By David Lynn
One year ago today, President Obama signed into law the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank
Act"). While the Dodd-Frank Act focuses principally on changes to the financial
regulatory system, several corporate governance, compensation and disclosure
provisions of the Dodd-Frank Act specifically target public companies of all
types. These include:
-
a requirement that public companies solicit
an advisory vote on executive compensation (the "Say-on-Pay" vote), an advisory
vote on the frequency of holding an advisory vote on executive compensation
(the "Say-on-Frequency" vote) and, in the event of a merger or other similar
extraordinary transaction, a vote on certain golden parachute compensation that
is triggered by the transaction (a "Say-on-Golden Parachute") vote;
-
requirements that the U.S. Securities and
Exchange Commission (the "SEC") adopt rules directing the securities exchanges
to adopt listing standards with respect to the independence of members of the
compensation committee and the use of consultants and other advisers to the
compensation committee;
-
provisions calling for the SEC to adopt
expanded disclosure requirements regarding executive compensation matters,
including the relationship of pay to performance, the ratio of the amounts of
median employee total compensation to CEO total compensation, and whether any
employee or director is permitted to purchase financial instruments designed to
hedge the value of equity securities;
-
provisions that require the SEC to direct the
securities exchanges to adopt listing standards with respect to compensation
recovery policies that provide for the recoupment of executive compensation in
the event of an accounting restatement;
-
provisions impacting the ability of brokers
to vote uninstructed "street name" shares in their discretion on matters
related to director elections, executive compensation and potentially other
matters to be determined by the SEC;
-
authorization for the SEC to adopt rules
permitting shareholders meeting specified criteria to nominate director
candidates that must be included in a company's proxy statement (so-called
"proxy access"); and
-
new disclosure requirements regarding conflict
minerals, mine safety and payments by companies engaged in resource extraction
(referred to collectively as "Specialized Corporate Disclosure").
The SEC has adopted rules implementing the Say-on-Pay,
Say-on-Frequency and Say-on-Golden Parachute requirements. Final rules have
also been adopted prohibiting broker discretionary voting on executive
compensation matters. The SEC adopted rules implementing proxy access (which
had been proposed prior to enactment of the Dodd-Frank Act), although the effectiveness
of those rules has been stayed pending the resolution of litigation challenging
the validity of the rules.
The SEC has proposed rules regarding compensation committee
independence and the use of compensation consultants and other advisers, but
has not yet adopted any final rules. Further, the SEC has proposed rules
implementing the Specialized Corporate Disclosure provisions, but has not yet
adopted final rules. No rules have been proposed or adopted with respect to the
relationship of pay to performance, the ratio of the amounts of median employee
total compensation to CEO total compensation, and whether any employee or
director is permitted to purchase financial instruments designed to hedge the
value of equity securities. Further, no rules have been proposed to direct the
securities exchanges to adopt listing standards with respect to compensation
recovery policies that provide for the recoupment of executive compensation in
the event of an accounting restatement. Final action on these proposed rules
and expected rules is planned for later this year.
ADVISORY VOTES ON EXECUTIVE COMPENSATION
Dodd-Frank Act Requirements
Beginning with shareholder meetings occurring on or after
January 21, 2011, Section 951 of the Dodd-Frank Act required that all public
companies (except those companies exempted from the requirement by the SEC)
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. A Say-on-Frequency vote is required
in the form of a separate resolution asking stockholders to cast an nonbinding
vote on whether the Say-on-Pay vote takes place every one, two, or three years.
Section 951 of the Dodd-Frank Act also provides that if
golden parachute compensation has not been approved as part of a Say-on-Pay
vote, then a company must solicit shareholder approval of certain 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 payments under the "golden parachute"
provisions. The Dodd-Frank Act also 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.
The SEC's Implementing Rules
In order to implement these requirements, the SEC adopted
new Exchange Act Rule 14a-21, which governs advisory votes on executive
compensation going forward (with the exception of those issuers that have
indebtedness outstanding under the TARP program, who must solicit annual
Say-on-Pay votes under the Emergency Economic Stabilization Act, as amended
(the "EESA"), and Exchange Act Rule 14a-20). The SEC also adopted a number of
additional rule, form and schedule changes to accommodate the new Say-on-Pay,
Say-on-Frequency and Say-on-Golden Parachute votes.
Say-on-Pay Votes
New Rule 14a-21(a) provides that if a solicitation is
made by an issuer relating to an annual or other meeting of shareholders at
which directors will be elected and for which the SEC's rules require executive
compensation disclosure pursuant to Item 402 of Regulation S-K, then the issuer
must conduct a Say-on-Pay vote, and a Say-on-Pay vote must occur thereafter no
later than the annual or other meeting of shareholders held in the third
calendar year after the immediately preceding Say-on-Pay vote. The Say-on-Pay
vote relates to the executive compensation disclosure required to be included
in the proxy statement pursuant to Item 402 of Regulation S-K, which generally
includes the Compensation Discussion and Analysis (the "CD&A"), the
compensation tables, and the narrative disclosure on executive compensation.
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© Copyright 2011 Morrison &
Foerster LLP.
Because of the generality
of this update, the information provided herein may not be applicable in all
situations and should not be acted upon without specific legal advice based on
particular situations.