The Financial Reform Act: SEC Adopts Final Say-on-Golden Parachute Rules—Practical Advice
The SEC recently adopted final rules implementing section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act or the Financial Reform Act, which requires U.S. public companies to conduct separate nonbinding shareholder advisory votes on
executive compensation (the say-on-pay vote) at least once every three calendar years;
the frequency of say-on-pay votes (the say-on-frequency vote) at least once every six calendar years; and
golden parachute compensation arrangements in connection with mergers and other significant corporate transactions that are presented to shareholders for approval.
The final rules will be effective April 4, 2011, except as noted below. Although the final rules substantially reflect the proposed rules, there are important differences, and companies should carefully review the SEC's final rules for guidance. For a summary of the proposed rules, click here.
This update summarizes the key aspects of the final rules on say-on-golden parachute votes and provides practical advice on steps companies can take to prepare for these new requirements. For more information about the final rules on the say-on-pay and say-on-frequency votes, see our February 17, 2011 update.
Summary of the Final Rules on Say-on-Golden-Parachute Arrangements
The final rules require companies to include disclosure regarding certain golden parachute arrangements in proxy statements relating to proxy solicitations seeking shareholder approval of a merger or similar significant corporate transaction, as well as in other types of SEC filings. Additionally, when seeking shareholder approval of a merger or similar significant corporate transaction, companies will be required to provide a shareholder advisory vote on certain golden parachute arrangements unless those arrangements were previously subject to a say-on-pay vote.
Golden Parachute Compensation ArrangementsOverview of New Disclosure Requirements. The SEC adopted new Item 402(t) to Regulation S-K, pursuant to which companies will be required to include certain disclosures regarding "golden parachute" arrangements in proxy materials relating to a proxy or consent solicitation seeking shareholder approval of a merger or similar transaction. In short, such disclosures must include information about any agreement or understanding (written or unwritten) between the target or acquiring companies and the named executive officers of each concerning any type of compensation (current, deferred or contingent) that is based on or otherwise relates to the transaction. The final rules also require companies to provide a shareholder advisory vote on certain golden parachute arrangements, unless those arrangements were subject to a prior say-on-pay vote.
Effective for Applicable SEC Filings Made on or After April 25, 2011. Companies must comply with the disclosure and vote requirements in applicable SEC filings made on or after April 25, 2011. Unlike the say-on-pay and say-on-frequency requirements, the trigger for compliance with the new golden parachute rules is the filing date, not the shareholder meeting date.
Requires Disclosure of Arrangements Between Acquiring Company and NEOs. Notably, Item 402(t) requires disclosure of golden parachute arrangements between the acquiring company and the named executive officers of the soliciting target company, although these arrangements are not subject to the golden parachute advisory vote.
Golden Parachute Disclosure. To implement the Financial Reform Act's requirement that companies disclose golden parachute arrangements "in a clear and simple form," new Item 402(t) to Regulation S-K requires both tabular and narrative disclosures regarding golden parachute arrangements. This disclosure is required in proxy statements relating to meetings at which shareholders will be asked to approve a merger, a sale of all or substantially all assets, an acquisition or similar transaction, as well as in other types of SEC filings, as described below.
Each separate form of compensation reported in any column will be required to be identified in a footnote. Additionally, amounts attributable to "single-trigger" and "double-trigger" arrangements will be required to be separately identified by footnote.
Issuers are permitted to add additional named executive officers and additional columns or rows to the tabular disclosure so long as such disclosure is not misleading.
Narrative Disclosure. New Item 402(t) of Regulation S-K also requires a description of any material conditions applicable to the receipt of golden parachute payments, including noncompete and nonsolicitation agreements. Companies will also have to describe the particular triggers for the payments, whether the payments would be lump-sum payments or annual payments, the duration of the payments, and who would provide the payments.
Golden Parachute Disclosure in Other SEC Filings. The final rules amend the disclosure requirements for other SEC filings so that comparable golden parachute disclosure would be included in filings for other transactions, including in registration statements on Forms S-4 and F‑4 containing disclosure relating to mergers and similar transactions, and in Schedule 13E-3 filings for going-private transactions. 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.
Advisory Vote on Golden Parachutes.
Under the final rules, companies are only required to provide a separate nonbinding shareholder vote on golden parachute compensation arrangements in connection with meetings at which shareholders are asked to approve an acquisition, merger, consolidation or proposed sale or other disposition of all or substantially all assets of the registrant. Like the say-on-pay and say-on-frequency votes, the final rules do not require any specific language or form of resolution to be voted on by shareholders. For more information about the final rules on the say-on-pay and say-on-frequency votes, see our February 17, 2011 Update
Vote Requirement Is Narrower Than Disclosure Requirement. As noted above, although the SEC final rules require disclosure of golden parachute arrangements between an acquiring company and the target's named executive officers, those arrangements are not subject to the shareholder advisory vote unless the acquiring company is the one seeking shareholder approval for the transaction.
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Exception for Golden Parachute Arrangements Subject to Prior Say-on-Pay Vote—Proceed With Caution. Under the final rules, the advisory vote on golden parachute arrangements will not be required if the compensation in question had been included in compensation disclosure that was subject to a prior say-on-pay vote. This exception will only be available if the compensation disclosure subject to the prior say-on-pay vote included the Item 402(t) disclosure of these golden parachute arrangements. Companies may be tempted to take advantage of this exception by voluntarily including the Item 402(t) golden parachute arrangement disclosure in the annual meeting proxy statement and subjecting the golden parachute arrangements to the say-on-pay vote described above. However, companies should note that the exception is very limited, and for the following reasons should proceed with caution when using it.
Amended Arrangements Would Not Be Covered by Exception. If the golden parachute compensation arrangements are amended (except for amendments to decrease the total compensation payable), the exception will no longer be available.
New or Amended Arrangements Would Require Additional Tabular Disclosure. Companies would still need to give shareholders an advisory vote on any new golden parachute arrangements that were not subject to the earlier say-on-pay vote. Item 402(t) will then require companies to include two tables (one for the original golden parachute arrangements and one for the new or amended golden parachute arrangements) to allow for a comparison of the new or revised arrangements against the arrangements that were previously subject to a say-on-pay vote.
Given the limited availability of the exception and the disclosure challenges that could be posed by multiple tables, the exception may ultimately be of limited value to most companies.
Delayed Rulemaking on Other Financial Reform Act Compensation-Related Provisions
On a related note, the SEC has pushed back its estimate of when it will issue proposed rules for the following compensation-related provisions of the Financial Reform Act: clawback policies, pay-for-performance disclosure, pay ratio of CEO compensation to employee compensation, and hedging policies. The SEC had indicated previously that it would propose rules under these sections in the April-July 2011 time frame, but recently announced that it expected proposed rules to be released between August and December of 2011. The delay means that these rules may not be in effect for the 2012 proxy season.
This update is only intended to provide a summary of the SEC's final rules on the say-on-golden-parachute votes. Read our update on the final rules on the say-on-pay and say-on-frequency votes. You may also read our other Financial Reform Act updates.
For more information, please contact the Perkins Coie attorney with whom you work or:
Chris Warner, 206.359.3047;
Danielle Benderly, 503.727.2011;
Eric DeJong, 206.359.3793;
Laura Lintner, 206.359.6110;
Andrew Moore, 206.359.8649; or
Sue Morgan, 206.359.8447.
© 2011 Perkins Coie LLP