02.17.2011
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Updates
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. However, even before the rules become effective, U.S. public companies are subject to the Financial Reform Act's requirements to hold a say-on-pay vote and a say-on-frequency vote for shareholder meetings held on or after January 21, 2011.
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.
This update summarizes the key aspects of the final rules on the say-on-pay and say-on-frequency votes and provides practical advice on steps companies can take in anticipation of the upcoming proxy season. For more information about the say-on-golden-parachute final rules, see our February 17, 2011 update.
Summary of the Final Rules on Say-on-Pay and Say-on-Frequency Votes
Say-on-Pay. The final rules require companies to provide shareholders—no less frequently than once every three years—a nonbinding advisory vote on the compensation paid to named executive officers, as disclosed pursuant to Item 402 of Regulation S-K. In addition, the final rules require companies to disclose in the compensation discussion and analysis (CD&A) section of future proxy statements whether and, if so, how their compensation policies and decisions have taken into account the results of the most recent say-on-pay votes and, if so, how that consideration affected their executive compensation policies and decisions.
Say-on-Frequency. The final rules require companies to provide shareholders a nonbinding advisory vote on the frequency of the say-on-pay vote. Companies' proxy cards must provide shareholders the option to vote in favor of conducting say-on-pay votes every one, two or three years or to abstain from voting on the say-on-frequency proposal. In addition, companies will need to disclose in a current report on Form 8-K, filed no later than 150 days after the annual meeting, their decisions as to how frequently they will conduct future say-on-pay votes in light of the voting results on the say-on-frequency vote.
Say-on-Pay
Under the final rules and in accordance with the Financial Reform Act, most companies will be required to provide shareholders a nonbinding say-on-pay vote in their proxy statements for annual meetings at which proxies will be solicited for the election of directors (or a special meeting in lieu of such annual meeting), beginning with meetings occurring on or after January 21, 2011. (As noted later in this update, the compliance deadline for smaller reporting companies has been delayed to January 21, 2013.) The final rules modified the proposed rules to clarify that a say-on-pay vote is required at least once every three calendar years—the rules as proposed would have required a vote within three years of the date of the most recent say-on-pay vote, which in some cases could have required a say-on-pay vote more frequently than once every three calendar years.
Scope of Say-on-Pay Vote. The say-on-pay vote is to approve the compensation of the named executive officers as such compensation is disclosed in Item 402 of Regulation S-K, including:
- the CD&A;
- the compensation tables; and
- the other narrative disclosures required by Item 402.
A more limited scope for this vote, such as a vote on compensation policies and procedures only, will not satisfy the requirements under the final rules.
Disclosures relating to director compensation or disclosures under Item 402(s) of Regulation S-K relating to risk considerations as part of a company's general compensation policies for employees generally are not subject to the shareholder advisory vote. However, to the extent risk considerations are a material aspect of the company's compensation policies for named executive officers, the company is required to discuss them in its CD&A, and this disclosure would be covered by the say-on-pay vote.
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Practical Tip Separate General Compensation Risk Disclosure From Executive Compensation Disclosure Covered by Say-On-Pay Vote. To make clear that disclosure relating to risk considerations as part of the company's general compensation policies for employees is not included in the say-on-pay vote, companies should include the say-on-pay disclosure under a separately identifiable heading that is not part of the executive compensation disclosure. |
Form of Resolution to Be Voted on by Shareholders. The final rules do not require issuers to use any specific language or form of resolution to be voted on by shareholders. However, the resolution must indicate that the vote is "to approve the compensation of executives, as disclosed pursuant to [Item 402 of Regulation S-K] or any successor thereto." The SEC also added an instruction to Rule 14a-21(a) to provide the following nonexclusive example of a resolution that would satisfy the applicable requirements:
RESOLVED, that the compensation paid to the company's named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion is hereby APPROVED.
Although the Financial Reform Act and the SEC's final rules appear to require a "resolution" format for the say-on-pay proposal, companies typically do not present management proposals this way. The SEC may
issue further guidance on whether a "resolution" format is required. The SEC has also clarified that companies may use a more "plain English" way of referring to the executive compensation disclosure covered by the say-on-pay vote instead of referring to "Item 402 of Regulation S-K" as in the example resolution above. In addition, the adopting release explains that issuers are not limited to the required shareholder advisory vote and may solicit shareholder votes on a range of compensation to obtain more specific feedback on the issuer's compensation policies and programs.
Additional Say-on-Pay Proxy Statement Disclosures. The final rules require the following disclosures relating to the separate shareholder advisory say-on-pay vote:
- Nature of Say-on-Pay Vote. Companies must disclose in their proxy statements that they are providing a separate say-on-pay shareholder vote and briefly explain the general effect of the vote (i.e., the nonbinding nature of the vote).
- Disclosure of Next Say-on-Pay Vote. After a company's initial say-on-pay and say-on-frequency votes, companies in subsequent proxy statements must also disclose the current frequency of say-on-pay votes and when the next say-on-pay vote will occur.
- CD&A Disclosure of Consideration of Say-on-Pay Results. Companies must disclose in future CD&As whether and, if so, how the results of their most recent say-on-pay vote have been considered in determining compensation policies and decisions and, if so, how that consideration affected their executive compensation policies and decisions. Companies should address their consideration of the results of earlier say-on-pay votes to the extent material.
Say-on-Frequency
Under the final rules and in accordance with the Financial Reform Act, most companies will be required to provide a separate shareholder advisory vote in their proxy statements for annual meetings at which proxies will be solicited for the election of directors (or a special meeting in lieu of an annual meeting), beginning with meetings occurring on or after January 21, 2011 (January 21, 2013 for smaller reporting companies) to determine whether the say-on-pay vote should occur every one, two or three calendar years. Companies will be required to provide this separate shareholder advisory vote not less frequently than once every six calendar years.
The SEC did not adopt specific language in the final rule but will require the following:
- Companies must disclose in their proxy statements that they are providing a separate say-on- frequency shareholder vote and briefly explain the general effect of the vote (i.e., the nonbinding nature of the vote).
- The proxy card must provide shareholders with four alternatives: to choose one of the alternatives for the frequency of the say-on-pay vote (i.e., every one, two or three years) or to abstain from voting on the say-on-frequency proposal.
- The SEC noted in the adopting release that although it expects boards of directors will include a recommendation as to how shareholders should vote on the say-on-frequency proposal, companies must make clear that shareholders are not voting to approve or disapprove the recommendation of the board of directors.
The SEC has also clarified that the say-on-frequency vote does not have to be in the form of a resolution.
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Practical Tip Management Discretion to Vote Uninstructed Proxy Cards. In order to facilitate implementation of the final rules, the SEC indicated in the adopting release that for 2011 the proxy card may provide for only three alternatives (to hold a say-on-pay vote every one, two or three years) if a proxy service provider has difficulty programming its system to provide four alternatives. However, companies will not be able to vote uninstructed proxy cards in accordance with management's recommendation for the frequency vote unless they
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New Form 8-K Disclosure of Decision Regarding Frequency of Say-on-Pay Vote
Companies are already required to disclose voting results pursuant to Item 5.07 of Form 8-K within four business days following the shareholder meeting. This existing requirement will apply to the say-on-pay and say-on-frequency votes, in addition to other matters voted on at shareholder meetings. For say-on- frequency votes, the final rules require a company to disclose the number of votes cast for each of the frequency alternatives (i.e., one year, two years and three years), as well as the number of abstentions.
The final rules also require a company to disclose, in light of such vote, its decision on how frequently the company will hold say-on-pay votes. The proposed rules would have required the disclosure on the next periodic report on Form 10-Q or Form 10-K filed after the shareholder meeting. Under the final rules, such disclosure must be provided by means of an amendment to the Form 8-K previously filed to disclose the voting results under Item 5.07. This amended Form 8-K will be due no later than 150 calendar days after the date of the annual meeting, but in no event later than 60 calendar days prior to the deadline for the submission of a Rule 14a-8 shareholder proposal for the subsequent annual meeting.
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Practical Tip Update Disclosure Checklist. The consequences of an untimely filing for the new disclosure under Item 5.07 of Form 8-K include the loss of Form S-3 eligibility. Companies should update their disclosure checklist to add the new Item 5.07 requirement to file an amended Form 8-K within 150 calendar days after the date of the annual meeting (but not later than 60 calendar days prior to the deadline for the submission of a Rule 14a-8 shareholder proposal for the subsequent annual meeting). In addition, companies should plan to schedule board and/or committee meetings to consider the results of the say- on-frequency vote and reach a decision on the company's response in time to permit timely disclosure. |
Ability of Companies to Exclude Shareholder Proposals on Say-on-Pay or Say-on-Frequency
The final rules add a note to Rule 14a-8(i)(10) clarifying that a company may exclude from its proxy statement on "substantially implemented" grounds shareholder proposals that would provide a say-on-pay vote, seek future say-on-pay votes, relate to the frequency of say-on-pay votes or seek future advisory votes on executive compensation if
- in the most recent shareholder vote on frequency of say-on-pay votes, any of the three frequencies (one, two or three years) received the support of a majority of the votes cast, and
- the issuer has adopted a policy that is consistent with that choice.
Under the proposed rules, exclusion would have been permitted if the company had implemented a frequency policy consistent with the frequency alternative that had received plurality support in the most recent say-on-frequency vote.
No Preliminary Proxy Statement
The final rules amend Rule 14a-6(a) to add shareholder advisory votes on say-on-pay and say-on- frequency to the list of matters that will not trigger a preliminary proxy statement filing requirement. The final rules also provide that a preliminary proxy statement also will not be required for any other advisory vote on executive compensation, even one not required by the Financial Reform Act.
Exclusion for TARP Recipients
Under existing law, companies with outstanding indebtedness under the Troubled Asset Relief Program, or TARP, are required to submit votes on executive compensation to shareholders on an annual basis. The SEC believes the additional say-on-frequency votes would be overly burdensome and have little benefit to the TARP recipient or its shareholders. Consequently, the final rules exempt TARP recipients from the rules on shareholder say-on-frequency votes until the company has repaid all outstanding indebtedness under TARP.
Two-Year Exclusion for Smaller Reporting Companies
Smaller reporting companies (generally companies having a public equity float of less than $75 million) are not required to comply with the rules requiring say-on-pay or say-on-frequency votes until their first annual shareholder meeting (or special meeting in lieu of an annual meeting) that occurs on or after January 21, 2013. However, a similar delay will not apply to the say-on-golden-parachute vote requirements. The say-on-pay vote required will only need to cover the compensation of the named executive officers as disclosed under Items 402(m) through 402(q) of Regulation S-K. Although smaller reporting companies, as now, will not be required to include CD&A in their proxy statements, the SEC notes in the adopting release that once smaller reporting companies are subject to the say-on-pay requirements, they may wish to include supplemental disclosure to facilitate shareholder understanding of their compensation arrangements in connection with say-on-pay votes. Also, to the extent material to an understanding of the information disclosed in the summary compensation table, a smaller reporting company should disclose its consideration of the most recent say-on-pay vote.
Treatment of IPO Companies
A newly public company will be required to provide say-on-pay and say-on-frequency votes in the proxy statement for its first annual meeting after its initial public offering.
Foreign Private Issuers Excluded
The final rules exempt foreign private issuers from the say-on-pay and say-on-frequency vote requirements.
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.
Additional Information
This update is only intended to provide a summary of the SEC's final rules on the say-on-pay and say-on- frequency votes. Read our update on the final rules on the say-on-golden-parachute vote.
For more information, please contact the Perkins Coie attorney with whom you work or:
Danielle Benderly, 503.727.2011;
Eric DeJong, 206.359.3793;
Laura Lintner, 206.359.6110;
Andrew Moore, 206.359.8649;
Sue Morgan, 206.359.8447.
© 2011 Perkins Coie LLP
