SEC Adopts Say-On-Pay Rules

By Cydney Posner

This morning, the SEC voted to adopt rules relating to shareholder advisory votes to approve the compensation of executives (say-on-pay votes), the frequency of say-on-pay votes and golden parachutes. The vote was three to two, with some low-level pyrotechnics from Commissioners Casey and Paredes, who both dissented. Except as noted below, the rules related to say-on-pay and frequency votes will apply to proxy statements related to companies' first meetings at which directors are elected after January 21, 2011, and the parachute vote requirements will become applicable April 25. If the SEC continues its most recent practice, the release should be posted to the SEC's website later today.

As you know, new Section 14A of the Exchange Act, added by Dodd-Frank, mandates three new non-binding shareholder votes applicable to public companies:

• At least once every three years, a separate say-on-pay resolution to approve the compensation of executives as disclosed pursuant to Item 402 of Reg S-K;
• At least once every six years, a separate resolution to determine whether the shareholder vote to approve the compensation of executives will occur every 1, 2 or 3 years; and
• Whenever shareholders are asked to approve an acquisition, merger, consolidation or proposed sale of all or substantially all the assets of an issuer, a separate shareholder vote to approve golden parachute arrangements, unless already voted on in connection with the periodic say-on-pay vote described above.

From the summary description given during the meeting, there did not appear to be many significant changes to the proposal, but that may not ultimately turn out to be the case when the final rule release is actually posted.

• For smaller reporting companies, the application of the SOP and frequency vote requirements (but not the parachute vote requirements) will be deferred for two years until January 13, 2015, allowing the SEC time to study the impact on larger companies and make adjustments appropriate for smaller companies and allowing smaller companies to observe the operation of the rules and prepare for implementation.
• The proposed rule had provided, under a note to Rule 14a-8(i)(10), that shareholder proposals seeking an advisory say-on-pay vote or relating to the frequency of say-on-pay votes could be excluded if the company adopted and implemented a policy regarding frequency that was consistent with the plurality of votes cast in the most recent frequency vote. The final rules permit this exclusion only if the policy adopted and implemented is consistent with the majority of votes cast (if one of the frequency choices receives a majority vote).
• Under the proposal, a company would have been required to report, in the Form 10-Q covering the period during which the frequency vote occurred, the company's decision regarding how frequently it would conduct say-on-pay votes in light of the results of the shareholder vote. In response to comments indicating that there would be insufficient time to properly consider the impact and alternatives, the final rules transfer the requirement to a Form 8-K, which will be due 150 calendar days after the meeting date but no later than 60 days prior to the deadline for receipt of shareholder proposals for the next meeting.
• In response to comment, the final rules clarify that the SOP and frequency vote requirements apply only to shareholder meetings at which directors will be elected and where Item 402 disclosure is required to be included in the related proxy statement.
• Apparently, technical problems have been resolved and, under amendments to Rule 14a-4, the proxy card will be required to provide four choices for the frequency vote, including "abstain."
• The CD&A must disclose whether, and if so, how companies have considered the results of the most recent say-on-pay vote.
• Under amendments to Rule 14a-6, preliminary proxy filing would not be required as a result of inclusion in proxy statements of the say-on-pay and frequency votes.
• With regard to the parachute vote, bidders in third-party tender offers will be exempt from compliance; however, target companies will be required to provide the information in the 14D-9.

Commissioners Casey and Paredes both objected on the same two grounds. First, in light of the express exemptive authority for smaller reporting companies given to the SEC in Dodd-Frank, they viewed the delay in application of the vote requirements as inadequate and unduly restrictive. As Paredes noted, the SEC "did not do enough" to minimize the burden on smaller companies. Commissioner Walter contended, on the other hand, that the final rule was balanced in that it provided for a delay and did not impose a requirement on smaller companies to include a CD&A. Second, both commissioners objected that the rules did not provide a one-year delay for newly public companies. Casey contended that the disclosure and vote would inappropriately capture pre-public compensation. Paredes worried that the absence of a deferral could deter companies from going public in the U.S. Casey also objected strenuously to the change in the threshold for the exclusion under Rule 14a-8 from plurality to majority in the frequency vote. Her concern was that, given the multiple choices available to shareholders, it was unlikely that any of the choices (other than "annual") would receive a majority vote and this higher threshold could coerce companies into recommending an annual vote, especially in light of the announced policy positions by proxy advisory firms (such as ISS) advocating annual votes.

The SEC also voted to propose rule amendments regarding the definition of "accredited investor" and to propose a rule under the Advisers Act establishing reporting obligations for advisers to private funds, all as required under the DFA.

View the final release here.

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