SEC Alert Say-on-Pay and Say-on-Frequency Votes

The SEC recently issued proposed rules to implement the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) that mandate shareholder advisory votes (a) on executive compensation (“say-on-pay”) and (b) on the frequency of the say-on-pay vote (“say-on-frequency”). The Dodd-Frank Act requires companies to comply with the say-on-pay and say-on-frequency provisions for meetings of shareholders occurring on or after January 21, 2011, whether or not the SEC issues final rules by that date. This SEC Alert will summarize the key aspects of the proposed rules.

Say-on-Pay Vote

At its 2011 annual shareholders meeting and at least once every three years thereafter, every company is required to conduct a non-binding, advisory say-on-pay shareholder vote to approve the compensation of the company’s named executive officers. The named executive officers are those whose compensation is required to be disclosed in the company’s annual proxy statement, namely, the company’s CEO and CFO, as well as the three most highly compensated executive officers (other than the CEO and CFO).

The SEC has not proposed any specific language or form of resolution to be voted on by shareholders, but companies must disclose in their proxy statements that they are holding a say-on-pay vote, and briefly explain the general effect of the vote, i.e., that the vote is advisory. In addition, the language of the say-on-pay vote must cover the compensation disclosures required by Item 402 of Regulation S-K, namely, the Compensation Discussion & Analysis (“CD&A”), the compensation tables, and the other narrative disclosures required by Item 402.

According to the proposed rule, the say-on-pay vote will not trigger a requirement to file preliminary proxy materials with the SEC so long as the only matter that would have required such a filing is the say-on-pay vote.

In future proxy statements, commencing as of the 2012 annual shareholders meeting, every company will be required to disclose in its CD&A the extent to which the company’s compensation policies and decisions have taken into account the results of previous say-on-pay votes on executive compensation.

Say-on-Frequency Vote

At its 2011 annual shareholders meeting and at least once every six years thereafter, every company is required to conduct a non-binding, advisory say-on-frequency shareholder vote on whether the say-on-pay vote should occur every one, two, or three years.

As is the case with the say-on-pay vote, the SEC has not proposed any specific say-on-frequency language or form of resolution to be voted on by shareholders, but companies must disclose in their proxy statements that they are holding a say-on-frequency vote, and briefly explain the general effect of the vote, i.e., that the vote is advisory. The proxy card must provide shareholders with the following voting alternatives: to have the say-on-pay vote every one, two, or three years, or to abstain from voting on the say-on-frequency proposal. Although the SEC expects each company’s Board of Directors to recommend one of the alternatives as to how the shareholders should vote on the say-on-frequency proposal, each company must make clear that shareholders have four choices and that the shareholders are not voting to approve or disapprove of the recommendation of the Board of Directors.

In addition to disclosing the results of all shareholders votes on a current report on Form 8-K following the shareholder meeting, The SEC’s proposed rules would require a company to make an additional disclosure in its quarterly report on Form 10-Q covering the period during which the say-on-frequency vote occurs (or in its annual report on Form 10-K if the vote occurs during the company’s fourth quarter), disclosing the company’s decision regarding how frequently the company will conduct say-on-pay votes in light of the results of the say-on-frequency vote.

As with the say-on-pay vote, the say-on-frequency vote will not trigger the requirement to file preliminary proxy materials with the SEC.

Please contact us if you would like to discuss this alert or receive additional information regarding the say-on-pay and say-on-frequency rule proposals.

By: Steve Kronengold and David C. Zuckerbrot. © January 2011. All rights reserved.
This article is provided for educational, informational and non-commercial purposes only. The content of this article is not intended to provide legal advice on any subject matter and should not be relied on as such.

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