The Securities and Exchange Commission (the SEC) has proposed rules to implement Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), that provide public company shareholders with an advisory vote on executive compensation packages and "golden parachute" arrangements received by company executives in connection with acquisitions (Release No. 33-9153). Further, the SEC issued additional proposed rules that seek to implement the Dodd-Frank Act requirement that institutional investment managers report on an annual basis how they voted on executive compensation issues (Release No. 34-63123). Smaller Reporting Companies (companies with a public float of less than $75 million) are not exempt from the proposed rules. The SEC is currently soliciting comments on the two releases, which may be submitted electronically on the SEC's internet comment form ( or in paper form. All comments will be available for public review on the SEC's website. The SEC may formally adopt the new rules once the 30-day comment period ends on November 18, 2010. It is expected that these rules will be in place for the 2011 proxy season.

Below is a summary of the key proposed rules:

Required Say-on-Pay Votes and Additional Disclosure Requirements

Shareholder Approval of Executive Compensation: The SEC's proposed rules require all public companies, not less frequently than once every three years, to provide a separate shareholder advisory vote in proxy statements to approve the compensation of the company's named executive officers (commonly referred to as the "say-on-pay vote") and to briefly explain the general effect of the vote, such as whether the vote is non-binding. The say-on-pay vote applies to annual or other meetings of shareholders for which SEC rules require the disclosure of executive compensation, and relates to non-binding, advisory approval of the compensation paid to the issuer's named executive officers, as disclosed in the proxy statement, including the Compensation Discussion and Analysis (CD&A), the compensation tables and other narrative executive compensation disclosures. (Note that under the proposed rules, the SEC is not changing the current rule that exempts Smaller Reporting Companies from including CD&A in their proxy statements.) Director compensation is not subject to the shareholder advisory vote. The proposed rules also require disclosure in CD&A of whether, and if so how, companies consider the results of previous say-on-pay votes in structuring their compensation policies and decisions. The Dodd-Frank Act requires the say-on-pay vote for all proxy statements relating to an annual or other meeting of shareholders occurring on or after January 21, 2011, regardless of whether the proposed rules have been adopted.

Shareholder Approval of the Frequency of Shareholder Votes on Executive Compensation: Under the proposed rules, companies will be required to allow shareholders a separate advisory vote on how often they would like to cast the newly required say-on-pay vote (e.g., every year, every other year or once every three years). Such "frequency" votes will begin with the first annual shareholders' meeting taking place on or after January 21, 2011, and then not less frequently than once every six years. The shareholders voting on this matter must be given four choices; abstain, or vote that the shareholder vote on executive compensation will occur every one, two or three years. Board recommendations as to how shareholders should vote may be included, but the SEC has advised that issuers must be clear that that the proxy provide for four choices, rather than merely approving or rejecting the issuer's recommendation. Since there are multiple choices afforded to the shareholders, the option receiving the largest plurality of votes will be deemed the shareholders' choice. Further, the proposed rules require companies to disclose in its quarterly report on Form 10-Q (or on Form 10-K for shareholder meetings taking place during the fourth quarter), its decision regarding how frequently it will conduct the say on pay votes in light of the results of said vote. (This is in addition to its Form 8-K reporting the results of the meeting under the recently adopted rules.)

The addition of the say-on-pay vote and "frequency" votes will not trigger a requirement to file a preliminary proxy statement. Further, to the extent that an issuer decides to adopt the shareholders' non-binding vote relating to the frequency of the say-on-pay vote, then subsequent shareholder proposals requesting a say-on-pay vote with a different frequency may be disregarded. 

Shareholder Disclosure and Approval of Golden Parachute: Under the proposed rules, public companies will be required to disclose details about compensation arrangements (known as "golden parachute arrangements") with named executive officers of both acquiring and target companies in any proxy or consent solicitation (as well as information statements, registration statements, going private transactions and third party tender offers) to approve an acquisition, merger, consolidation or proposed sale or other disposition of all or substantially all assets of a company. New Item 402(t) of Regulation S-K requires tabular and narrative disclosure, as well as footnote disclosure of certain items, such as whether such compensatory amounts are attributable to single or double-trigger arrangements. Further, the proposed rules will require public companies in certain circumstances to hold a separate shareholder advisory vote on golden parachute arrangements in connection with mergers and similar transactions; notably, such an advisory vote will not be required with respect to arrangements between the acquiring issuer and the target's named executive officers when the target conducts the proxy or consent solicitation to approve the merger or similar transaction. In addition, issuers would not be required to include in the merger proxy a separate shareholder vote on the golden parachute compensation disclosed under Item 402(t) of Regulation S-K if such disclosure had been subject to a prior vote of shareholders (e.g. in an annual meeting proxy). In the event that there have been new arrangements or revised terms to golden parachute arrangements previously subjected to shareholder vote, then the proposed rules provide that two separate tables should be provided under Item 402(t); one that discloses all golden parachute compensation, including that previously disclosed and voted upon as well as the new or revised terms, so that shareholders may see the full scope of the arrangements, and a second table setting forth only the new or revised terms, which is what the vote would be limited to. Unlike the say-on-pay vote, the disclosure and advisory vote relating to golden parachute arrangements will not be effective until the SEC rules are final and effective.

Institutional Investment Manager Reporting of Votes: The SEC's proposed rules will require an institutional investment manager to annually report how they voted on executive compensation issues. The proposal will apply to every institutional investment manager that exercises investment discretion over accounts holding certain equity securities having an aggregate fair market value of at least $100 million or more. The investment manager would be required to report the vote on such compensation matters only if it held the power (whether sole or shared) to vote or direct the voting with respect to those compensation matters. Those subject to the proposed rules will be required to report annually on Form N-PX, not later than August 31 of each year, for the most recent 12-month period ending June 30. If adopted, reporting persons will be required to file their first reports on Form N-PX covering each of the above described executive compensation votes at meetings that occur on or after January 21, 2011. 

The SEC further proposed to amend Form N-PX, which is currently used by registered investment management companies to file their complete proxy voting records with the SEC. The information required on the amended form is substantially the same as the information currently required on Form N-PX, with a few exceptions. Notably, the reporting person will be required to include: securities voted; a general description of the compensation issue voted on; the number of shares that the reporting person was entitled to vote or had or shared voting power over; the number of shares that were voted; and how those shares were voted. 

Steps to Take

To ensure that your company is adequately prepared to address the shareholder advisory votes and disclosure, we advise that the following steps be considered:

  • Consider the impact of these rules on your upcoming proxy statement, including your CD&A disclosure and the inclusion of the vote into your proxy statement.
  • Talk with your proxy service providers regarding the mechanics of the new voting requirements.
  • Begin to evaluate how the results of the shareholder vote should impact your company's future executive compensation structure and philosophy.
  • Determine the company's position and recommendation regarding frequency of the shareholder vote, and be prepared to disclose the company's decision regarding frequency in its report for the period of the meeting date.
  • Determine whether it is advisable for your company to include the new Regulation 402(t) golden parachute disclosure in your annual proxy statements now, so as to be exempt from the shareholder advisory vote if your company participates in a triggering transaction in the future.

For questions or more information, contact one of the members of the firm's Securities/SEC Practice Group including:

Lewis U. Davis, Jr. — 412 562 8953;
Jeremiah G. Garvey — 412 562 8811;
Jennifer R. Minter — 412 562 8444;
Brian S. North — 215 665 3828;
Brian S. Novosel — 412 562 5266;