SEC Adopts “Say-On-Pay” Rules


The Securities and Exchange Commission (the “SEC”) on January 25, 2011 adopted new rules concerning shareholder approval of executive compensation and “golden parachute” compensation arrangements to implement the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).

The Dodd-Frank Act requires public companies subject to the federal proxy rules to, among other things: (i) provide their shareholders with an advisory vote on executive compensation, generally known as “say-on-pay” votes; (ii) provide their shareholders with an advisory vote on the desired frequency of say-on-pay votes; and (iii) provide their shareholders with an advisory vote on compensation arrangements and understandings in connection with merger transactions, known as “golden parachute” arrangements.

Frequency of Shareholder Votes on Executive Compensation

The SEC’s new rules specify that say-on-pay votes required under the Dodd-Frank Act must occur at least once every three years beginning with the first annual shareholders’ meeting taking place on or after January 21, 2011. Companies are also required to hold a “frequency” vote at least once every six years in order to allow shareholders to decide how often they would like to be presented with the say-on-pay vote. This “frequency” vote, which also is a non-binding advisory vote, is required at least once every six years beginning with the first annual shareholders’ meeting taking place on or after January 21, 2011. The rules require companies to disclose the frequency vote in the annual meeting proxy statement, including whether the vote is non-binding.

Following the frequency vote, a company must disclose on an SEC Form 8-K how often it will hold the say-on-pay vote. This Form 8-K is required no later than 150 calendar days after the date of the annual meeting in which the vote took place, but in any event no later than 60 calendar days prior to the deadline for submission of Rule 14a-8 shareholder proposals for the subsequent annual meeting. In order to implement the requirement for such a “frequency” vote, the rules revises the proxy rules to permit these three choices on the proxy card. The rules also revise the shareholder proposal rule (Rule 14a-8) to provide guidance regarding the impact of these new requirements on shareholder proposals relating to say-on-pay votes or frequency of say-on-pay votes.

Approval and Disclosure of Golden Parachute Compensation

Under the SEC’s new rules, companies also are required to provide additional disclosure regarding “golden parachute” compensation arrangements with certain executive officers in connection with merger transactions. Disclosure is required of all agreements and understandings that the acquiring and target companies have with the named executive officers of both companies. The rules require this disclosure in both narrative and tabular formats. The “golden parachute” disclosure is also required in connection with other transactions, including going-private transactions and third-party tender offers, so that the information is available for shareholders no matter the structure of the transaction. The rules require companies to provide a separate shareholder advisory vote to approve certain “golden parachute” compensation arrangements in connection with a merger, acquisition, consolidation, proposed sale or other disposition of all or substantially all assets. Companies are required to comply with the golden parachute compensation shareholder advisory vote and disclosure requirements in proxy statements and other schedules and forms initially filed on or after April 25, 2011.

Extension for Smaller Reporting Companies

Under the new rules the SEC provided a temporary exemption for smaller reporting companies (public float of less than $75 million). These smaller companies are not required to conduct say-on-pay and frequency votes until annual meetings occurring on or after January 21, 2013.