SEC Proposes Say-on-Pay, Golden Parachute Regulations

The Securities and Exchange Commission (SEC) has released proposed regulations implementing some of the executive compensation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act” or “the Act”).  While the Act, which was signed into law on July 21, 2010, focuses on overhauling the financial services industry, it also includes a number of broad executive compensation provisions that apply beyond this sector. Among other things, Section 951 of the Act provides for a “say-on-pay” shareholder advisory vote on executive compensation and golden parachutes. The proposed regulations – Reporting Of Proxy Votes On Executive Compensation And Other Matters (pdf) and Shareholder Approval Of Executive Compensation And Golden Parachute Compensation (pdf) – address these provisions.

Say-on-Pay

The regulations would require public companies subject to the federal proxy rules to provide their shareholders with a non-binding vote on executive compensation and a separate non-binding vote on how often such votes should occur. The Act requires these votes to take place at least once every three years beginning with the first annual shareholders’ meeting conducted on or after January 21, 2011. Shareholders would be permitted to vote at least once every six years starting with the first shareholder meeting held on or after January 21, 2011 to determine how often these say-on-pay votes should take place. The Act requires separate resolutions subject to shareholder vote to approve executive compensation and to approve the frequency of say-on-pay votes for proxy statements relating to an issuer’s annual or other meeting of the shareholders occurring on or after January 21, 2011, whether or not the SEC has adopted final rules to implement these provisions by that date.

Under the SEC proposed rules, companies must provide disclosure of the say-on-pay and frequency votes in the annual proxy statement and explain the non-binding nature of the votes. The proposal would amend Form 10-K and Form 10-Q to require additional disclosure regarding the company’s action as a result of the shareholder vote on the frequency of shareholder votes on executive compensation. The proposed rule does not require companies to use any specific information or form of resolution to be voted on by the shareholders. However, the SEC is soliciting comments on whether the SEC should designate the specific language to be used and/or require issuers to frame the shareholder vote to approve executive compensation in the form of a resolution.

The proposed regulations require a company to explain in the CD&A whether and how it has applied the results of previous say-on-pay votes. The SEC is soliciting comments on whether the proposed requirement for CD&A discussion of the issuer’s application of previous shareholder advisory votes be revised to relate only to application of the most recent shareholder advisory votes.

Golden Parachutes

Shareholders would be entitled to an advisory vote on compensation arrangements and understandings in connection with merger transactions, commonly referred to as “golden parachutes.” Moreover, under the proposed regulations, companies would be required to provide additional information to shareholders regarding such arrangements in their merger proxy statements. Because the Act requires such disclosure “in accordance with regulations to be promulgated by the Commission,” the golden parachute disclosure and vote would not be required until the SEC has issued final rules on this provision.

Disclosure of any golden parachute arrangements would be required of all agreements and understandings that the acquiring and target companies have with the named executive of both entities, and in connection with going-private transactions and third-party tender offers. The proposed rule would require disclosure of named executive officers’ golden parachute arrangements in both tabular and narrative formats. Issuers must 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. The SEC proposal also requires issuers to provide a description of the specific circumstances that would trigger payment of the golden parachute, 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.

Institutional Investment Manager Reporting

All institutional investment managers that manage certain equity securities of at least $100 million in fair market value must report to the SEC their votes on executive compensation and golden parachutes at least once a year, unless their votes are already required to be reported publicly. As discussed in an SEC press release, such managers must identify and describe the securities and executive compensation matters voted on, “disclose the number of shares over which the manager held voting power and the number of shares voted, and indicate how the manager voted.” These reports must be disclosed by August 31 of each year for the prior 12-month period ending June 30.

Smaller Companies

The proposed rule does not exempt smaller reporting companies from the say-on-pay vote, frequency of say-on-pay votes, and golden parachute disclosure and vote. According to the preamble to the proposed rule, the SEC “believe[s] investors have the same interest in voting on the compensation of smaller reporting companies and in clear and simple disclosure of golden parachute compensation in connection with mergers and similar transactions as they have for other issuers.” The SEC is also soliciting comments on whether it would be appropriate to exempt smaller reporting companies from the shareholder vote to approve executive compensation.

Comments on these proposed regulations must be received on or before November 18, 2010, and contain the file number S7-30-10 for comments on the regulations governing the reporting of proxy votes on executive compensation, and file number S7-31-10 for comments on the regulations governing the shareholder approval of executive compensation and golden parachutes. Comments may be made electronically using the SEC’s Internet comment form; via email: rule-comments@sec.gov (include the appropriate file number on the subject line); or through the federal eRulemaking portal: http://www.regulations.gov. Written comments should be sent in triplicate to: Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.

For more information on the executive compensation provisions contained in the Dodd-Frank Act, see Littler's ASAP: Executive Compensation and the Wall Street Reform and Consumer Protection Act by Nick Linn, Ilyse Schuman, and Ellen Sueda.

Photo credit: DigitalZombie

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.