Type: Law Bulletins
Date: 02/02/2011

SEC Adopts Final Rules on Shareholder Advisory Votes on Executive Compensation

Last week, the Securities and Exchange Commission (the "SEC") approved final rules implementing Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank"), which requires companies that are subject to the federal proxy rules to hold non-binding shareholder votes on the compensation of their named executive officers and certain related matters. The final rules, which are substantially similar to the proposed rules the SEC issued on October 18, 2010, will affect the proxy statements prepared in connection with the 2011 annual meetings of most public companies. The main provisions of the final rules are described below.

Say-on-Pay and Say-on-Frequency

Say-on-Pay Vote:  New Exchange Act Rule 14a-21(a) requires registrants to hold a shareholder advisory vote to approve the compensation of their named executive officers (“say-on-pay”) at least once every three years. The rule requires the vote to be structured as a vote on a resolution approving all the compensation of the registrant's named executive officers as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Disclosure and Analysis. Although no specific form of resolution is required, the rule does include an example resolution.

New Item 24 to Schedule 14A requires registrants to include in their annual proxies disclosure about the say-on-pay vote and its effect, including whether or not the vote is binding. After registrants conduct their initial say-on-pay vote, new Item 24 will also require them to disclose in their annual proxies how frequently they conduct say-on-pay votes and when the next vote will be held.

Say-on-Frequency:  New Exchange Act Rule 14a-21 (b) requires registrants to hold a shareholder advisory vote on how often to conduct say-on-pay votes (“say-on-frequency”) at least once every six years. Shareholders must be given the choice of abstaining from the say-on-frequency vote or voting for the say-on-pay vote to be held every year, every two years or every three years. The registrant may, but need not, make a recommendation on the say-on-frequency vote. Because, as described below, in certain circumstances registrants who have made a recommendation for a say-on-frequency vote may vote uninstructed proxies in that vote, registrants should strongly consider making a recommendation.

As it does with say-on-pay vote, new Item 24 to Schedule 14A requires registrants to include in their annual proxies disclosure about the say-on-frequency vote and its effect, including whether or not the vote is binding.

Timing:  Registrants other than smaller reporting companies are required in most cases to hold their first say-on-pay and say-on-frequency votes at their first annual meeting of shareholders at which proxies are solicited for the election of directors (or special meeting held in lieu thereof) held on or after January 21, 2011. Smaller reporting companies will be required to hold these votes in their first annual meeting held on or after January 21, 2013.

Effect of the Votes:  As the proposed rules did, the final rules make clear that the required shareholder say-on-pay and say-on-frequency are not binding on the registrant. Likewise, the final rules make clear that the shareholder advisory votes do not overrule decisions made by the registrant or its board and do not alter or add to the fiduciary duties of the registrant’s directors in any way.

Shareholder Proposals:  The final rules’ amendments to Exchange Act Rule 14a-8 allow registrants to exclude shareholder proposals related to say-on-pay votes from their proxies under certain circumstances. Specifically, proposals that provide for a say-on-pay vote, seek a future say-on-pay vote or relate to the frequency of say-on-pay votes may be excluded as substantially implemented if a majority of the registrant’s shareholders have voted for a particular frequency of say-on-pay votes and the registrant has adopted a policy consistent with that frequency.

Preliminary Proxies:  The final rules amend Exchange Act Rule 14a-6(a) to provide that the mere inclusion of a say-on-pay or say-on-frequency vote (or any other shareholder advisory vote on executive compensation) in a registrant’s proxy will not require the registrant to file a preliminary proxy.

Uninstructed Proxies:  In say-on-frequency votes, the registrant may vote uninstructed proxies in favor of its recommendation if: (i) the registrant has made a recommendation; (ii) the proxy card gives shareholders the option to indicate that they are abstaining from the vote; and (iii) the proxy card includes a legend in bold type indicating how uninstructed proxies will be voted.

Compensation Disclosure and Analysis:  The final rules’ amendments to Item 402(b) of Regulation S-K add to the list of mandatory Compensation Disclosure and Analysis topics a discussion of whether and how the registrant considered its most recent say-on-pay vote and the effect such consideration has had on its compensation policies. Except for TARP companies, which are otherwise required to make such disclosure in their current proxies, this disclosure will be required only after registrants have held their initial mandatory say-on-pay votes under the final rules.

Form 8-K Disclosure:  The final rules’ amendments to Item 5.07 of Form 8-K require registrants to disclose whether and how they will implement the shareholders’ recommendation in say-on-frequency votes. This disclosure must be made either in the Form 8-K disclosing the results of the say-on-frequency vote or in an amendment to that Form 8-K. The amendment must be made within 150 days of the applicable meeting, but not later than 60 days before the deadline for shareholder proposals for the next annual meeting.

Golden Parachutes

Golden Parachutes:  The final rules require registrants to provide disclosure about, and in some cases to hold shareholder advisory votes to approve, "golden parachute" compensation for named executive officers in connection with mergers, acquisitions and similar transactions that are subject to shareholder approval. As required by Dodd-Frank, the final rules define “golden parachute” broadly to include any agreement or understanding, whether or not in writing, between the named executive officer and the target or the acquirer, regarding all forms of compensation, including deferred and contingent compensation, “that is based on or otherwise relates” to the transaction.

Disclosure Related to Golden Parachutes:  New Item 402(t) of Regulation S-K applies to proxy statements and similar documents prepared in connection with mergers, acquisitions, going-private transactions, tender offers and similar transactions (including materials that solicit proxies to approve ancillary matters necessary to effect such transactions, such as share issuances and reverse splits). Item 402(t) requires the proxy statement or similar document to include narrative and tabular disclosure about all golden parachute compensation payments that may be paid in connection with the transaction. The narrative disclosure must discuss all material conditions related to the compensation, as well as their duration and any provisions for their waiver or breach. The disclosure generally must cover arrangements between the named executive officers and both the target and the acquirer and does not include any exception for de minimis amounts or for amounts that will be paid to a broader class of the registrant’s employees.

Shareholder Vote:  The final rules require a shareholder vote on a golden parachute arrangement only when shareholder approval is sought for the transaction itself, and not when approval is sought for only ancillary matters (such as the issuance of additional shares or to address state anti-takeover statutes).

Exemptions and Exclusions:  Bidders in third-party tender offers are not required to provide golden parachute disclosure or obtain a shareholder vote, unless the tender offer is a going-private transaction subject to Rule 13e-3. Likewise, when an acquisition target is soliciting proxies to approve a transaction, the final rules do not require it to make disclosure about or obtain a shareholder vote on golden parachute arrangements between its named executive officers and the acquirer. Golden parachute arrangements that have been subject to a previous say-on-pay vote in which Item 402(t) disclosure was provided and that have not been modified (or modified only to reduce the value of the compensation) since such vote are exempt from the voting requirement, regardless of the outcome of the previous vote.

Effect of the Vote:  As the proposed rules did, the final rules make clear that the required golden parachute vote is not binding on the registrant, does not overrule decisions made by the registrant or its board and does not alter or add to the fiduciary duties of the registrant’s directors in any way.

Timing:  Golden parachute disclosure and votes will be required for all registrants, including smaller reporting companies, in all affected proxy or consent solicitation materials that are initially filed on or after April 25, 2011.


With proxy season and the initial say-on-pay and say-on-frequency votes fast approaching, registrants that have not yet done so should begin carefully scrutinizing their executive compensation practices and their current proxy disclosure about them. Disclosure should be reviewed not only for compliance with SEC requirements, but also to ensure that it strongly and clearly makes the case to shareholders that the company’s compensation arrangements merit their approval. As discussed above, because making such a recommendation will give them the ability to vote uninstructed proxies, registrants should strongly consider making a recommendation for their say-on-frequency vote. Although we do not expect that holding a voluntary advisory vote on their golden parachute arrangements will benefit most companies, registrants may also wish to consider whether such a vote would be beneficial to them.

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