SEC Adopts Amended Rules for Say-on-Pay and Golden Parachute Compensation as Required Under Dodd-Frank Act

The Securities and Exchange Commission has adopted rules concerning shareholder approval of executive compensation and “golden parachute” compensation arrangements as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The SEC’s new rules specify that say-on-pay votes required under the Dodd-Frank Act 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 “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 an SEC Form 8-K how often it will hold the say-on-pay vote.

Under the SEC’s new rules, companies also are required to provide additional disclosure regarding “golden parachute” compensation arrangements with certain executive officers in connection with merger transactions.

The Commission also adopted a temporary exemption for smaller reporting companies (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.

“I believe that this two-year deferral is a balanced and responsible way for the SEC to ensure that its rules do not disproportionately burden small issuers,” said SEC Chairman Mary L. Schapiro. “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. The two-year deferral period is designed to assist the Commission in its consideration of these factors and will enable us to adjust the rule if appropriate before it applies to smaller issuers.”

Background

The rule amendments implement Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added Section 14A to the Exchange Act. This statute requires public companies subject to the federal proxy rules to:

- Provide their shareholders with an advisory vote on executive compensation, generally known as “say-on-pay” votes.

- Provide their shareholders with an advisory vote on the desired frequency of say-on-pay votes.

- Provide their shareholders with an advisory vote on compensation arrangements and understandings in connection with merger transactions, known as “golden parachute” arrangements. Such golden parachute arrangements would need to be disclosed in merger proxy statements.

Rule Amendments

Required Say-on-Pay Votes and Additional Disclosure Requirements

Shareholder Approval of Executive Compensation

Under the final rules, companies subject to the federal proxy rules are required to provide shareholders with an advisory vote on executive compensation. In particular, the rule amendments, which implement the Dodd-Frank Act, specify that these say-on-pay votes are required at least once every three years beginning with the first annual shareholders’ meeting taking place on or after January 21, 2011.

The rule amendments require companies to provide disclosure in the annual meeting proxy statement regarding the say-on-pay vote, including whether the vote is non-binding. The rules also require additional disclosure in the Compensation Discussion and Analysis (CD&A) regarding whether, and if so how, companies have considered the results of the most recent say-on-pay vote.

Shareholder Approval of the Frequency of Shareholder Votes on Executive Compensation

Under the new rules, companies are required to allow shareholders to vote on how often they would like to be presented with the say-on-pay vote: every year, every other year, or once every three years.

This “frequency” vote, which also is a non-binding advisory vote, is required at least once every six years beginning with the first annual shareholders’ meeting taking place on or after January 21, 2011. The rules require companies to disclose the frequency vote in the annual meeting proxy statement, including whether the vote is non-binding.

In order to implement the requirement for such a “frequency” vote, the rules revises the proxy rules to permit these three choices on the proxy card. The rules also revise the shareholder proposal rule (Rule 14a-8) to provide guidance regarding the impact of these new requirements on shareholder proposals relating to say-on-pay votes or frequency of say-on-pay votes.

Form 8-K Disclosure of Frequency Determination

In light of the non-binding nature of the vote and in order to allow shareholders to learn how often a company will provide the say-on-pay vote, the rule also revises the current report on Form 8-K. That form now requires disclosure following a shareholder advisory vote on frequency of the company’s decision regarding how frequently it will conduct say-on-pay votes. This Form 8-K is required no later than 150 calendar days after the date of the annual meeting in which the vote took place, but in any event no later than 60 calendar days prior to the deadline for submission of Rule 14a-8 shareholder proposals for the subsequent annual meeting.

Smaller Reporting Companies

The Commission also adopted a temporary exemption so that smaller reporting companies are not required to conduct say-on-pay and frequency votes until annual meetings occurring on or after Jan. 21, 2013. As with other issuers, smaller reporting companies are required to conduct the shareholder advisory vote on golden parachute compensation upon effectiveness of the rules.

The delayed compliance date for the say-on-pay and frequency votes for smaller reporting companies is designed to allow those companies to observe how the rules operate for other companies, and should allow them to better prepare for implementation of the rules. Delayed implementation for these companies will allow the Commission to evaluate the implementation of the adopted rules by larger companies and provide the Commission with the additional opportunity to consider whether adjustments to the rule would be appropriate for smaller reporting companies before the rule becomes applicable to them.

Shareholder Approval and Disclosure of Golden Parachute Arrangements

Under the rules, companies are required to provide additional disclosure regarding compensation arrangements with executive officers in connection with merger transactions, known as “golden parachute” arrangements. Disclosure is required of all agreements and understandings that the acquiring and target companies have with the named executive officers of both companies. The rule requires this disclosure in both narrative and tabular formats.

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.

The rules require companies to provide a separate shareholder advisory vote to approve certain “golden parachute” compensation arrangements in connection with a merger, acquisition, consolidation, proposed sale or other disposition of all or substantially all assets. Companies are required to comply with the golden parachute compensation shareholder advisory vote and disclosure requirements in proxy statements and other schedules and forms initially filed on or after April 25, 2011.

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