SEC Proposes Say-on-Pay Rules

On October 18, 2010, the SEC announced proposed rules for the implementation of Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to shareholder approval of executive compensation and "golden parachute" compensation arrangements. Comments on the proposed rules are due by November 18, 2010, with adoption likely to follow shortly thereafter.

The Say-on-Pay and Say-on-Pay frequency votes outlined below will be required for all public reporting companies for any annual meeting (or special meeting at which directors are to be elected) occurring after January 21, 2011. The Golden Parachute Advisory vote will be required only after the SEC issues final rules on the requirement, which will likely be in early 2011.

Attachment A is a summary sheet of the material provisions of the proposed rules, which are intended to implement the statutory requirements. The full text of the SEC’s proposing release and proposed rules, Shareholder Approval of Executive Compensation and Golden Parachute Compensation, Release Nos. 33-9153; 34-63124 (October 18,2010), may be accessed at http://sec.gov/rules/proposed/2010/33-9153.pdf.

Say-on-Pay Shareholder Advisory Votes

Proposed Rule 14a-21(a). Similar to Rule 14a-20 relating to shareholder approval of executive compensation for TARP recipients, Rule 14a-21(a) specifies how other public companies must provide a separate shareholder advisory vote to approve the compensation paid to named executive officers (NEOs). The proposed rule does not specify the language or form of resolution that are required to be used for such shareholder vote. Moreover, only executive compensation for NEOs is covered; the vote does not relate to director compensation or to a company’s compensation policies and practices as they relate to risk management and risk-taking incentive compensation for employees generally.

Proposed Item 24 to Schedule 14A. A proxy statement with a Say-on-Pay proposal would have to briefly explain the general effect of the shareholder advisory vote, such as that the vote is non-binding.

Proposed Amendments to Item 402(b) of Regulation S-K. Companies would be required to address in the CD&A whether and, if so, how their compensation policies and decisions have taken into account the results of shareholder advisory votes on executive compensation. As “smaller reporting companies” are not required to include a CD&A in their disclosures, they would only be required to provide a narrative description of such factors pursuant to Item 402(o), if consideration of prior executive compensation advisory votes is a material factor necessary to an understanding of the information disclosed in the Summary Compensation Table.

Say-on-Pay Frequency Votes

Proposed Rule 14a-21(b). Commencing after January 21, 2011, public companies are also required at least once every six years to conduct a separate shareholder advisory vote on the frequency of presenting shareholder advisory Say-on-Pay votes on executive compensation. Under proposed Rule 14a-21(b) and amended Rule 14a-4, shareholders would have to be given four choices on the company's proxy card: whether the shareholder vote on executive compensation should occur every 1, 2, or 3 years, or a choice to abstain from voting on the matter. The Staff noted that any other variation would not meet the Dodd-Frank Act requirements.

Golden Parachute Arrangements

Proposed Item 402(t) of Regulation S-K. Companies would be required by Rule 14a-21(c) to include in any proxy or solicitation material seeking to approve an acquisition, merger, consolidation or proposed sale or disposition of all or substantially all of its assets a tabular disclosure under Item 402(t) separately quantifying for each NEO the value of:

• cash severance payments,
• accelerated stock awards, in-the-money option awards for which vesting would be accelerated, and payments in cancellation of stock and option awards,
• pension and nonqualified deferred compensation benefit enhancements,
• perquisites and other personal benefits and health and welfare benefits,
• tax reimbursements,
• any other benefits (including benefits pursuant to arrangements that are available generally to all salaried employees and do not discriminate in scope, terms or operation in favor of the NEOs), and
• the total amount of all such payments and benefits.

Companies would be required to footnote the table showing amounts that are triggered by the covered transaction (single trigger) and amounts that are contingent upon additional conditions, such as termination of employment (double trigger). The tabular disclosure would require quantification with respect to any agreements or understandings, whether written or unwritten, between each NEO and the acquiring company or the target company, concerning any type of compensation, whether present, deferred, or contingent, that is based on or otherwise relates to the subject acquisition, merger, consolidation, or other similar transaction.

Companies would also be required to provide a narrative describing (i) the specific circumstances that would trigger such payments, (ii) whether the payments would or could be lump sum, or annual, and their duration, (iii) by whom the payments would be provided, and (iv) any material conditions or obligations to the receipt of the compensation, including non-compete, non-solicitation, non-disparagement or confidentiality agreements and provisions regarding waiver or breach of such agreements.

Form 10-Q and 10-K Changes

The proposed rules would also add new disclosure requirements to the Form 10-Q and Form 10-K rules. In the periodic report covering the period during which the shareholder advisory vote on Say-on-Pay frequency occurs, the issuer must disclose the company’s decision on how frequently it will conduct shareholder advisory votes on executive compensation in light of the results of the shareholder vote on frequency.

Other Changes

The SEC proposes to amend Rule 14a-6 relating to the requirement to file preliminary proxy materials to exclude the Say-on-Pay and Say-on-Pay Frequency proposals from triggering a preliminary proxy filing requirement. As such, the inclusion of these proposals will not trigger a preliminary proxy filing and ten-day waiting period. In addition, Rule 14a-8 relating to shareholder proposals would be revised to allow companies to exclude from proxy materials any shareholder proposal that seeks a Say-on-Pay vote or that relates to the frequency of Say-on-Pay votes, provided the company has adopted a policy on the frequency of Say-on-Pay votes that is consistent with the plurality of votes cast in the most recent vote, and the company provides a vote on frequency at least every six years as required by the Dodd-Frank Act.

Finally, although not specifically required by the Dodd-Frank Act, the SEC has proposed that disclosures set forth in Item 402(t) of Regulation S-K relating to golden parachute compensation would be required to be included in (i) information statements filed pursuant to Regulation 14C, (ii) proxy or consent solicitations that do not contain merger proposals but nonetheless require disclosure of information under Item 14 of Schedule 14A, (iii) registration statements on Forms S-4 and F-4 containing disclosure relating to mergers and similar transactions, (iv) going private transactions on Schedule 13E-3, and (v) third party tender offers on Schedule TO and Schedule 14D-9 solicitation/recommendation statements. A bidder in a third party tender offer would be required to disclose in its Schedule TO the target's golden parachute arrangements only to the extent the bidder has knowledge about such arrangements after reasonable inquiry.

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