Focus on Your CD&A in 2012: Being Responsive to Stockholders and Avoiding Say-On-Pay Lawsuits

Focus on Your CD&A in 2012: Being Responsive to Stockholders and Avoiding Say-On-Pay Lawsuits

In 2012, companies should focus on the disclosure requirements of the Compensation Discussion and Analysis (CD&A) contained in their proxy statements, particularly with a view toward being responsive to stockholders and minimizing the risk of say-on-pay lawsuits.

Excerpt:

During 2011, stockholders voted on an advisory basis on the executive compensation of most all public companies (generally known as "say-on-pay"). Stockholders also voted on the frequency of future say-on-pay votes (generally, annually or every two or three years). In 2012, companies should focus on the disclosure requirements of the Compensation Discussion and Analysis (CD&A) contained in their proxy statements, particularly with a view toward being responsive to stockholders and minimizing the risk of say-on-pay lawsuits.

Background

Stockholders overwhelmingly approved their company's say-on-pay proposals in 2011. 1 Companies should now focus on the level of that approval and the appropriate responsive actions to take. SEC rules require that a company disclose in its proxy statement whether and how the company took into account the say-on-pay vote in making future executive compensation decisions. Additionally, Institutional Shareholder Services (ISS) has stated that if the company's say-on-pay vote received less than 70% of stockholder support, ISS will closely scrutinize the company's responsiveness to stockholder concerns, and depending on that review potentially recommend voting against compensation committee members and the company's next say-on-pay vote. Finally, some companies with failed say-on-pay votes have been sued by plaintiffs that have generally alleged that the company's proxy was misleading because, notwithstanding the company's assertion that it pays for performance, there was evidence to the contrary (including the fact of a failed say-on-pay vote).

CD&A Disclosure in Response to Say-On-Pay Vote

Item 402(b)(vii) of Regulation S-K requires that public companies disclose whether and, if so, how, the company has considered the results of the most recent say-on-pay vote (i.e., 2011 vote) in determining compensation policies and decisions.

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