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Tuesday, October 19, 2010

Director Highlights of Yesterday's SEC Proposed Say on Pay Rule

Yesterday the SEC proposed rules to implement the say on pay provisions of Dodd-Frank. Here are the key points for directors.
  1. Director compensation is not subject to stockholder approval under Dodd-Frank.
  2. There must be a shareholder advisory say on pay vote at the 2011 annual meeting (or other meeting, whichever is first, held after January 21) and no less frequently than once every three years thereafter. The non-binding shareholder vote is required to cover the compensation of the named executive officers as disclosed under Item 402 of Reg SK, which means the tables, the narrative and the CD&A -- including the golden parachute compensation. And, of course, the CD&A must now discuss the impact of any shareholder votes on the comp committee's subsequent compensation determinations.
  3. At least once every 6 years, starting in 2011, stockholders must be given a separate non-binding (under the proposed rules) vote on how frequently to hold the say on pay votes. With limited exceptions, a non-binding frequency vote presented to the stockholders must be in a form that allows them to select from 4 choices: ONE, TWO or THREE years or ABSTAIN. This is NEW. Most proxy cards are structured FOR, AGAINST or ABSTAIN, and some service providers may not be able to reprogram their systems for a 4 choice vote (In that case, the SEC has provided a limited exception). Of course, management can make a recommendation regarding that frequency and is not bound by the vote, in any event. All other things being equal, we think an annual say on pay vote is preferable, even if the shareholders elect a different cycle. An annual vote makes it a routine matter and gives more immediate feedback to the Board and Management rather than delaying the conversation, building shareholder frustration and making the vote a major crisis when it finally arrives.
  4. The SEC has proposed a new table and disclosure regime for proxy statements on mergers, sales, asset sales, other changes in control etc. ( "CICc") and the related say on pay votes. The CICs format includes, among other things, a table breaking out in columnar form the golden parachute components for each NEO: cash, equity, pension/nqdc, perquisites/benefits, tax reimbursement, other and total. For their routine proxy statements companies can (but are not required to) choose to use the CICs format, in which event that disclosure and shareholder advisory vote will count when it comes time for a deal. If companies do not use the CICs format when seeking the regular say on pay vote, then another separate golden parachute vote is required in that Change in Control proxy statement. As expected, even if the CICs regime is used for routine meetings, additional disclosure and a separate vote would be required if the information in the table changes. The practice point, however, is that activist shareholders are expected to press companies (and send in comments to the SEC during the comment period) to utilize the more extensive tabular disclosure mandated by the CICs regime in its annual disclosure even where a merger or other change in control is not involved.
  5. Shareholder say on pay proposals may be excluded from the proxy statement to the extent they duplicate the votes presented to the meeting under Dodd-Frank.
  6. Broker discretionary voting of uninstructed shares, of course, is not permitted on these say on pay votes.
  7. These are just the highlights of most interest to directors. There are provisions for smaller companies and TARP companies and other changes and forms affected by the proposed rule. The rule can change. Comments are due by November 18, 2010, some time after which we should have a final rule.

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