SEC ADOPTS NEW RULES CONCERNING “SAY-ON-PAY,” “SAY ON FREQUENCY OF SAY-ON-PAY,” AND REQUIRING DISCLOSURE OF GOLDEN PARACHUTE ARRANGEMENTS IN MERGER PROXY STATEMENTS
January 31, 2011
On January 25, 2011, the SEC adopted final rules concerning “Say- on-Pay” and “Say on Frequency of Say-on- Pay,” and requiring disclosure of golden parachute arrangements in merger proxy statements as required under the Dodd-Frank Wall StreetReform and Consumer Protection Act (“Dodd-Frank Act”).
The new rules have been adopted substantially as proposed by the SEC, with certain modifications in response to public comment.
The new rules will apply to all issuers including “smaller reporting companies.” However, smaller reporting companies have been provided an exemption that will not require them to conduct say-on-pay votes and frequency votes until annual meetings occurring on or after January 21, 2013.
The SEC’s amendments include a new rule, amendments to existing rules, and implementing amendments to its forms and the disclosure requirements in Schedules 14A, 14C, certain other forms, and under Regulation S-K.
New Section 14A adopted pursuant to the Dodd-Frank Act requires that an initial shareholder vote on executive compensation and the initial vote on the frequency of votes on executive compensation be included in proxy statements for the first annual or other meeting of shareholders occurring on or after January 21, 2011, regardless of whether the SEC has adopted rules to implement new Section 14A(a).
The new rules and form amendments, discussed below, will be effective 60 days after publication in the Federal Register.
“Say on Pay”
Under new Rule 14a-21(a), issuers with a class of securities registered under Section 12 of the Securities Exchange Act are required not less frequently than once every three calendar years to provide a separate shareholder advisory vote in proxy statements to approve executive compensation.
A separate shareholder advisory vote on executive compensation is required for the first annual or other meeting occurring on or after January 21, 2011, at which directors will be elected and for which the SEC’s proxy rules require disclosure of executive compensation under Item 402 of Regulation S-K.
Shareholders will have the opportunity to vote to approve the compensation of an issuer’s named executive officers as such compensation is disclosed in Item 402 of Regulation S-K, including the Compensation Discussion and Analysis (“CD&A”), compensation tables and other narrative disclosure. However, neither the compensation of directors nor the issuer’s compensation policies and practices as they relate to risk management and risk taking incentives would be subject to an advisory vote.
Amendments to disclosure requirements in Regulation S-K and under the Schedule 14A require an issuer to address in CD&A how their compensation policies and decisions have taken into account the results of shareholder advisory votes on executive compensation.
Amendments to Item 402(b) of Regulation S-K
Amendments to Item 402(b)(1) of Regulation S-K require an issuer to add to its CD&A disclosure whether, and if so, how it has considered the results of the most recent shareholder vote on executive compensation in determining compensation policies and decisions and, if so, how that consideration has affected its compensation policies and decisions.
Although smaller reporting companies are not subject to the CD&A requirement, they are required to provide a narrative description of any material factors necessary to an understanding of the information disclosed in the Summary Compensation Table. If consideration of prior say-on-pay votes is such a factor, the SEC stated in its adopting release that disclosure would be required under Item 402(o).
“Smaller reporting companies” will be required to vote to approve the compensation of named executive officers as disclosed under the “scaled” disclosure requirements applicable to such entities.
“Say on Frequency of Say-on-Pay”
Under new Rule 14a-21(b), issuers are required not less frequently than once every six calendar years to provide a separate shareholder advisory vote in proxy statements for annual meetings to determine whether the shareholder advisory vote on executive compensation will occur every one, two or three years. Such a separate advisory vote is required only in a proxy statement solicited for an annual or other meeting of shareholders at which directors will be elected. A separate shareholder vote is required for the first annual or other meeting occurring on or after January 21, 2011.
The SEC stated in the adopting release that it is of the view that a say-on-pay vote and frequency vote is required of a new public company in the proxy statement for such company’s first annual meeting after its initial public offering.
Amendments to Rule 14a-4 provide, in effect, that shareholders be given four choices: whether the shareholder vote on executive compensation will occur every 1, 2 or 3 years, or to abstain from voting on the matter. The SEC noted that issuers may vote uninstructed proxy cards in accordance with management’s recommendations for the frequency vote only if the issuer follows the existing requirement of Rule 14a-4 to (1) include a recommendation for the frequency of say-on-pay votes in the proxy statement, (2) permit abstention on the proxy card, and (3) include language regarding how uninstructed shares will be voted in bold in the proxy card.
Item 24 to Schedule 14A
New Item 24 requires disclosure in any proxy statement in which an issuer is providing a separate shareholder vote on executive compensation to briefly explain the general effect of the vote, such as whether the vote is non-binding. The new item requires disclosure of the current frequency of say-on-pay votes and disclosure of when the next say-on-pay vote will occur.
Also, new Item 24 requires an issuer to disclose in the proxy statement that it is providing a separate shareholder advisory vote on the frequency of the shareholder vote on executive compensation. New Item 24 requires a brief explanation of the effect of this vote, such as whether the vote is non-binding.
Amendments to Rule 14a-8
Subject to certain exclusions, existing Rule 14a-8 provides eligible shareholders with an opportunity to include a proposal in an issuer’s proxy material for a vote at an annual or special meeting of shareholders. Amendments to the notes to Rule 14a-8(i)(10) adopted by the SEC permit the exclusion of a shareholder proposal that would provide a say-on-pay or seeks future say-on-pay votes or that relates to the frequency of say-on-pay votes provided the issuer has adopted a policy on the frequency of say-on-pay votes that is consistent with the majority of votes cast in the most recent vote in accordance with Rule 14a-21(b). However, an issuer would not be permitted to exclude such shareholder proposals under the note if no frequency choice received a majority of the votes cast.
Amendments to Form 8-K
Proposed amendments to the Forms 10-K and 10-Q requiring disclosure of an issuer’s decision regarding its decision to adopt a policy on how frequently it will conduct shareholder advisory votes on executive compensation in light of the results of the shareholder vote on frequency were not adopted be the SEC. Instead, the SEC adopted amendment to Item 5.07 to the Form 8-K.
As amended, Item 5.07 requires an issuer to disclose its decision regarding how frequently it will conduct shareholder advisory votes on executive compensation following each shareholder vote on the frequency of say-on-pay votes. An issuer will do so by filing an amendment to its prior Form 8-K filing under Item 5.07 that discloses the preliminary and final results of the shareholder vote on frequency of say-on-pay.
The amended Form 8-K will be due no later than 150 calendar days after the date of the end of the annual or other meeting in which the vote required by Rule 14a-21(b) took place, but in no event later than 60 calendar days prior to the deadline for the submission of shareholder proposals under Rule 14a-8 for the subsequent annual meeting, as disclosed in the issuer’s proxy materials for the meeting at which the frequency vote occurred.
Amendments to Rule 14a-6
Under amended Rule 14a-6, the inclusion of a shareholder vote on executive compensation and on the frequency of shareholder votes on executive compensation in an issuer’s proxy material will not (in and of itself) trigger a requirement to file a preliminary proxy statement.
Broker Discretionary Voting
Section 957 of the Dodd-Frank Act amends Section 6(b) of the Securities Exchange Act to direct national securities exchanges to change their rules to prohibit broker discretionary voting of uninstructed shares in certain matters, including shareholder votes on executive
compensation. The exchanges are adopting amended rules to implement such requirement. Under these amended rules, broker discretionary voting of uninstructed shares of issuers listed on a national securities exchange will not be permitted for a shareholder advisory vote on executive compensation or the frequency of such a vote.
Disclosure of “Golden Parachute” Arrangements and Shareholder Approval of Such Arrangements
New Section 14A(b)(1) of the Securities Exchange Act requires all persons making a proxy or consent solicitation seeking shareholder approval of an acquisition, merger, consolidation or proposed sale or disposition of all or substantially all of an issuer’s assets to provide disclosure in accordance with rules adopted by the SEC of any agreements or understandings the soliciting person has with its named executive officers concerning compensation that is based on or otherwise relates to the merger transaction. Also, the section requires disclosure of any agreements or understandings that an acquiring issuer has with its named executive officers and that it has with the named executive officers of the target company in any transactions in which the acquiring issuer is making a proxy or consent solicitation seeking shareholder approval of an acquisition, merger, consolidation or proposed sale or other disposition of all or substantially all of an issuer’s assets.
In order to implement the disclosure requirements of Section 14A(b)(1), the SEC has amended Schedule 14A to require disclosure with respect to “golden parachute” arrangements in proxy or consent solicitations in connection with an acquisition, merger, consolidation, or proposed sale or other disposition of all or substantially all assets in accordance with Item 402(t) of Regulation S-K.
Item 402(t) of Regulation S-K
Consistent with new Section 14A(b)(1), under new Item 402(t), golden parachute arrangements between a target issuer conducting a proxy solicitation in connection with an acquisition, merger, consolidation, or similar transaction and its named executive officers would be subject to disclosure. Also, golden parachute arrangements between an acquiring company and the named executive officers of the target company would require disclosure.
New Item 402(t) requires such disclosure in both narrative and tabular formats. However, the new item requires disclosure only of compensation that is based on or otherwise relates to the subject transaction and not of amounts that would not be paid or payable in connection with the transaction subject to shareholder approval.
The tabular disclosure is required to present quantitative disclosure of the individual elements of compensation that an executive would receive that are based on or otherwise related to the subject transaction, and the total for each executive. The narrative disclosure requires issuers to describe any material conditions or obligations applicable to the receipt of payment, including but not limited to non-compete, non-solicitation, non-disparagement or confidentiality agreements, their duration, and provisions regarding waiver or breach, as well as a description of the specific circumstances that would trigger payment, whether the payments would or could be lump sum, or annual, and their duration, and by whom the payments would be provided, and any material factors regarding each agreement.
Item 402(t) disclosure is not required in annual meeting proxy statements.
Proposed Amendments to Schedule 14A, Schedule 14C, Schedule 14D-9, Schedule 13E-3 and Item 1011 of Regulation M-A
The SEC has also adopted amendments to Schedule 14A, conforming changes to Schedule 14C, Schedule 13E-3, Schedule 14D-9, Item 1011 of
Regulation M-A and Schedule TO.
Consistent with the goals of Section 14A(b)(1), the amendments require the disclosure in Item 402(t) be included in any proxy or consent solicitation material seeking shareholder approval of an acquisition, merger, consolidation, or proposed sale or other distribution of all or substantially all the assets of the issuer.
The amendments require such disclosure in the following:
information statements filed pursuant to Regulation 14C
proxy or consent solicitations that do not contain merger proposals but require disclosure of information under Item 14 of Schedule 14A pursuant to Note A of Schedule 14A
registration statement on Forms S-4 and F-4 containing disclosure relating to mergers and similar transaction
going private transaction on Schedule 13E-3
third party tender offers on Schedule TO and Schedule 14D-9 solicitation/recommendation statements
Schedule TO is amended to clarify that Item 402(t) disclosure is not required in third-party bidders’ tender offer
statements, so long as the transactions are not also Rule 13e-3 going-private transactions.
Proposed New Rule 14a-21(c)
Section 14A(b)(2) of the Securities Exchange Act adopted as part of the Dodd-Frank Act generally requires a separate shareholder advisory vote on golden parachute compensation arrangements required to be disclosed in connection with acquisitions, mergers and similar transactions.
However, a separate shareholder advisory vote would not be required on golden parachute arrangements if disclosure of that compensation had been included in the executive compensation disclosure that was subject to a prior advisory vote of shareholders under Section 14A(a)(1) of the Securities Exchange Act. The SEC has adopted Rule 14a-21(c) to implement such requirement.
Under Rule 14a-21(c), issuers are required to provide a separate shareholder advisory vote in proxy statements for meetings at which shareholders are asked to approve an acquisition, merger, consolidation or similar transaction. Issuers are not required to provide a separate shareholder advisory vote for meetings at which shareholders are asked to approve other proposals, such as an increase in authorized shares or a reverse stock split, which may be necessary for an issuer to effect a transaction.
A vote under Rule 14a-21(c) is only required if the shareholders are voting to approve the transaction and the transaction and golden parachute arrangements come within those covered by Section 14A(b). The advisory vote will be required only with respect to golden parachute arrangements required to be disclosed pursuant to Section 14A(b)(1), as disclosed pursuant to Item 402(t). Section 14A(b)(1) requires disclosure of any agreements or understandings between the soliciting person and any named executive officer of the issuer or any named executive officers of the acquiring issuer, if the soliciting person is not the acquiring issuer. When a target issuer conducts a proxy or consent solicitation to approve a merger or similar transaction, golden parachute arrangements between the acquiring issuer and named executive officers of the target issuer are not within the scope of disclosure required by Section 14A(b)(1) and, thus, a shareholder vote to approve arrangements between the soliciting target issuer’s named executive officers and the acquiring issuer is not required by Section 14A(b)(2).
Accordingly, Rule 14a-21(c) as adopted requires a shareholder advisory vote only on the golden parachute arrangements for which Section 14A(b)(1) requires disclosure and Section 14A(b)(2) requires a shareholder vote.
A separate shareholder advisory vote is not required on golden parachute compensation if, consistent with Item 402(t), disclosure of that compensation was included in the executive compensation disclosure that was the subject of a prior advisory vote of shareholders at an annual meeting. However, if new arrangements have been entered into or the terms of such arrangements have changed, such new or changed arrangements will be subject to a separate shareholder advisory vote.
For more information, please contact:
Neil R.E. Carr
Direct Dial: +1 202 587 2983
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