On October 18, 2010, the Securities and Exchange Commission (“SEC”) proposed rules [see SEC Release Nos. 33-9153; 34-63124] for the implementation of provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) related to shareholder approval of executive compensation and “golden parachute” compensation arrangements. If enacted, the proposed rules will govern certain votes and disclosures required under the Dodd-Frank Act, including: (a) non-binding shareholder votes for the approval of an issuer’s executive compensation arrangements; (b) non-binding shareholder votes on the frequency with which shareholders are to vote on an issuer’s executive compensation arrangements; (c) the disclosure of golden parachute compensation arrangements triggered as part of a merger, acquisition, or other similar transaction; and (d) in certain instances, non-binding shareholder votes for the approval of an issuer’s golden parachute arrangements based on or otherwise related to a merger, acquisition, or other similar transaction.
Under new Section 14A(c) of the Securities and Exchange Act of 1934 (the “Exchange Act”), all of the shareholder votes required by Section 951 of the Dodd-Frank Act related to executive compensation and golden parachutes are non-binding and advisory in nature. Section 14A(c) also makes clear that these votes do not modify or add to the fiduciary duties of boards of directors of issuers.
Pursuant to new Section 14A(a)(1) of the Exchange Act and proposed Rule 14a-21(a), the SEC will require issuers to provide for a separate shareholder advisory vote in proxy statements to approve the compensation of executives. This so-called “say-on-pay” vote:
Proposed Item 24 of Schedule 14A would require issuers to disclose in a proxy statement (a) that they are providing a separate shareholder vote on executive compensation and (b) the general effect of that vote (e.g. that it is non-binding). The SEC has also proposed an amendment to Item 402(b) that would require issuers to discuss in CD&A whether, and, if so, how prior say-on-pay votes affected compensation policies and decisions. Companies with a public float of less than $75 million are generally not required to disclose how say-on-pay votes affected their compensation policies and decisions because they are not required to provide a CD&A (although such disclosure may be necessary if required to understand information disclosed in the Summary Compensation Table under Item 402(o)).
The SEC has proposed Rule 14a-21(b) in order to implement new Exchange Act Section 14A(a)(2). Under the proposed rule, issuers are required at least once every six years to provide a separate shareholder advisory vote in proxy statements to determine whether the shareholder say-on-pay vote will occur every one, two, or three years.
The shareholder vote on the frequency of the say-on-pay vote is required to be included in proxy statements prepared for applicable meetings held on or after January 21, 2011. As with the say-on-pay vote, the frequency vote (including the general effect of the vote) would be required to be disclosed under proposed Item 24 to Schedule 14A and would be excluded from preliminary filing under the proposed amendment to Rule 14a-6.
In addition, the SEC is proposing amendments to Forms 10-Q and 10-K that would require issuers to disclose, in the report covering the quarter during which the vote on the frequency of say-on-pay votes was held, their decisions on how frequently they will conduct say-on-pay votes in light of the most recent shareholder vote on the subject.
A proposed amendment to Rule 14a-8 would allow an issuer to exclude otherwise proper shareholder proposals requesting say-on-pay votes and votes on their frequency if it has adopted a policy on the frequency of say-on-pay votes that is consistent with the plurality of votes cast in the most recent vote on say-on-pay frequency. An issuer’s board of directors must weigh the benefits of this exclusion against the benefits of holding the vote less frequently than voted for by the shareholders in order to promote a longer term view of both issuer and executive performance.
Section 957 of the Dodd-Frank Act amends Section 6(b) of the Exchange Act to direct national securities exchanges to change their rules to prohibit broker discretionary voting of uninstructed shares for say-on-pay votes and votes on the frequency of say-on-pay voting.
New Section 14A(b)(1) of the Exchange Act requires that golden parachute compensation to be paid to an issuer’s named executive officers based on or otherwise related to a merger, acquisition, consolidation, or proposed disposition of all or substantially all of the issuer’s assets be disclosed in any proxy statement or consent solicitation material related to such transaction in a “clear and simple form in accordance with regulations to be promulgated by the Commission.” To meet this directive, the SEC has proposed Item 402(t) of Regulation S-K, which requires the disclosure of executive golden parachute arrangements in both tabular and narrative form. The proposed table under Item 402(t) would include: (a) any cash severance payment, (b) the dollar value of accelerated stock awards, in-the-money options awards for which vesting would be accelerated, and payments in cancellation of stock and option awards, (c) pension and non-qualified deferred compensation benefit enhancements, (d) perquisites and other personal benefits and health and welfare benefits (including de minimis perquisites and benefits), and (e) tax reimbursements. The table would require footnote identification of payments occurring simply because of the transaction (“single-trigger”) and those that require an additional event (e.g., consummation of a merger and subsequent termination—“double trigger”).
Payments must be based on or related to one of the above-referenced transactions in order to require disclosure under Item 402(t). Previously vested equity awards and bona fide post-transaction employment agreements with the target or the acquirer, for example, would not be considered “based on or related to” the transaction (although information on future employment agreements might require disclosure under Item 5 of Schedule 14A).
The SEC is also proposing amendments to its rules so that the disclosures under Item 402(t) would have to be made for transactions that do not require filing under Section 14(a) of the Exchange Act but that nonetheless require the consent of shareholders for implementation. Tender offers and Rule 13e-3 going-private transactions, for example, would necessitate Item 402(t) disclosure.
Narrative disclosure under proposed Item 402(t) would require the description of any material condition or obligation applicable to the receipt of payment, including but not limited to non-competition, non-solicitation, and confidentiality provisions.
Under new Section 14A(b)(2) and proposed Rule 14a-21(c), issuers would be required to provide for a separate shareholder advisory vote on golden parachute arrangements in proxy statements for meetings at which shareholders are asked to approve a merger, acquisition, consolidation, or proposed sale or disposition of all or substantially all of the issuer’s assets. This vote would not be required if the disclosures required under Item 402(t) related to golden parachutes were disclosed in a prior say-on-pay vote under proposed Rule 14a-21(a). However, new golden parachute arrangements and any revision to previously voted-on golden parachute arrangements would still be subject to a shareholder advisory vote.
The SEC’s proposed rules on golden parachutes will not be imposed for merger proxy statements until the effective date of the rules. This differs from the rules on say-on-pay voting, under which the votes on say-on-pay and on the frequency of say-on-pay votes must be included in proxy statements for meetings to be held on or after January 21, 2011, regardless of whether or not the SEC has implemented its proposed rules on those issues.
For more information regarding the SEC’s proposed rules, please contact your regular Baker Hostetler contact person.
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