SEC Proposes Say-on-Pay Rules

Author:Mr David Lynn, Michael T. Frank and Jackie Liu
Profession:Morrison & Foerster LLP


Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") requires that companies include a resolution in their proxy statements asking shareholders to approve, in a nonbinding vote, the compensation of their executive officers, as disclosed under Item 402 of Regulation S-K (the "Say-on-Pay" vote). A separate resolution is also required to determine whether this Say-on-Pay vote takes place every one, two, or three years (the "Say-on-Frequency" vote). If any golden parachute compensation has not been approved as part of a Say-on-Pay vote, the Dodd-Frank Act requires that companies solicit shareholder approval of golden parachute compensation through a separate nonbinding vote at the meeting where the shareholders are asked to approve a merger or similar extraordinary transaction that would trigger "golden parachute" payments (the "Say-on-Golden Parachute" vote). The Dodd-Frank Act requires that any proxy statement used for soliciting the Say-on-Golden Parachute vote must include clear and simple disclosure of the golden parachute arrangements or understandings and the amounts payable.

While Section 951 of the Dodd-Frank Act did not specifically mandate the adoption of rules to implement the advisory vote on executive compensation provisions, the SEC has decided to propose rules that will facilitate the implementation of the new requirements. Under the proposed rules specified in Release 33-9153 (the "Proposing Release"), public companies subject to the proxy rules would be required to:

provide their shareholders with a Say-on-Pay vote and a Say-on-Frequency vote, along with additional disclosure about the Say-on-Frequency vote; provide shareholders with a Say-on-Golden Parachute vote; and provide additional disclosure of golden parachute arrangements in merger proxy statements (and potentially in proxy statements seeking a Say-on-Pay vote). The SEC also proposed rules in Release 34-63123 that would require that institutional investment managers report their votes on Say-on-Pay, Say-on-Frequency, and Say-on-Golden Parachutes at least annually, unless the votes are otherwise required to be reported publicly by SEC rules.


Comments on the proposals are due by November 18, 2010. It is expected that the SEC would be in a position to adopt the final rules by as early as January 2011; however, it appears unlikely that the final rules will be effective for all proxy statements required to be filed for annual meetings taking place on or after January 21, 2011. The SEC confirms in the Proposing Release that a company must include separate resolutions for the Say-on-Pay and Say-on-Frequency vote in any preliminary or definitive proxy statement filed for an annual meeting occurring on or after January 21, 2011, whether or not the SEC's proposed rules and amendments have been adopted by that time.

However, the SEC notes that because the statute requires SEC rulemaking with respect to the disclosure of golden parachute compensation arrangements, the proposed disclosure that would be mandated under a new paragraph (t) of Item 402 of Regulation S-K and a separate shareholder resolution to approve golden parachute compensation arrangements would not be required for merger proxy statements until the implementing rules become effective.

The SEC notes the following important transition issues:

Until the SEC takes final action to amend Rule 14a-6, the SEC would not object if an issuer did not file a preliminary proxy statement when the only matter that would trigger such a preliminary proxy statement filing is a Say-on-Pay or Say-on-Frequency vote. Until the SEC takes final action to amend Rule 14a-4, the SEC will not object if the form of proxy used by an issuer for a shareholder vote on a Say-on-Frequency resolution provides a means whereby persons solicited are afforded an opportunity to specify by boxes a choice among one, two, or three years, or abstain. Further, if proxy services such as Broadridge are unable to accommodate the four choices in time for the vote, the SEC will not object if the solicited persons are afforded the opportunity to specify by boxes a choice among one, two, or three years, and proxies are not voted on the Say-on-Frequency matter if a solicited person does not select one of the three choices. SAY-ON-PAY VOTE

The SEC proposes a new Rule 14a-21 to address the implementation of the advisory votes on executive compensation matters mandated by Section 951 of the Dodd-Frank Act. In many cases, the SEC took a similar approach to the rules that it adopted under the Emergency Economic Stabilization Act (the "EESA"), which required that financial institutions receiving government assistance submit a Say-on-Pay vote to their...

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