On October 18, 2010, the Securities and Exchange Commission issued proposed rules to implement Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding the Dodd-Frank Act-imposed requirements for public reporting companies to provide nonbinding shareholder advisory votes on executive compensation and golden parachute compensation arrangements. The Dodd-Frank Act added new Section 14A to the Securities Exchange Act of 1934, and these proposed rules implement these statutory requirements. The say-on-pay and say-on-pay frequency votes described in this legal alert will be required for all public reporting companies for any annual meeting (or special meeting at which directors are to be elected) occurring after January 21, 2011. The golden parachute advisory vote described below will be mandated only after the SEC issues final rules on the requirement.

Say-on-Pay Shareholder Advisory Votes

  • Proposed rule 14a-21(a) specifies how companies must provide a separate shareholder advisory vote to approve the compensation paid to named executive officers (NEOs), as such compensation is disclosed in accordance with the requirements of Item 402 of Regulation S-K, including the Compensation Discussion & Analysis (CD&A), the compensation tables, and other narrative executive compensation disclosures.

    • The proposed Rule does not specify the language or form of resolution that are required to be used for such shareholder vote. However, the SEC Staff stated that a vote to approve a proposal on different terms, such as a vote that seeks approval only of compensation policies and procedures, would not be sufficient.

    • Smaller reporting companies[1] are not exempted from these requirements, and the proposed rules do not provide any type of staggered effectiveness for smaller reporting companies.

    • Only executive compensation for NEOs is covered—no shareholder approval is required for director compensation, or for any disclosure regarding compensation policies and practices as they relate to risk management and risk-taking incentive compensation for employees generally. 

    • The proxy statement disclosure will need to include a brief explanation of the general effect of the vote, such as whether the vote is nonbinding. 

    • Item 402(b) of Regulation S-K is being amended to include a CD&A requirement to discuss whether and, if so, how a company's compensation policy and decisions have taken into account the results of previous shareholder advisory votes on executive compensation. 

    • The results of the shareholder vote would not be binding on the company or its board of directors.

    Say-on-Pay Frequency Votes

    • Public reporting companies are also required, beginning after January 21, 2011, and at least once every six years thereafter, to conduct a separate shareholder advisory vote on the frequency of presenting shareholder advisory say-on-pay votes on executive compensation. 

      • Under proposed Rule 14a-21(b) and amended Rule 14a-4, shareholders must be given four choices on the company's proxy card: whether the shareholder vote on executive compensation should occur every 1, 2, or 3 years, or to abstain from voting on the matter. The Staff noted that any other variation would not meet the Dodd-Frank Act requirements.

      • The proposed rules contemplate that a company will provide, in the proxy statement, a board of directors’ recommendation as to the frequency of the say-on-pay vote.

      • The proxy statement disclosure will need to include a brief explanation of the general effect of the vote, such as whether the vote is nonbinding. 

      • The proposed rules also add new requirements to the Form 10-Q and Form 10-K rules. Such amendments will require disclosure, in the periodic report covering the period during which the shareholder advisory vote occurs, that discloses the company’s decision on how frequently it will conduct shareholder advisory votes on executive compensation in light of the results of the shareholder vote on frequency. 

      • The results of the shareholder vote would not be binding on the company or its board of directors.

      Amendment to Shareholder Proposal Rules

      Rule 14a-8 (covering shareholder proposals) is proposed to be amended to add a note to Rule 14a-8(i)(10) to permit a company to exclude a shareholder proposal that would provide for a say-on-pay vote at that or at future meetings, or that relates to the frequency of say-on-pay votes, as long as the company has adopted a policy on the frequency of say-on-pay votes that commits the company to select a say-on-pay vote frequency that is consistent with the results of the shareholder vote at the most recent meeting.

      Other Issues to Consider

      The proposed rules also address the following matters:

      • Broker discretionary voting of uninstructed shares would not be permitted for these say-on-pay votes. 

      • Companies will not be required to file a preliminary proxy statement because of the inclusion of these say-on-pay shareholder votes.

      • A company that has received financial assistance under the Troubled Asset Relief Program (TARP), which itself mandates annual say-on-pay shareholder votes, would not be required to comply with the process required by these proposed rules regarding annual meeting say-on-pay votes until that company has repaid all indebtedness under TARP. 

      Golden Parachute Arrangements

      The Dodd-Frank Act requires a company soliciting votes to approve a merger, acquisition, consolidation, or proposed sale or other disposition of all or substantially all assets, or a similar transaction, to seek an advisory say-on-pay shareholder vote on any agreements or understandings that the soliciting person has with its NEOs (or the NEOs of the acquiring company) concerning compensation that is based on or otherwise relates to the subject transaction. Such vote must include the aggregate total of all such compensation that may (and the conditions upon which it may) be paid or become payable to or on behalf of such NEOs. The proposed rules would implement this requirement through new Item 402(t) of Regulation S-K, which sets forth these disclosure requirements. Proposed Item 402(t) disclosures must be presented in a clear and simple form in both tabular and narrative format. The tabular disclosure would require quantification with respect to any agreements or understandings, whether written or unwritten, between each NEO and the acquiring company or the target company, concerning any type of compensation, whether present, deferred, or contingent, that is based on or otherwise relates to the subject acquisition, merger, consolidation, or other similar transaction. The table would quantify cash severance, equity awards that are accelerated or cashed out, pension and nonqualified deferred compensation enhancements, perquisites, tax reimbursements, and any other compensation related to the transaction. This would not include bona fide post-transaction employment agreements to be entered into in connection with the transaction. 

      The proposed rule does not require companies to use any specific language or form of resolution in seeking such golden parachute say-on-pay vote. The results of the shareholder vote would not be binding on the company or its board of directors.

      These non-binding shareholder votes will also need to be included in any solicitation material seeking shareholder approval of an acquisition, merger, consolidation, or sale of all or substantially all assets, including going-private transactions and third party tender offers. Bidders in a third party tender offer would also need to provide information about a target’s golden parachute arrangements, but only if the bidder has made a reasonable inquiry into the golden parachute arrangement and has knowledge of such arrangements. Bidders and targets in third party tender offers and companies undergoing a going-private transaction would be exempted from the above requirements when the target or subject company is a foreign private issuer. 

      A company would not be required to include this golden parachute say-on-pay vote in a merger proxy statement if disclosure of that compensation had been included in the Item 402 disclosure that was subject to a prior say-on-pay vote by shareholders. This exception would be available only if such same golden parachute arrangements remained in effect and had not been modified. Modified or new portions of such an arrangement would be subject to the separate golden parachute say-on-pay shareholder vote. The company would need to provide two separate tables—disclosing all golden parachute compensation in one table and only the new or modified arrangements in the second table.

      If any individual or company wishes to submit comments on any of these proposed rules, such comments must be received by the SEC on or before November 18, 2010.

      Ballard Spahr's Financial Institutions Reform Task Force continues to monitor the Dodd‑Frank Act, and its members are available to assist clients as they prepare to address the new requirements. Please contact Mary J. Mullany, 215.864.8631 or mullany@ballardspahr.com; Justin P. Klein, 215.864.8606 or kleinj@ballardspahr.com; or any member of the Securities Group with any questions.

      To help clients understand and comply with the Dodd-Frank Act, Ballard Spahr has formed the Financial Institutions Reform Task Force. The task force tracks developments under this historic legislation and provides clients with information, guidance, and other legal services relating to the Dodd-Frank Act.


      [1]  A smaller reporting company is generally a company with a public float of less than $75 million.  Smaller reporting companies have scaled down disclosure requirements and do not have to provide CD&A. 

      Copyright © 2010 by Ballard Spahr LLP.
      (No claim to original U.S. government material.)


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      This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.