SEC Increases Shareholder Control
by Julie A. Chandler
Last October, the SEC further increased shareholder control and transparency in corporate governance when it proposed new rules regarding shareholder approval of executive compensation and “golden parachute” compensation. The rules were enacted in accordance with Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and apply to all public company shareholder meetings conducted on or after January 21, 2011, with some exceptions. The three mainstays of the new rules are known as 1) “Say-on-Pay,” 2) “Say-on-Frequency,” and 3) “Say-on-Parachute.”
Say-on-Pay requires public companies, at least once every three years, to allow their shareholders an advisory vote on all executive compensation. The Say-on-Pay vote must cover all executive compensation required to be disclosed under Item 402 of Regulation S-K of the Securities Exchange Act of 1934. Generally speaking, this means that the vote must include all plan and non-plan compensation awarded to, earned by, or paid to executive officers for all services rendered in all capacities. Notably, the SEC stated its view in the proposed rule release that a vote to merely approve a company’s general compensation policies and procedures would not satisfy the Say-on-Pay requirement.
Say-on-Frequency requires public companies, at least once every six years, to give shareholders an advisory vote on whether the Say-on-Pay vote should be held every one, two or three years. The SEC has stated that it expects Boards of Directors to make a recommendation to shareholders as to the frequency of the Say-on-Pay vote, although they must make clear that shareholders are not voting to approve or disapprove the Board’s recommendation. Further, once a Say-on-Frequency advisory vote has been taken, companies are required to make additional disclosures in their Forms 10-K or 10-Q regarding the results of the Say-on-Frequency vote and how they have affected the company’s decision on the frequency of Say-on-Pay.
Say-on-Parachute requires that public companies provide shareholders an advisory vote on all benefits received by executives in connection with an acquisition, merger, consolidation or proposed sale or disposition of all or substantially all of the company’s assets (known as “golden parachute compensation”). Though companies have long been required to disclose potential payments upon termination or change in control in annual proxy statements and Forms 10-K, such requirements did not apply to merger proxies. In an effort to fill this gap, the Say-on-Parachute rules require companies to disclose, in proxy statements soliciting shareholder approval of a merger or similar change-in-control transaction, any and all agreements, plans or arrangements, whether written or unwritten, that provide for golden parachute compensation.
Additionally, the SEC has confirmed that the Say-on-Pay and Say-on-Frequency votes qualify as non-routine matters related to executive compensation under NYSE Rule 452. NYSE Rule 452 prohibits brokers from voting on non-routine matters, such as executive compensation, without specific instructions from the beneficial owner of the securities. Many shareholders hold their shares “in street name,” in which case the shareholder’s broker holds the shares. In the past, it was common practice for brokers to simply vote in the affirmative in the event that they did not receive specific voting instructions from the beneficial owners of the shares. With the advent of Rule 452, many measures, including matters related to executive compensation, will require more shareholder involvement in order to pass.
It is important to remember that even if a company is not listed on the NYSE, Rule 452 governs FINRA-member broker-dealers, and therefore it has the potential to impact voting even at companies that are listed on another exchange. Further, NASDAQ followed NYSE’s lead with NASDAQ Rule 2251, which mirrors Rule 452 and became effective on December 15, 2010.
Although Say-on-Pay, Say-on-Frequency and Say-on Parachute votes are all non-binding on the Boards of Directors, their impact is nonetheless significant. In preparation for upcoming shareholder meetings and the transition to the new rules, companies should undertake a thorough review of their executive compensation policies and practices, eliminating or revising practices that are unfair or could give the appearance of impropriety. The practical import of Say-on-Pay, Say-on-Frequency, Say-on-Parachutes, NYSE Rule 452 and NASDAQ Rule 2251 is that the SEC’s trend toward giving shareholders a real measure of control over corporate governance is continuing, and public companies should stay prepared for increased transparency and greater accountability.
Ms. Chandler is a corporate associate in the Dallas office of K&L Gates, LLP, where her practice focuses on securities and mergers and acquisitions. She can be reached at firstname.lastname@example.org.