in order to glean insight
into the SEC’s views on the say-on-pay matters, which will apply to proxy
statements for shareholder meetings of most public companies3 occurring on or after
January 21, 2011. Since the Proposed Rules were issued near the front end of the
October – December 2010 range given in the estimated Dodd-Frank Act rulemaking
timeline published by the SEC in September 2010, the SEC appears to be on pace to
adopt final rules within its initial estimate of January – March 2011.4
Say-on-Pay
Section 951 of the Dodd-Frank Act added Section 14A to the Securities Exchange
Act of 1934 (the “Exchange Act”). Section 14A requires a non-binding say-on-pay
vote to approve the compensation of a company’s named executive officers.5 Newly
proposed Rule 14a-21(a) would implement this requirement of Section 14A and
mandate a say-on-pay vote at least once every three years. The say-on-pay vote
would be necessary solely in the context of shareholder meetings involving director
elections which require executive compensation disclosure in the related proxy
statement. The named executive officer compensation to be approved would be the
1
“Named Executive Officers” is defined in Item 402(a)(3) of Regulation S-K.
2
See “New Executive Compensation and Governance Requirements in Financial Reform
Legislation,” available here. The Proposed Rules are available at
www.sec.gov/rules/proposed/2010/33-9153.pdf.
3
The Proposed Rules would apply to issuers that have a class of equity securities registered under
Section 12 of the Exchange Act and that are subject to federal proxy rules. There are certain
exceptions for smaller reporting companies (as defined in Rule 12b-2 under the Exchange Act) and
companies having outstanding TARP obligations.
4
See www.sec.gov/spotlight/dodd-frank/dfactivity-upcoming.shtml#0910.
5
Compensation of directors is not subject to the say-on-pay vote.
Securities Alert
compensation described in the company’s Compensation Discussion and Analysis (“CD&A”),6 related
compensation tables and other compensation disclosures required by Item 402 of Regulation S-K.
Section 957 of the Dodd-Frank Act, which requires national securities exchanges to prohibit broker
discretionary voting of uninstructed shares on certain matters, including executive compensation matters
such as say-on-pay, may have a substantial impact on say-on-pay voting. While say-on-pay votes conducted
to date, whether voluntarily or as a result of shareholder proposals, generally have received majority
approval, some recent say-on-pay votes have failed to obtain majority approval. The prohibition on broker
discretionary voting may make it significantly more difficult to obtain majority approval in the future.7
Also, it remains to be seen how and to what degree RiskMetrics and other investor advisory firms will
evaluate and provide recommendations on say-on-pay votes under Section 14A, especially given the
dramatic increase in the number of say-on-pay votes that will occur each year as compared to prior years.
Frequency of Say-on-Pay Vote
Rule 14a-21(b), which would implement Section 14A(a)(2) of the Exchange Act, would require a separate,
non-binding shareholder vote on the frequency of future say-on-pay voting at least once every six years.
The voting results would dictate whether the company holds a say-on-pay vote each year, every two years or
every three years. This vote, like the say-on-pay vote itself, would be required only in connection with
shareholder meetings with respect to which executive compensation disclosure must be included in the
related proxy statement.
Disclosure and Shareholder Approval of Golden Parachute Compensation
Disclosure. Section 14A(b)(1) of the Exchange Act requires “clear and simple” disclosure in a proxy
statement seeking approval of an acquisition, merger, consolidation or proposed sale or disposition of all or
substantially all of a company’s assets (a “Merger Transaction”) of any golden parachute compensation that
would be received from the soliciting company by its named executive officers (and the named executive
officers of the acquiring company if the soliciting company is not the acquiror).8
The Proposed Rules would add a new Item 402(t) to Regulation S-K, providing for quantitative disclosure of
golden parachute compensation consistent with Section 14A(b)(1), and it also would expand the
requirements of Section 14A(b)(1) by providing for disclosure of golden parachute compensation to be
received by the named executive officers of the target company from the acquiring company. These
disclosures would be obligatory in connection with proxy solicitations involving Merger Transactions but
not in typical annual meeting proxy statements.9 The Item 402(t) disclosures would include the following
new table:
6
Because smaller reporting companies are not required to include a CD&A in proxy statements, say-on-pay votes for smaller
reporting companies would be limited to the compensation disclosures required to be included by such companies in their proxy
statements under Items 402(m)-(q) of Regulation S-K.
7
Even though the say-on-pay vote is non-binding and approval of such a proposal may not be subject to a majority standard
under applicable law in any event, the failure to receive majority approval likely can be interpreted in most instances as a general
dissatisfaction of shareholders with the company’s executive compensation.
8
Similar information often is provided under Item 5 of Schedule 14A, which requires disclosure by a target company of any
substantial interest of any of its executive officers in any matter to be acted upon, or Item 402(j) of Regulation S-K, which
mandates disclosure of payments that may be made to named executive officers upon termination of employment or a change in
control of the issuer based on particular information and assumptions.
9
In addition to proxy and consent solicitations, these disclosures also would be required in information statements filed pursuant
to Regulation 14C, proxy or consent solicitations not relating to Merger Transactions but otherwise implicating Item 14 of
Schedule 14A by virtue of Note A of Schedule 14A, registration statements on Forms S-4 and F-4 relating to Merger
Transactions, Schedule 13E-3 filings, third-party tender offer statements on Schedule TO and solicitation/recommendation
statements on Schedule 14D-9.
October 2010
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Securities Alert
Name
PEO
PFO
A
B
C
Cash ($)
Equity ($)
Pension/
NQDC ($)
Perquisites/
Tax
Benefits ($) Reimbursement ($) Other ($) Total ($)
Despite the broad categories of compensation listed in the table’s column headings, only compensation that
is “based on or otherwise relates to” the Merger Transaction must be disclosed under Item 402(t).10 The
table would not reflect vested equity awards or other non-Merger Transaction compensation that is otherwise
disclosed under other tables in the proxy statement, such as the Pension Benefits Table or the Nonqualified
Deferred Compensation Table.
Companies also would be required under Item 402(t) to make narrative disclosures with respect to payments
reflected in the table above, including descriptions of material conditions to the receipt of any payment (such
as the recipient’s agreement to noncompete or other restrictive covenants), applicable triggering events for
payment of the compensation, the form (e.g., lump sum, installment, etc.) and payor of any payment and any
other material information. These narrative disclosures would be similar to the narrative descriptions
currently provided pursuant to Item 402(j) of Regulation S-K regarding termination and change-in-control
agreements.
Shareholder Approval. Under newly proposed Rule 14a-21(c), if a company’s shareholders are asked to
approve a Merger Transaction, the company would be required to conduct a separate, non-binding
shareholder vote to approve any golden parachute compensation for which Section 14A(b)(1) mandates
disclosure (but not any additional golden parachute compensation for which Item 402(t) requires disclosure,
as described above). Rule 14a-21(c) would not require a separate shareholder vote to approve golden
parachute compensation if (i) each golden parachute arrangement previously was disclosed in a manner
complying with Item 402(t), (ii) none of the arrangements were amended after being disclosed in such a
manner and (iii) the disclosures of the arrangements were subject to a prior say-on-pay vote, regardless of
the outcome of the vote.
Miscellaneous Conforming Amendments
The SEC also has proposed a number of additional conforming and otherwise related amendments, several
of which are noted below.
•
Shareholder proposals seeking a say-on-pay vote or relating to the frequency of future say-on-pay voting
could be excluded under Rule 14a-8(10) on the basis of substantial implementation if the company has
adopted a policy on the frequency of future say-on-pay voting consistent with the plurality of votes cast
in its most recent vote on the frequency of future say-on-pay voting.
•
Say-on-pay votes and votes on the frequency of future say-on-pay voting would not necessitate the filing
of a preliminary proxy statement that is not otherwise required.
10
Types of compensation that often would be reflected in the table would include cash severance, accelerated vesting and
cashouts of equity awards, enhanced pension or deferred compensation benefits, perquisites and other personal benefits and tax
gross-up payments.
October 2010
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Securities Alert
•
A company would be required to disclose in its proxy statement, when such votes are held, that it is
conducting a say-on-pay vote and a vote on the frequency of future say-on-pay voting, in each case with
an explanation of the non-binding nature of the votes.
•
A company (other than a smaller reporting company) would be required to discuss in CD&A the impact
of prior say-on-pay votes on its compensation policies and decisions.
•
A form of proxy would be permitted to reflect four choices in a vote on the frequency of future say-onpay voting (each year, every two years, every three years and abstain), as opposed to the traditional three
choices (approve, disapprove and abstain).
•
Companies would disclose in the periodic report covering any period during which a vote on the
frequency of future say-on-pay voting occurs how frequently it will conduct votes on the frequency of
future say-on-pay voting.
TARP Participants
Companies that participated in the Troubled Asset Relief Program (“TARP”) independently must conduct an
annual say-on-pay vote pursuant to the Emergency Economic Stabilization Act of 2008 (“EESA”) so long as
any financial assistance received under TARP remains outstanding. To avoid duplication, the SEC indicated
that it would not require such a company to conduct a separate say-on-pay vote pursuant to Section
14A(a)(1) until all TARP financial assistance has been fully repaid, at which time it must provide for a sayon-pay vote pursuant to Section 14A(a)(1) at its next annual meeting. Rule 14a-21(b) would exempt TARP
participants from conducting votes on the frequency of future say-on-pay voting until the first annual
meeting held after all TARP financial assistance has been fully repaid, since TARP participants are required
under EESA to hold such votes annually.
Timing and Transition
Public comments on the Proposed Rules are due on November 18, 2010. The SEC did not provide an
updated target for adopting final rules. It would seem unlikely that the SEC would be in a position to adopt
final rules prior to mid-December 2010, when many companies would file definitive proxy statements for
meetings occurring on or shortly after January 21, 2011, given that the level of interest in the topics covered
by the Proposed Rules may lead to a large number of public comments and the SEC’s estimate in September
2010 that final rules on these topics would be adopted between January and March 2011.11 Section 14A(a)
will apply to shareholder meetings taking place on or after January 21, 2011 regardless of whether final rules
are adopted or effective at that time. If say-on-pay provisions must be included in proxy statements prior to
the adoption of final rules, impacted companies might assume that the Proposed Rules will be adopted as
proposed and thus follow the Proposed Rules.
The SEC has indicated that, until final rules are adopted, it will not object if:
•
preliminary proxy statements are not filed if the only matters that would necessitate the filing of a
preliminary proxy statement are the say-on-pay vote and the vote on the frequency of future say-on-pay
voting;
•
four voting alternatives (each year, every two years, every three years and abstain) are offered in votes
on the frequency of future say-on-pay voting;
11
See www.sec.gov/spotlight/dodd-frank/dfactivity-upcoming.shtml#0910.
October 2010
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Securities Alert
•
only three voting options (each year, every two years and every three years) are offered in votes on the
frequency of future say-on-pay voting if proxy service providers are not able to implement the necessary
changes to allow for four voting alternatives; and
•
companies with outstanding indebtedness under TARP do not provide for a vote on the frequency of
future say-on-pay voting if they are in compliance with EESA’s say-on-pay voting obligations.
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participants and public sector entities. For more information, visit www.klgates.com.
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October 2010
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