SEC Adopts Final Rules Relating to Say-on-Pay and Golden Parachute Compensation; Updates Proposed Timing of Other Dodd-Frank Provisions

Shareholder Approval of Executive Compensation — Rule 14a-21(a)

Summary of Proposed Rule

The SEC's proposed rule requires 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.

Rule as Adopted on January 25, 2011

Rule 14a-21(a) was adopted substantially as proposed with certain "modifications". The final rules confirmed that the separate shareholder vote on executive compensation was required only when proxies are solicited for an annual or other meeting of security holders for which SEC rules "require the disclosure of executive compensation pursuant to Item 402 of Regulation S-K." In addition:

The final rules clarify that a SOP vote is required at least once every three calendar years.
Under the proposed rules, the SEC indicated that a shareholder proposal relating to SOP or frequency could be excluded so long as the company had adopted and implemented a policy relating to frequency consistent with the frequency which most recently received a plurality of the votes cast. In the final rules, the SEC modified this requirement so as to permit this exclusion only when the policy adopted and implemented by the company is consistent with a frequency which received a majority of the votes cast (if none of the frequency choices received a majority vote then the proposal cannot be excluded on this basis).
The SEC confirmed that, under Rule 14a-6, preliminary proxy filings would not be required as a result of the SOP and frequency vote requirement.
The final rules specify that the application of SOP and frequency vote (but not golden parachutes) for smaller reporting companies will be deferred for two (2) years, until January 13, 2013.

Shareholder Approval of Frequency of SOP — Rule 14a-21(b)

Summary of Proposed Rule

Under the proposed rule, companies would be required to allow shareholders a separate advisory vote on how often they would like to cast the newly required SOP 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.

Rule as Adopted on January 25, 2011

The proposed Rule 14a-21(b) was adopted substantially with "slight modifications", which include the following:

The final rules clarify that a say-on-pay vote is required at least once every six calendar years following the prior frequency vote.
The final rules confirm that proxy cards will be required to provide four choices with respect to the frequency vote- one year, two years, three years and "abstain".
The proposed rules included a requirement that a company include in its Form 10-Q (or 10-K as applicable) covering the period during which the frequency vote occurred, a statement of the company’s decision regarding how frequently it would include a SOP vote in its proxy statement in light of said shareholder vote. The final rules changed this requirement, such that the statement regarding the company’s decision must instead be reported on an amendment filed within 150 calendar days following the meeting date, but no later than 60 days prior to the deadline for receipt of shareholder proposals for the following year, to the Form 8-K which reported the results of the voting at the shareholder meeting.

Shareholder Disclosure and Approval of Golden Parachutes

Summary of Proposed Rule

Under the proposed rules, public companies are required to disclose details about "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 with respect to this disclosure. Further, the proposed rules require public companies in certain circumstances to hold a separate shareholder advisory vote on golden parachute arrangements in connection with mergers and similar transactions. However, issuers would not be required to include a golden parachute vote if the exact disclosure had been subject to a prior vote of shareholders (e.g. in an annual meeting proxy). Any new or revised arrangements would require that two separate tables be provided under Item 402(t)- one that discloses all golden parachute compensation, and a second table setting forth only the new or revised terms, which the vote would be limited to.

Rule as Adopted on January 25, 2011

The following are the notable confirmations and modifications reflected in the final adopted rules:

Unlike the SOP and frequency votes, which became effective for meetings held after January 21, 2011, the golden parachute provisions are not effective until April 25, 2011.
The table required by Item 402(t) of Regulation S-K was adopted by the SEC as proposed with the additional requirement of a separate footnote identification of amounts attributable to "single-trigger" arrangements and amounts attributable to "double-trigger" arrangements, so that "shareholders can readily discern these amounts."
As adopted, Item 402(t) requires a table as well as narrative disclosure in a proxy statement soliciting shareholder approval of a merger or similar transaction or a filing made regarding a similar transaction only of compensation that is "based on or otherwise relates to the subject transaction."
In response to commentators' responses to the proposed rules, under the final rules, issuers are permitted to add (1) additional named executive officers and (2) additional columns or rows to the tabular disclosure, so long as the disclosure is not misleading.

Delayed Rulemaking Under the Act

The SEC has updated the proposed timing on the following rules coming out of the Act, from the prior estimate of April – July of 2011 until August – December of 2011:

"Pay-for-performance" disclosure regarding the correlation between a company’s financial performance and compensation paid (Section 953).
Rules requiring the implementation of clawback policies relating to the clawback of officer compensation in the event of a restatement (Section 954);
Disclosure of the ratio between compensation of the CEO to all employees (Section 954); and
Disclosure as to whether a company has a policy regarding hedging by directors and employees (Section 955).

Depending on the exact timing of when these rules are proposed, the possibility exists that one or more of these rules will not be finalized in time for the 2012 proxy season.

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 :: lewis.davis@bipc.com
Jeremiah G. Garvey — 412 562 8811 :: jeremiah.garvey@bipc.com
Jennifer R. Minter — 412 562 8444 :: jennifer.minter@bipc.com
Brian S. North — 215 665 3828 :: brian.north@bipc.com
Brian S. Novosel — 412 562 5266 :: brian.novosel@bipc.com